In its January 26, 2015 unanimous decision in M&G Polymers USA, LLC v. Tackett, the U.S. Supreme Court resolved a split in the circuits as to the vesting of retiree health and welfare benefits under collective bargaining agreements (CBAs) in holding that the Sixth Circuit’s application in Tackett of its precedent in “Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” No less fundamentally, after holding that the Sixth Circuit had erred in treating collectively bargained retiree health care benefits as a form of deferred compensation, the Supreme Court held that the Sixth Circuit “[f]urther compound[ed] this error . . . [by] refus[ing] to apply general durational clauses [in CBAs] to provisions governing retiree benefits.” In so holding, the Supreme Court made clear that most CBAs, which only provide benefits “for the duration of this Agreement,” will not vest lifetime benefits in retirees.

Yard-Man & Its Progeny

Since 1983, when it issued UAW v. Yard-Man, Inc., the Sixth Circuit has held retiree health care benefits are “status” benefits, i.e., tied to an employee’s retirement, that “carry with them an inference that they continue so long as the prerequisite status is maintained.” Yard-Man reasoned that the vesting of retiree health benefits is unlikely to be left up to future negotiations when the retiree is no longer part of the bargaining unit. Instead of requiring some express language in the CBA that retiree health benefits are intended to survive the term of the CBA, the Sixth Circuit held that courts should “put a thumb” on the scale in favor of vested retiree benefits in all CBAs.

In implementing the Yard-Man inferences, the Sixth Circuit rejected applying CBAs’ general durational provisions to retiree health benefits. It held that the durational provisions, such as “this Agreement and all terms and conditions hereof shall terminate as of the end of the term,” does not bar vesting because that “language constituted a ‘general termination clause [that] does not support a finding that retiree benefits ended when the agreements expired.’” In its 2008 Noe v. PolyOne Corp. decision, which Tackett criticizes, the Sixth Circuit held that durational provisions for benefits that did not specifically identify retiree health care benefits were too general to prevent vesting.

The Sixth Circuit also extended Yard-Man for the inference that tying eligibility for health care benefits to receipt of pension benefits supports an inference that retiree health care benefits vest. In effect, Yard-Man became support for vesting of all collectively bargained retiree health benefits because such benefits necessarily are tied to retirement, i.e., the receipt of pension benefits is a condition for all collectively bargained retiree health benefits.

Sixth Circuit Alone Adhered to Yard-Man

Although the Supreme Court in its Tackett decision did not refer to a split in the circuits, the question for which the Supreme Court granted certiorari expressly recognized that the Second, Third and Seventh Circuits had rejected Yard-Man. In fact, every circuit other than the Sixth Circuit that had examined the vesting of collectively bargained retiree health benefits had declined to adopt Yard-Man. Tackett’s resolution of the circuit split will eliminate the forum shopping that has been a hallmark of collectively bargained retiree health litigation.

Tackett Rejects Yard-Man Inferences, Approves Application of General Durational Provisions

In Tackett, the Supreme Court initially recounted the history of the inferences the Sixth Circuit adopted in Yard-Man and its progeny. Tackett construes Yard-Man as holding that the existence of termination provisions for insurance benefits upon layoff and spousal retiree benefits upon the retiree’s death, in conjunction with the absence of a termination provision specifically addressing retiree benefits, supports an inference of “an intent to vest those retiree benefits for life.” Yard-Man also held that this inference “outweigh[ed] any contrary implications derived from a routine duration clause.”

Tackett then describes the Sixth Circuit’s 1985 Policy v. Powell Pressed Steel Co. decision as extending Yard-Man by construing “the language ‘will continue to provide at its expense, supplemental Medicare and major medical benefits for Pensioners aged 65 and over’ to ‘unambiguously confe[r]’ lifetime benefits.” Tackett quotes Policy for the “illusory contract” holding that retiree health benefits must vest for life because “a contrary interpretation ‘would render the Company’s promise [of benefits for retirees aged 65 and over] in substantial part nugatory and illusory,’” particularly in light of “Yard-Man’s admonition ‘that retiree benefits normally . . . are interminable.’”

Tackett states that the Sixth Circuit “continued to extend the reasoning of Yard-Man,” to hold in Noe that “‘[a]bsent specific durational language referring to retiree benefits themselves,’ a general durational clause says nothing about the vesting of retiree benefits,” and “that a provision that ‘ties eligibility for retirement-health benefits to eligibility for a pension . . . [leaves] little room for debate that retirees’ health benefits ves[t] upon retirement.’”

In vacating the Sixth Circuit’s Tackett decision, the Supreme Court held that “[w]e disagree with the Court of Appeals’ assessment that the inferences applied in Yard-Man and its progeny represent ordinary principles of contract law.” Instead, “Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits.” Rejecting Yard-Man’s premise that retiree health care benefits are not subjects of mandatory collective bargaining, the Supreme Court noted that in a CBA, the parties “can and do voluntarily agree to make retiree benefits a subject of mandatory collective bargaining.” Tackett also chastises the Sixth Circuit in holding that “retiree health care benefits are not a form of deferred compensation,” as Yard-Man had reasoned.

In a critical holding for future litigation, the Supreme Court stated that “[f]urther compounding this error, the Court of Appeals has refused to apply general durational clauses to provisions governing retiree benefits.” In treating the Sixth Circuit’s disregard of durational provisions as error, Tackett expressly holds that the Sixth Circuit’s decisions construing general durational provisions in CBAs “distort the text of the agreement and conflict with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties.”

The Supreme Court also rejected the Sixth Circuit’s illusory promise analysis. In short, a provision benefitting some, but not all, retirees is not illusory because “a promise that is ‘partly’ illusory is by definition not illusory.” Similarly, Tackett holds that Yard-Man and its progeny violate “the traditional principle that courts should not construe ambiguous writings to create lifetime promises.” Approving the Sixth Circuit’s en banc 1998 holding in Sprague v. General Motors Corp. that “vesting of welfare plan benefits is not required by law,” Tackett notes that Sprague “underscores Yard-Man’s deviation from ordinary principles of contract law.”

Finally, Tackett holds that Yard-Man failed “to consider the traditional principle that contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement,” which the Supreme Court had adopted in Litton Financial Printing Div., Litton Business Systems, Inc. v. NLRB. As a result, Tackett concludes 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.”

Tackett’s Significance for Retiree Health Benefits

Nearly every CBA that provides health and other welfare benefits to retirees contains a general duration provision that limits the CBA’s promises to the term of the CBA. Indeed, some CBAs contain such provisions for benefits provided by the CBA. In light of Tackett’s holding that the Sixth Circuit’s disregard of such provisions is error, most CBA-based retiree health benefit programs should be subject to modification or termination, at least to the extent that the benefits have not been continued through an “evergreen” position in prior and current CBAs. Accordingly, most “rust-belt” companies in and outside the Sixth Circuit should be able to modify or terminate retiree welfare plans with only minimal legal risk.

Finally, inasmuch as an accounting rule, FASB 106, has required employers to account for retiree welfare benefits as either an expense on the employer’s income statement or by amortization of the liability on a straight line basis since 1992, for which the aggregate impact on employers is in the billions of dollars, Tackett’s significance will be felt in three ways:

  • Rust-belt company balance sheets could improve significantly
  • Employers could terminate or modify union retiree plans, e.g., by charging premiums and increasing co-payments
  • Future union negotiations of retiree welfare benefits are likely to be even more contentious