The death knell for the so-called “Yard-Man Inference” has sounded. If you think we’re being a little dramatic – OK, maybe you’re right – we have a tendency to get a little too worked up about employee benefits cases that make it to the Supreme Court. But, in any event, last week the Supreme Court resolved a circuit split and overturned the Yard-Man Inference with its decision in M&G Polymers USA, LLC v. Tackett.

The Yard-Man Inference is named for the important retiree benefits decision handed down in 1983 in International Union et. al. v. Yard-Man, Inc., 716 F.2d 1476. In that case, the Sixth Circuit applied a presumption of vesting of retiree medical benefits in the absence of a termination provision in a collective bargaining agreement. You can read more about the original Yard-Man case in our earlier post on the case.

In M&G Polymers, the Supreme Court found that Yard-Man improperly “plac[es] a thumb on the scale in favor of vested retiree benefits” and “distorts the intent to ascertain the intention of the parties” with respect to the collective bargaining agreement. The unanimous opinion authored by Justice Thomas held that the Sixth Circuit’s reliance on Yard-Man is “incompatible with ordinary principles of contract law.”

The collective bargaining agreement at issue provided for retiree health care benefits and provided that retirees with a certain level of service would receive a full company contribution toward the cost of health care benefits. The agreement also provided that “for the duration of [the] Agreement…the Employer will provide [medical benefits].” The duration of the agreement was three years.

The retirees alleged that the company had promised them lifetime health care benefits with no required contribution in the collective bargaining agreement, and that M&G had created a vested right to those benefits through the agreement. Once the case made its way to the Supreme Court, the Court was faced squarely with whether to approve or reject the Yard-Man presumption once and for all.

In the Supreme Court opinion, Justice Thomas noted that “[a]lthough ERISA imposes elaborate minimum funding and vesting standards for pension plans…it explicitly exempts welfare benefits plans from those rules…” He quoted the 2013 Heimeshoff opinion and noted that “…the rule that contractual provisions ordinarily should be enforced as written is especially appropriate when enforcing an ERISA welfare benefits plan” (internal citations omitted). Justice Thomas concluded that the Sixth Circuit court had improperly “…derived its assessment…from its own suppositions about the intentions of employees, unions, and employers negotiating employee benefits…” and had “…failed even to consider the traditional principle[s] that courts should not construe ambiguous writings to create lifetime promises…[and that] contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement” (internal citations omitted). The M&G case was remanded with directions for the reviewing court to apply “ordinary principles of contract law in the first instance.”

The concurrence authored by Justice Ginsburg and joined by Justices Breyer, Sotomayor and Kagan stressed that vesting does not require “clear and express” language, but rather may arise from “implied terms of the agreement.” The Sixth Circuit may “turn to extrinsic evidence – for example, the parties’ bargaining history,” she wrote, “if the [Court] concludes the contract is ambiguous.” Notably, Justice Thomas’ opinion did not make mention of the introduction of parol evidence in interpreting ambiguous contract terms, although such evidence is widely considered admissible when the terms of a contract are ambiguous. What, if anything, do you make of this? Please leave your comments below.

This decision from the High Court reiterates the benefit of clear language in contracts and plan documents with respect to vesting and/or possible termination of regarding retiree health and welfare benefits to help avoid litigation, even without the Yard-Man inference.