The Supreme Court, in M&G Polymers USA, LLC v. Tackett,1 held that courts cannot infer an employer’s intent to vest welfare benefits from ambiguous or silent collective bargaining agreements, but instead courts must use ordinary contract principles to discern employer intent. The decision was in response to the Sixth Circuit’s “Yard-Man inference” doctrine,2 in which courts presume that collectively bargained retiree welfare benefits vest for life upon retirement. The Court unanimously vacated this reasoning, stating that the Yard-Man inference places “a thumb on the scale in favor of vested retiree benefits” and is “not the proper application of ordinary principles of contract law.”
The case arose shortly after M&G Polymers USA, LLC (M&G) announced that it would begin requiring retirees to make partial payments of their collectively bargained retiree health coverage premiums. Approximately 500 retirees sued M&G, arguing that the collective bargaining agreements (CBA) promise of “a full Company contribution towards the cost of [health care] benefits . . . for the duration of [the] Agreement,” caused the benefits to remain vested beyond the CBA’s three-year term. Although the District Court dismissed the case for failure to state a claim, the Sixth Circuit reversed and remanded, instructing the District Court to apply the Yard-Man inference. After a bench trial on remand, the District Court found in favor of the retirees, and the Sixth Circuit affirmed.
In reaching its decision, the Sixth Circuit applied the following reasoning: (1) retiree plans are “a form of delayed compensation” triggered by retirement status, (2) a promise that expires before certain union members become eligible for the benefit is illusory, and (3) retiree benefits are not mandatory subjects of collective bargaining, creating an inference that such benefits vest for life.
Justice Thomas, delivering the Court’s opinion, explained that “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.” The Court rejected each of the Sixth Circuit’s arguments, relying on the Employee Retirement Income Security Act of 1974 (ERISA), which governs certain private pension and welfare benefit plans. ERISA creates a distinction between retirement and welfare benefits, specifically exempting welfare benefits from the rigorous funding and vesting requirements imposed on retirement plans. The Court found that Yard-Man was inconsistent with ERISA’s structure, reasoning that ERISA reflects an intent to provide flexibility for welfare plan design and structure.
The Court further noted that many CBA provisions are drafted to benefit only certain groups of employees. These limitations do not imply lifetime promises, and such an interpretation contradicts the general rule that “contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.”3
Although the Court overturned the Sixth Circuit’s Yard-Man inference, it did not directly answer M&G’s question on appeal—whether the Court preferred (a) theYard-Man inference, (b) the Third Circuit’s position requiring a clear statement that the benefits are intended to survive an agreement’s expiration, or (c) the Second and Seventh Circuit analysis that simply requires some language that reasonably supports an interpretation that the benefits should continue. The Court declined to resolve ambiguity among the circuits, instead limiting its analysis to the Yard-Maninference.
Ironically, during oral argument, both parties argued for the use of traditional contract principles. In a concurring opinion, Justice Ginsburg (joined by Justices Breyer, Sotomayor and Kagan) provided some insight that is instructive for employers when considering their retiree medical arrangements by discussing factors that would support lifetime vesting under ordinary principles of contract law. For example, Justice Ginsburg explained that courts should look at industry-specific customs and practices on whether the arrangement ties healthcare benefits to the receipt of a monthly pension. Without further guidance on what constitutes a traditional contract principle and how to identify ambiguous contractual terms, this area remains open for interpretation. Employers should review their retiree benefit plan documents and participant communications to ensure that the terms clearly explain contractual obligations associated with retiree medical benefits and consider how best to include language that will reserve their right to amend or terminate the arrangement in as many jurisdictions as possible.