Court must apply ordinary contract principles to lifetime contribution-free retiree health care question

Applying ordinary principles of contract law, a unanimous U.S. Supreme Court vacated the Sixth Circuit’s ruling that provisions in expired collective bargaining agreements created a right to lifetime contribution-free health care benefits for retirees, their surviving spouses, and their dependents. In so ruling, the Court disapproved of the reasoning in the Sixth Circuit’s 2009 decision in M & G Polymers USA, LLC v. Tackett based on International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc. (Yard-Man), CA-6 (1983), 716 F2d 1476. Justice Ginsburg filed a separate concurring opinion, in which Justices Breyer, Sotomayor, and Kagan joined.

Retirees brought a class action against the employer after it announced that they would be required to make health care contributions. The retirees contended that the promise of “full Company contribution towards the cost of [health care] benefits” in collective bargaining agreements (CBAs) provided them with a vested right to receive lifetime health care benefits in retirement without any contributions. The employer countered that those provisions terminated when the agreements expired. The district court dismissed the complaint for failure to state a claim. The Sixth Circuit reversed, based on its earlier decision in Yard-Man. Applying Yard-Man, the district court found for the retirees on their claims that the employer violated the labor agreements and violated the employee benefit plans. The trial court issued a permanent injunction to reinstate the retirees’ lifetime contribution-free health care benefits. However, the retirees were only reinstated to the post-2007 versions of the plans. The Sixth Circuit affirmed that decision.

Ordinary principles of contract law

Here, the High Court found that the Sixth Circuit’s decision rested on principles that are incompatible with ordinary principles of contract law. The Court first noted that while ERISA governs pension and welfare benefits plans, it exempts welfare benefits plans from rules establishing minimum funding and vesting standards. Moreover, the Court reiterated that it interprets CBAs, including those establishing ERISA plans, according to ordinary principles of contract law, at least when those principles are not inconsistent with federal labor policy. But the Court concluded that the inferences applied in Yard-Man and its progeny do not represent ordinary principles of contract law. It found that the Sixth Circuit’s refusal to apply general durational clauses to provisions governing retiree benefits distorted the agreement’s text and conflicted with the principle that a written agreement is presumed to encompass the whole agreement of the parties.

The High Court also found that the Sixth Circuit also misapplied the illusory promises doctrine. It construed provisions that admittedly benefited some class of retirees as “illusory” merely because they did not benefit all retirees. The Sixth Circuit’s use of this doctrine was particularly inappropriate in the context of CBAs, which often include provisions inapplicable to some category of employees. The Sixth Circuit also failed even to consider other traditional contract principles, including the rule that courts should not construe ambiguous writings to create lifetime promises and the rule that “contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.”

Source: M & G Polymers USA, LLC v. Tackett, U.S. Supreme Court, Dkt. No. 13-1010, January 26, 2015.

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