Employer’s Proposed Changes In Funding Retiree Health Care Benefits Not What Parties Bargained For In CBA

An employer’s unilateral implementation of individual health reimbursement accounts (HRAs) in place of group health care plans breached the parties’ collective bargaining agreements, not because they were “unreasonable,” but because they were not what the parties bargained for, ruled the Sixth Circuit U.S. Court of Appeals in United Steel, Paper, Forestry, Rubber, Manufacturing Energy, Allied Industrial and Service Workers International Union v. Kelsey Hayes Co. (No. 13-1717). As a result, the Sixth Circuit affirmed the district court’s judgment granting injunctive relief in favor of the retirees. Judge Merritt filed a separate concurring opinion. While agreeing with the majority opinion that the employer had promised vested lifetime health care benefits for its retirees, Judge Sutton dissented from what he regarded as an advisory opinion, finding that under other circumstances the HRAs would satisfy the employer’s health care funding obligations.

HRAs. In September 2011, the employer announced that effective Jan. 1, 2012, it would make changes to its retiree health care program. The changes discontinued group health care plans and put into effect an individual HRA in place of the group health care plans. The planned HRA program was funded by the employer and used to pay premiums and other eligible health care expenses incurred in the future to “offset” health care costs incurred by the retiree. Moreover, the employer indicated that its contribution to the HRA would be reviewed annually and was subject to change, and it retained the right to amend or terminate the HRA. In response, the union and retirees filed suit under LMRA Sec. 301 and ERISA Secs. 501(a)(1)(B), (a)(3), (e) and (f).

The HRAs differed from the prior group coverage in that they shifted risk—and potentially costs—off the employer and on to the retirees. Following the implementation of the HRAs, the plaintiffs filed this action claiming that the health plan change to HRAs breached the CBAs in violation of Section 301 of the LMRA and ERISA. The plaintiffs sought a declaratory judgment that the employer violated the governing CBAs, plus damages and injunctive relief. The district court allowed the plaintiffs to proceed as a class and granted summary judgment on all claims, ruling that the CBAs established a commitment to lifetime health care benefits for plaintiffs and their families, and that defendants’ unilateral implementation of the HRAs constituted a breach of the CBAs. The district court ordered the employer to reinstate the “status quo,” that is, the health coverage that had been in effect up until 2012. The employer appealed.

Yard-Man inference. Before turning to the merits of this case, the Sixth Circuit reviewed the case law on retiree benefits. In the Sixth Circuit’s leading case on retiree benefits, Yard-Man, Inc., the court explained that “whether retiree insurance benefits continue beyond the expiration of the collective bargaining agreement depends on the intent of the parties” and that “traditional rules of contractual interpretation are applied” to determine whether the parties so intended. The court ultimately concluded that, based on the language of the CBA and in the context of surrounding CBA provisions, the parties intended for the insurance benefits to vest.

In subsequent years, the Sixth Circuit has continued to refine and clarify the scope both of the Yard-Man inference and vested retiree benefit rights more generally. Among other things, these cases clarified that the Yard-Man inference was not a legal presumption that shifted the burden to the employer to disprove that benefits vested. Additionally, the Sixth Circuit has clarified that “[a]n employer that contractually obligates itself to provide vested healthcare benefits renders that promise ‘forever unalterable.’”

Evolving health care delivery system. Turning to the Reese cases, Reese v. CNH Am. LLC, (Reese I and Reese II), the Sixth Circuit observed that in Reese I, it drew a distinction between the vesting of retirement benefits and “the scope of those benefits.” In that case, the Sixth Circuit concluded that the retirees had a vested right to lifetime health care benefits, but that the scope of those benefits could be “reasonably altered” unilaterally by the employer under the terms of the CBA. In Reese II, the court noted that the evidence indicated that the parties contemplated an evolving health care delivery system and that the scope of the vested health care benefit could change in light of that agreement.

In the present case, the employer argued that the Reese cases caused a sea-change in the Sixth Circuit’s retiree case law. However, the Sixth Circuit rejected the employer’s interpretation of those cases. It noted that contrary to the employer’s characterization, the Reese cases were entirely consistent with other Sixth Circuit retiree benefits cases insofar as the Reese courts simply examined the language of the CBA and the parties’ conduct. In short, the Reese cases simply “apply ordinary principles of contract interpretation” to CBAs. In sum, the Reese courts concluded that there, the scope of the vested right to health care could be unilaterally altered because that is what the evidence indicated the parties intended in that case, not because all vested health care rights in all CBAs are subject to unilateral alteration as a matter of law.

Continuance of health care coverage. At this point, the Sixth Circuit turned to the primary issue in the present case: What did the parties in this case intend with regard to retiree health care benefits? Under the parties’ CBA, the employer agreed that once an employee retired, it promised the “continuance” of the health care coverage that he or she had at the time of retirement. It also agreed to pay the full premium for retirees. Thus, the Sixth Circuit found this language unambiguous and that it created a vested lifetime right to health care benefits.

Upon retirement, the retirees all had company-provided group health insurance coverage, with the employer paying the full premium for that insurance. The HRAs are not company-provided group insurance; they are health care vouchers. They also shifted significant risks from the company to the retirees. Moreover, the employer not only refused to fund the HRAs past 2013, it failed to acknowledge that the right to health care was vested in the first place. For these reasons, the Sixth Circuit concluded that implementation of the HRAs violated the CBAs.

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