iResolving a long-standing circuit split, on January 26, 2015, the Supreme Court decided the standards by which courts should determine when collectively bargained retiree health benefits are intended to last forever. M&G Polymers USA, LLC v. Tackett, No. 13-1010, 2015 WL 303218 (U.S. Jan. 26, 2015). In Tackett, the Supreme Court rejected the Sixth Circuit's 30-year old Yard-Man inference that absent contractual language or extrinsic evidence to the contrary, parties to a collectively bargained agreement intend to vest retirees with lifetime health benefits. Since 1983, the Sixth Circuit has maintained that collectively bargained retiree benefits are "status" benefits, which "carry with them an inference that they continue so long as the prerequisite status [retirement] is maintained." International Union, United Auto, Aerospace, & Agriculture Implement Workers of Am. v. Yard-Man, Inc., 716 F.2d 1476, 1482 (6th Cir. 1983). The Yard-Man inference had been expressly rejected by the Second, Third, and Seventh Circuits. Writing for a unanimous Supreme Court, Justice Clarence Thomas held that any such inference is inconsistent with ordinary principles of contract law, which should govern the interpretation of collectively bargained agreements (CBA).
The Tacket Litigation
The facts of Tacket follow the familiar fact pattern in class action cases challenging a modification of the promised retiree benefits under an expired collectively bargained agreement. Although the specifics of the collective bargaining may differ from case to case, the common denominator in these cases is that the CBA includes language promising retirees medical benefits. Following the expiration of the CBA, the company moves to terminate or modify the benefits and the retirees sue alleging that the agreements created a lifetime vested right to contribution-free health benefits.
In Tacket, the Plaintiffs worked at and retired from the Point Pleasant Polyester Plant in Apple Grove, West Virginia. In 2000, M&G Polymers USA (M&G) purchased the Plant and entered into a master CBA and a Pension Insurance and Service Award Agreement (P & I Agreement) with the Union. The P & I Agreement set forth certain terms that provided former employees that were retired prior to 1996 and had achieved a certain level of seniority with contribution-free health benefits. The P & I Agreement did not have a specific durational provision governing the retiree health benefits, but it had a general durational provision that provided for the renegotiation of its terms in three years.
In 2006, M&G announced that it would begin requiring retirees to contribute to the cost of their health care benefits. Retirees receiving benefits under the old CBAs sued alleging that the decision to require the additional contributions breached both the CBA and the P & I Agreement in violation of § 301 of the Labor Management Relations Act (LMRA) and § 502(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, the retirees alleged that M&G had promised to provide lifetime contribution-free health care benefits for them, their surviving spouses, and their dependents. Plaintiffs alleged that this promise had created a vested right to such benefits that continued beyond the expiration of the 2000 P & I Agreement.
The district court dismissed the complaint for failure to state a claim because it concluded that the contract language was unambiguous and did not create a vested right to retiree benefits. 523 F. Supp. 2d 684, 696 (S.D. Ohio 2007). Relying on Yard-Man, the Sixth Circuit reversed concluding that the retirees had stated a plausible claim and finding it unlikely that the Union would agree to language that ensured its members a full Company contribution if the Company could unilaterally change the level of contribution. The Sixth Circuit discerned an intent to vest lifetime contribution-free health care benefits from the provisions tying eligibility for health care to eligibility for pension benefits. On remand, the district court found in favor of the retirees and the Sixth Circuit affirmed. The Company filed a petition for certiorari with the Supreme Court to resolve the split in the Circuits.
The Supreme Court Unanimously Rejects the Yard-Man Inference
Justice Thomas began his analysis by reciting the following well-established principles governing employee welfare benefit plans:
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ERISA's vesting provisions do not apply to welfare benefit plans;
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ERISA does not limit the right of employers or other plan sponsors to adopt, modify or terminate welfare plans at any time and for any reason;
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Plan sponsors have large leeway to design welfare plans as they see fit; and
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The unambiguous plan terms should be enforced as written.
Justice Thomas then reviewed the basis of the Sixth Circuit's ruling in Yard-Man and its progeny. He noted that, in Yard-Man, the Sixth Circuit had identified the following three reasons to infer that the parties to the collective bargaining agreement intended to vest the retiree benefits:
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The CBA lacked a durational clause specifically governing the retiree benefits;
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The promise to provide retiree benefits would be illusory for early retirees if the CBA's general durational clause of three years was applied; and
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The unlikelihood that retiree benefits would be left to the contingencies of future negotiations since retiree benefits are not mandatory subjects of collective bargaining.
Justice Thomas noted that the Sixth Circuit had continued to expand Yard-Man in subsequent cases, and apparently had applied Yard-Man as though it created a presumption in favor of vesting retiree benefits in the collectively bargained context. Writing for the majority, Justice Thomas stated that Yard-Man violated ordinary contract principles by placing a "thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements." That rule, the Court noted, has no place in contract law and has distorted the Sixth Circuit's view of the intent of the parties to a CBA. The Court continued its attack on the reasoning of Yard-Man and its progeny. Recognizing that a court may look to known customs or usages in a particular industry to determine the meaning of a contract, Justice Thomas noted that the parties must nonetheless prove those customs and usages with affirmative evidence. When the Sixth Circuit concluded that the parties to collective bargaining customarily vest retiree benefits, Justice Thomas noted that it relied on no record evidence, and "worse" it indiscriminately applied the inference across all industries. The Court also clarified that, while pension benefits are a form of deferred compensation, there is no support in ERISA to find that health care benefits are a form of deferred compensation. Finally, the Court admonished the Sixth Circuit for failing to apply general durational clauses to provisions governing retiree benefits.
The Court held that Yard-Man and its progeny misapplied a number of traditional principles of contract law, including the illusory promise doctrine, the principle that courts should not construe ambiguous provisions as creating lifetime promises, and the principle that contractual obligations cease when the collective bargaining agreement expires. The Court remanded the case to the Sixth Circuit to review the collective bargaining agreements applying the principles of contract law without the Yard-Man inference.
Justice Ginsberg, joined by Justices Breyer, Sotomayor and Kagan, filed a concurring opinion providing additional guidance to the Sixth Circuit. Justice Ginsberg stated that if the Court of Appeals determined that the collective-bargained agreement was ambiguous, then it should examine the entire agreement to determine whether the parties intended retiree health-care benefits to vest and identified a couple of contract provisions that she thought were relevant to the court's inquiry, including a provision that tied receiving health benefits to receiving a monthly pension benefit. She also underscored that the rules of contract interpretation required consideration of extrinsic evidence to determine the intent of the parties where the contract was deemed ambiguous.
Significance of Tackett
Tackett resoundingly rejects the Yard-Man inference, which as applied, has made it nearly impossible for employers subject to Sixth Circuit precedent to modify or terminate retiree benefits in the collectively bargained context. The opinion by no means tips the scale in favor of employers. Retiree benefits may still be deemed vested, but the cases will proceed under ordinary principles of contract law without the Yard-Man "thumb on the scale" favoring vested retiree benefits. The Sixth Circuit will now fall in line with the Second, Third and Seventh Circuits and employers operating in multi-jurisdictions will no longer have to be overly concerned with trying cases in the Sixth Circuit or addressing inconsistencies of different outcomes in different circuits.
