Risk & Compliance

Ruling Lets Companies Cut Retiree Benefits Costs

Appeals court shoots down lifetime health benefits under collective bargaining agreements that don't specifically promise them.
Nancy G. Ross and Brian D. NetterFebruary 23, 2016
Ruling Lets Companies Cut Retiree Benefits Costs

Strategies for providing effective health benefits to employees have shifted dramatically in the past two decades. Nonetheless, some companies continue to bear the burdens of legacy benefit liabilities.

Nancy G. Ross

Nancy G. Ross

Until recently, courts had a practice of interpreting benefits arrangements in collective bargaining agreements (CBAs) to ensure lifetime coverage — often defying the company’s intentions in the process. But the legal environment has changed, and now is the time for companies to press ahead in reducing legacy retiree benefits costs on their balance sheets.

Before 2015, plaintiffs filed claims for lifetime health benefits in the Sixth Circuit, whenever possible, because that appeals court’s 1983 decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., created an “inference” that, absent express evidence to the contrary, retiree benefits were intended to vest for life.

But last year, in deciding M & G Polymers USA, LLC v. Tackett, the Supreme Court soundly rejected the Yard-Man inference and held that “ordinary principles of contract law” should govern the temporal scope of CBA benefits arrangements. That decision intensifies the burden on plaintiffs to show a meeting of the minds on lifetime benefits for cases brought in the Sixth Circuit and also in jurisdictions less favorable to unions. But Tackett did not resolve how “ordinary principles of contract law” should be applied to the familiar terms of CBAs.

Last week, the Sixth Circuit issued a sweeping decision that confirms that “ordinary principles of contract law” rarely will require a company to freeze outdated benefits in place.

Brian D. Netter

Brian D. Netter

In Gallo v. Moen Inc., which the Sixth Circuit decided on Feb. 8, a class of retirees who had worked at a shuttered Ohio factory alleged that they had been promised lifetime health benefits. They claimed that an agreement entered into at the time of the plant’s closure provided that health care coverage “shall continue” for beneficiaries “as indicated” under the final CBA. The retirees alleged that Moen violated that agreement when it later altered the retirees’ benefits.

A district court had previously sided with the retirees in a pre-Tackett ruling, invoking Yard-Man’s “nudge in favor of vesting.” Moen appealed, and the Sixth Circuit reversed. Applying the “ordinary principles of contract law,” the court found “nothing in … any of the CBAs [that] says Moen committed to provide unalterable healthcare benefits … for life.”

Concluding, therefore, that the contract was ambiguous, the circuit court then examined the contract for evidence of the parties’ intent and found no evidence that the parties had agreed to lifetime benefits. The court observed that the last CBA was explicitly a three-year agreement, and that courts “should not expect to find lifetime commitments in time-limited agreements.” Indeed, the court noted that no other courts have found “a promise of lifetime unalterable healthcare benefits based on CBA language of this sort in a time-limited agreement.”

The Sixth Circuit also emphasized that interpretations of contracts should not make any terms superfluous, and that reading the CBA to include lifetime benefits would violate that canon. The CBA, for example, stated that various benefits would “continue,” which the court viewed as evidence that none of the previous CBAs in effect prior to the plant’s closure had vested lifetime benefits; if they had, it would have been unnecessary to say they would continue. Furthermore, while the CBA was conspicuously silent on the duration of the health care benefits, it explicitly vested pension benefits for life.  In the court’s view, the difference in language also demanded a difference in meaning.

The court rejected the plaintiffs’ arguments to the contrary. Although the contract did use the future tense when referring to benefits, the court wrote that “the use of the future tense without more — without words committing to retain the benefit for — does not guarantee lifetime benefits.” And the court refused to look beyond the four corners of the contract, because “[a]bsent ambiguity from this threshold inquiry, no basis for going beyond the contract’s four corners exists.”

Sixth Circuit Judge Jane Stranch dissented. She agreed that ordinary contract principles must govern but stated that she would have applied that standard in a manner favoring the plaintiffs.

Gallo shows how far the law has moved since Tackett. The days of granting “nudges” in favor of vested benefits have come to a close. As a result, many companies that have previously deferred the modernization of their legacy benefits obligations may want to reevaluate the applicable agreements.

Nancy G. Ross and Brian D. Netter are partners at the law firm Mayer Brown. For more information about the topics raised in this article, contact them at 312-701-8788 and 202-263-3339, respectively.