In a unanimous decision, the U.S. Supreme Court has established a new standard requiring that collective bargaining agreements, including those that establish ERISA plans, be interpreted by using ordinary principles of contract law. The decision crushed an inference of vesting of retiree health benefits in the collective bargaining context that has been upheld by the U.S. Court of Appeals for the Sixth Circuit, in Cincinnati, for more than 30 years. That court’s “Yard-Man Inference” – after the name of the employer in the case – found an intent to vest for life certain collectively bargained retiree health care benefits absent language to the contrary in the bargaining agreement. M&G Polymers USA, LLC v. Tackett, No. 13-1010 (Jan. 26, 2015).

The Yard-Man case involved a 1974 collective bargaining agreement that stated that the employer “will provide” retiree health benefits for an unspecified duration. The company sought to eliminate these benefits after expiration of the agreement’s term, and the retirees filed suit to compel the company to continue the retiree benefits. While acknowledging the agreement was ambiguous as to the duration of the benefits, the Sixth Circuit ruled the employer had breached its contractual obligations by canceling the retiree health insurance. The Sixth Circuit explained, “When the parties contract for benefits which accrue upon achievement of retiree status, there is an inference that the parties likely intended those benefits to continue as long as the beneficiary remains a retiree.” International Union, United Auto, Aerospace & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983).

Since that decision, the Sixth Circuit has adhered to the “Yard-Man Inference” while federal appeals courts in the First (Boston), Fourth (Richmond) and Eleventh (Atlanta) Circuits accepted it in varying degrees. Other circuits, however, flatly rejected it, holding that upon the expiration of a collective bargaining agreement that is silent on the vesting of retiree benefits, there should be a presumption against the vesting of retiree health benefits for life.

The agreement in the M&G Polymers case provided that certain retirees “will receive a full Company contribution toward the cost of [health care] benefits.” When the company reduced the contribution, the retirees sued, with the Sixth Circuit ultimately upholding a ruling in their favor.

In rejecting the Sixth Circuit’s position, the Supreme Court stated “collective bargaining agreements, including those establishing ERISA plans” must be interpreted “according to ordinary principles of contract law,” with which the inferences in the Yard-Man line of cases did not accord. The Court found the Sixth Circuit decision violated ordinary principles of contract law “by placing a thumb on the scale in favor of vested retiree benefits in all collective bargaining agreements,” which distorted the attempt to ascertain the intent of the parties.

For more on this decision, see “Ordinary Contract Principles Apply to Whether Retiree Health Benefits Survive Expired Bargaining Agreement” at www.jacksonlewis.com

Although the decision in M&G Polymers provides employers within the jurisdiction of the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee) with an enhanced ability to defend class actions seeking to invalidate an employer’s reduction or elimination of collectively bargained retiree benefits, the issue of vested retiree benefits in a collective bargaining context still exists. Courts must apply ordinary contract principles to determine whether retiree health benefits survive the expiration of a collective bargaining agreement.

No rule requires that union contracts contain clear and express language showing the parties intended retiree benefits to vest; such intent also may arise from the implied terms of an expired agreement. Consequently, employers and counsel must be cautious and precise in negotiating and drafting provisions relating to retiree benefits. Preferably, express language that retiree benefits do not survive term expiration should be included, if that is intended. Employers must take care to avoid any language that could be susceptible to an interpretation (under ordinary principles of contract law) that the parties intended to provide for vested retiree benefits.