The U.S. Supreme Court has unanimously denounced the Sixth Circuit’s legal test for interpreting whether a collective bargaining agreement “vests” health care benefits to retirees. In M&G Polymers USA, LLC et al. v. Hobert Freel Tackett et al., 574 U.S. ____ (Jan. 26, 2015), the Court rejected the legal presumption that, in the absence of extrinsic evidence to the contrary, an employer intends to vest lifetime health benefits for retirees by including them in a collectively-bargained agreement. This decision overturns more than 31 years of law in the Sixth Circuit that developed under International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F. 2d 1476 (6th Cir. 1983).

M&G Polymers had entered into a three-year collective bargaining agreement and pension agreement with the union that included retiree health care benefits. After that agreement expired, M&G Polymers announced changes to retiree benefits, including increased contributions by the retirees that had not been required under the collective bargaining agreement. The union and retirees sued, arguing that health benefits were vested and could not be changed. Using the Yard-Man analysis, the Sixth Circuit upheld a decision that M&G Polymers and the union intended retiree health benefits to vest for life by including them in a collective bargaining agreement linking eligibility to pension benefits. M&G Polymers was ordered to permanently reinstate contribution-free health care benefits for the retirees, and it petitioned the Supreme Court for review. The Supreme Court vacated the Sixth Circuit’s decision and remanded the case.

The Court’s opinion, written by Justice Thomas, rejected the presumption in Yard-Man that since retiree benefits are not mandatory subjects of bargaining, parties to collective bargaining would generally intend retiree benefits to vest for life. The Court also rejected any presumption that health care benefits were a form of delayed compensation for past services similar to pension benefits, pointing out that federal law governing employee benefits, the Employee Retirement Income Security Act (“ERISA”), allows employers to adopt, modify or terminate health care and other “welfare” benefits and does not impose the same strict vesting rules that apply to pension benefits. Therefore, ordinary principles of contract law apply to the collective bargaining agreement provisions for health care benefits, to the extent that they are not inconsistent with federal labor policy, and Yard-Man’s assumptions about the intentions of the parties are simply too speculative to apply generally to any particular collective bargaining agreement.

Justice Ginsberg wrote a short concurring opinion, joined by Justices Breyer, Sotomayor and Kagan. The concurrence agreed that in examining the collective bargaining agreement, contract principles should be applied without the Yard-Man assumptions; that the agreement as a whole should be considered when determining the intent of the parties; that when the contract is unambiguous, the court’s inquiry ends; and that extrinsic evidence is not needed unless the contract is ambiguous. However, the concurrence also stated that the court should consider explicit and “implied” terms of the agreement “in light of relevant industry-specific ‘customs, practices, usages, and terminology,’” although it rejects “’Yard-Man’s ‘thumb on the scale in favor of vested retirees.’”

The case was returned to the Sixth Circuit with instructions to review the terms of the expired collective bargaining agreement under ordinary principles of contract law. This leaves M&G Polymers to once again litigate its position that retiree health benefits did not “vest” and should not continue, even though the collective bargaining agreement expired in 2003. The decision highlights the importance of using experienced legal counsel when negotiating and drafting terms of a collective bargaining agreement.