In determining whether retiree health-care benefits provided under collective bargaining agreements should continue indefinitely, how should courts interpret collective bargaining agreements that are silent on the duration of retiree health-care benefits?
When interpreting a collective bargaining agreement that is silent on the duration of retiree health-care benefits, the Sixth Circuit inferred that the health-care benefits are vested (and therefore continue indefinitely). This approach, however, differs from the interpretative approach of other federal appellate courts. The Supreme Court will now resolve this circuit split. M&G Polymers USA, LLC argues that health-care benefits should terminate when the collective bargaining agreement ends unless there is a clear and explicit statement that such benefits should continue indefinitely. In opposition, several M&G retirees argue that, notwithstanding contractual silence, the parties’ intent that health-care benefits should continue indefinitely can be presumed. The resolution of this case will impact both the retention of retiree health-care benefits and the operational costs of American companies.
Questions as Framed for the Court by the Parties
- Whether, when construing collective bargaining agreements in Labor Management Relations Act (LMRA) cases, courts should presume that silence concerning the duration of retiree health-care benefits means the parties intended those benefits to vest (and therefore continue indefinitely), as the Sixth Circuit holds; or should require a clear statement that health-care benefits are intended to survive the termination of the collective bargaining agreement, as the Third Circuit holds; or should require at least some language in the agreement that can reasonably support an interpretation that health-care benefits should continue indefinitely, as the Second and Seventh Circuits hold.
- Whether, as the Sixth Circuit has held in conflict with the Second, Third, and Seventh Circuits, different rules of construction should apply when determining whether health-care benefits have vested in pure ERISA plans versus collectively bargained plans.
In 1992, Shell Chemical Company (“Shell”) purchased a West Virginia polyester plant from The Goodyear Tire & Rubber Company (“Goodyear”). Shell subsequently sold the plant to M & G Polymers USA, LLC, a producer of polymer and chemical products, in 2000. These companies, during their ownership of the plant, negotiated various labor agreements with a union, Local 644 of the United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union, AFL-CIO (“USW”), who represented the plant’s employees.
These collectively bargained agreements (“CBAs”) stipulated, among other things, that the plant’s employees who acquired sufficient seniority points and retired on or after a certain date would receive “a full Company contribution towards the cost of [health-care benefits].” Retirees who did not meet the point requirement received “a reduced Company contribution” and would have to pay the remaining costs. Under these CBAs, various retirees were supposed to receive health-care benefits upon retirement.
Side letters (“cap letters”) were also included in some of the agreements and capped the maximum average annual company costs per retiree for health-care benefits at a specified dollar amount. These cap letters also stipulated that if the health-care benefit costs exceeded the specified maximum costs per retiree, the surplus costs would be split evenly among all retirees. Per the cap letters and similar documents, required contributions from the retirees towards the surplus costs would begin on a specified date.
In December 2006, M&G told the retirees that, per the cap letters, all retirees would have to contribute to the cost of their health-care benefits, which exceeded the maximum average annual company costs per retiree. Respondents USW and employees Hobert Tackett, Woodrow Pyles, and Harlan Conley (collectively, “Retirees”) filed a class action suit against Petitioners M&G and affiliated health plans (collectively, “M&G”) on February 9, 2007 in the District Court for the Southern District of Ohio (“district court”). The Retirees claimed that their health-care benefits were vested because the CBAs guaranteed a “full contribution towards the cost of [health-care benefits]” so the retirees were not obligated to provide additional contributions. In response, M&G argued that the Retirees did not have a right to vested health-care benefits because the cap letters limited the terms set out in the CBAs.
The Retirees alleged that M&G’s actions violated the Labor Management Relations Act and Employee Retirement Income Security Act of 1974 (“ERISA”). M&G moved to dismiss and the district court granted the motion. The Retirees appealed the dismissal to the Court of Appeals for the Sixth Circuit (“Sixth Circuit”), and the Sixth Circuit reversed the district court’s dismissal and remanded the first two claims. After denying M&G’s motion for summary judgment, the district court, through a bench trial, found in favor of the Retirees. M&G appealed the liability ruling to the Sixth Circuit, but the appellate court affirmed the district court’s finding that the CBAs guaranteed the Retirees vested health-care benefits.
After the Sixth Circuit denied a rehearing, M&G appealed to the Supreme Court of the United States. The Supreme Court granted certiorari, in part to determine whether courts should assume that contractual “silence regarding the duration of retiree health-care benefits means that the parties intended those benefits” to continue indefinitely.
The Supreme Court will decide how to interpret a CBA’s silence on the duration of retirees’ health-care benefits. In doing so, the Supreme Court will likely determine two legal issues: (1) whether a CBA that does not directly state the duration of retiree health-care benefits should be interpreted as vesting the retirees with health-care benefits for life or as allowing the benefits to expire when the agreement expires; and (2) whether different rules of interpretation should apply when determining whether health-care benefits have vested in pure ERISA agreements versus CBAs.
M&G argues that benefits should expire with the agreement when an agreement does not contain any specific language indicating that the health-care benefits were vested. Conversely, the Retirees contend that benefits should vest when the language of an agreement reflects the parties’ intent that retirees will receive health benefits for the duration of their retirement. Additionally, while M&G also argues that different rules of interpretation should not apply when determining whether health-care benefits have vested in pure ERISA agreements versus CBAs, the Retirees maintain that different rules should apply.
INTERPRETING THE PROPER DURATION OF RETIREES’ HEALTH-CARE BENEFITS
Both parties agree that ordinary rules of contract interpretation should be applied to CBAs, however they differ regarding how this interpretation should occur.
THE CBA’S DURATIONAL LANGUAGE
M&G asserts that the durational language in the CBA in question is clear and definitively limits the duration of the benefits to extend only until the expiration of the agreement. M&G argues that the health-care benefits were not intended to continue beyond the duration of the agreement, and that if the benefits had been intended to vest, the parties would have included language specifically regarding vesting similar to the language the parties incorporated regarding pension benefits vesting.
In opposition, the Retirees contend that the issue of the agreement’s durational language is improperly before the court but that the agreement’s durational language still should not cause the retiree health-care benefits to terminate upon the agreement’s expiration. The Retirees argue that the ordinary rules of contract interpretation require the Court to attempt to determine the parties’ intent by reviewing the agreement’s text while also making inferences based on the context surrounding the agreement and considering relevant extrinsic evidence. They contend that the text of the agreement in question supports the interpretation that the parties intended that the health-care benefits vest.
THE SIXTH CIRCUIT’S APPROACH
M&G maintains that the Sixth Circuit’s reliance on Yard-Man, a case which also considered the vesting of retiree benefits, was misplaced because it held that health-care benefits are presumptively vested unless there is explicit language stating otherwise. According to M&G, a presumption that benefits are vested runs opposite to the ordinary rules of contract interpretation, which require that the plain language of the contract be the primary indicator of the parties’ intent. M&G also argues that the Sixth Circuit’s presumption is contrary to Congress’ intent and Supreme Court precedent. M&G explains that there is a “baseline rule that the terms of CBAs expire when the agreement does” and that the court’s presumption should be that the benefits expire at the termination of the agreement unless the agreement states otherwise.
In opposition, the Retirees argue that M&G’s critique of the Sixth Circuit’s interpretation of Yard-Man is flawed. In defense of Yard-Man, the Retirees assert that the case supports traditional contract interpretation, which includes a standard approach that encourages considering context in order to determine intent.
OTHER CIRCUIT APPROACHES
M&G argues in support of the Third Circuit’s “clear statement” rule, which requires an express statement in the agreement in order to find that benefits are vested. M&G asserts that this rule aligns with “ordinary rules of contract interpretation, . . . federal labor law, and . . . congressional assessment under ERISA that welfare benefits should not vest unless there is an express agreement that they should.” In support of this argument, M&G cites Litton, which holds that obligations terminate when the agreement expires, unless the agreement explicitly states otherwise. Alternatively, M&G supports the Second and Seventh Circuits’ approach, which is that CBAs must, at minimum, include some language that could be “reasonably interpreted” as indicating the intent that health care benefits vest.
The Retirees counter that—unlike the Third Circuit’s rule—the parties’ intent that the health-care benefits vest for life does not need to be explicitly stated in the text of the agreement and can instead be implied. Furthermore, the Retirees maintain that M&G misrepresented Litton because Litton supports the argument that terms may be implied in the agreement. Moreover, they contend that if the Supreme Court were to adopt the standard set forth by the Second and Seventh Circuits, the agreement in question would be “reasonably susceptible” to the interpretation that health-care benefits were intended to vest. The Retirees explain that the language of the agreement, the surrounding context, and the actions of the parties all support an interpretation of the agreement that is “reasonably susceptible” to the meaning that the parties intended the benefits to continue beyond the the agreement’s expiration.
INTERPRETING ERISA AGREEMENTS VS. COLLECTIVE BARGAINING AGREEMENTS
M&G argues that different rules of interpretation should not apply when determining whether health-care benefits have vested in pure ERISA agreements versus CBAs. They contend that Congress evaluated retiree health-care benefits under ERISA and determined that such benefits should not vest unless the parties make “an express agreement that they should.” M&G points out that that Congress made a specific determination to exempt retiree health-care benefits and other welfare benefits from the vesting requirements that Congress imposed on pension benefits in ERISA. In light of this fact, M&G asserts that ERISA reflects congressional recognition that welfare benefits should be flexible and involve fewer administrative and cost burdens than those associated with mandatory vesting.
The Retirees however, argue that different rules of interpretation should apply when determining whether health-care benefits have vested in pure ERISA agreements versus CBAs. According to the Retirees, Congress’ decision not to impose a mandate that retiree health-care benefits be automatically vested under ERISA agreements does not mean that Congress decided there must be an explicit agreement before health-care benefits could vest under CBAs. The Retirees point out that the pension requirements that Congress imposed under ERISA are law and eliminate the need to determine the parties’ intent. However, the Retirees maintain that this does not limit parties’ rights to use CBAs to establish health-care benefits and their duration or impose a requirement that such an agreement be expressed explicitly.
In this case, the Supreme Court has an opportunity to resolve a circuit split on whether employers owe vested health-care benefits to retirees through collective bargaining agreements, which are silent on the duration of such benefits. M&G contends that, unless there is a clear and explicit statement that such benefits should continue indefinitely, health-care benefits should terminate when the collective bargaining agreement ends. The Retirees counter that, notwithstanding contractual silence, the parties’ intent that health-care benefits should continue indefinitely can be presumed. The Supreme Court’s determination implicates the retention of retiree health-care benefits as well as operational costs of American companies.
EMPLOYER BURDEN OR EMPLOYEE BENEFIT?
Amici in support of M&G argue that the Third Circuit approach would prevent unbargained-for obligations on employers to provide vested health-care benefits and achieve greater uniformity of health-care plans in different jurisdictions. Moreover, the amici contend that a presumption of vesting gives a judicially created advantage to unions, incentivizing unions to avoid negotiating about the issue. Specifically, the Chamber of Commerce asserts that, without a clear and express statement approach, employers would have to bear the burden of demonstrating that they should not be liable for benefits that will continue indefinitely.
The Retirees and supporting amici contend that the Third Circuit approach of requiring a clear and explicit statement that health-care benefits should continue indefinitely would deprive retirees of the health-care benefits to which they are entitled. The American Federation of Labor and Congress of Industrial Organizations in support of the Retirees emphasize that retiree health-care benefits should not end when the collective bargaining agreement expires because these benefits are often considered as a type of deferred compensation that employees earned during the length of the CBA. Amici in support of the Retirees also argue that following the Third Circuit approach would allow employers, despite evidence demonstrating that the parties intended for the health-care benefits to continue indefinitely, to unilaterally decide when to stop providing vested health-care benefits.
OPERATIONAL COSTS OF AMERICAN BUSINESSES
M&G and supporting amici argue that adopting the Sixth Circuit approach of inferring vested health-care benefits in contractual silence will impose excessive, unanticipated, and retroactive costs on companies. Numerous amici maintain that current retirees will be able to bring suits against their companies to demand unstipulated benefits, which would negatively impact the financial stability of American companies and potentially cause some to declare bankruptcy. Additionally, the Chamber of Commerce contends that these enormous and rising health-care costs will affect American companies’ ability to compete in the international marketplace and drive up costs of products and services to consumers. The Chamber of Commerce explains that this could also ultimately negatively impact the wages and retiree benefits for current employees.
Amici in support of the Retirees counter that many employers, notwithstanding the cost of providing health-care benefits, may be motivated by various factors to provide vested health-care benefits. Some professors of labor and employee benefits law argue that many employers have historically provided full health-care coverage to retirees as a tool to gain leverage in the collective bargaining process and to incentivize older employees to voluntarily retire earlier without violating the Age Discrimination in Employment Act of 1967. Further, the Fox Retiree Committee and supporting organizations contend that providing retiree health-care allows companies to attract and keep stellar workers.
The Supreme Court will likely resolve a circuit split by determining whether retiree health-care benefits may vest for life absent an explicit statement of the duration of such benefits in a collective bargaining agreement. This decision will impact the functioning and contracting practices of American companies and could have a significant impact on the health-care benefits available to retirees across the country.
- Wilber Boies & Kirk Watkins: Supreme Court Grants Certiorari to Review Sixth Circuit’s Pro-Union Inference in Retiree Health Insurance Benefits Cases, McDermott, Will & Emery (May 6, 2014).
- Arthur Marrapese III: Post-Retirement Medical Benefits Under Siege, JD Supra Business Advisor (Sept. 30, 2014).
- Kevin McGowan: Justices Begin Term With Eight Cases on Labor and Employment Law Docket, Bloomberg BNA (Oct. 14, 2014).