Ordinary contract principles govern disputes about collectively bargained retiree medical benefits.

A Morgan Lewis team secured a major victory for employers when the U.S. Supreme Court, in M&G Polymers USA, LLC v. Tackett,[1]unanimously rejected a decades-old precedent that placed “a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements” (CBAs). The Supreme Court held instead that ordinary principles of contract law apply to such agreements.

In its 1983 Yard-Man decision,[2] the U.S. Court of Appeals for the Sixth Circuit considered whether an employer had breached a CBA when it terminated benefits for retired employees. Although the Yard-Man CBA included a general “durational clause” that provided that the CBA and all of its obligations expired at the end of the CBA's term, the Sixth Circuit court concluded that the agreement was ambiguous as to the duration of retiree medical benefits. To resolve the ambiguity, the court looked to the “context” of labor negotiations and inferred that parties engaged in collective bargaining would intend retiree benefits to vest for life. To support its position, the court suggested that (1) such benefits are typically understood as a form of deferred compensation or reward for past services, (2) the benefits are tied to attaining retiree status under a related pension plan, and (3) retiree benefits are not a mandatory subject of bargaining that must be included in a CBA.

In the decades following Yard-Man, the Sixth Circuit extended the reasoning behind the Yard-Man presumption even further. As a result, the Sixth Circuit became a magnet for litigation about collectively bargained retiree benefits and, unlike similar disputes in other circuits, retirees almost always prevailed in the Sixth Circuit.

In the M&G Polymers decision, Justice Clarence Thomas, writing for a unanimous Supreme Court, vacated the Sixth Circuit’s decision and remanded the case back to the court of appeals. The Court specifically rejected the “Yard-Man presumption” as inconsistent with ordinary contract principles, stating that  it stands “on a shaky factual foundation” and is not grounded on “inferences in any record evidence.” Importantly, the Court held that retiree health benefits are not a form of deferred compensation, which undercuts one of Yard-Man’s primary rationales. The Court also rejected the Sixth Circuit’s approach to durational clauses, writing 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 M&G Polymers decision highlights principles of contract law that courts should apply to agreements that govern retiree medical benefits. First, general durational clauses should be construed as part of the whole agreement between the parties. Second, courts should not construe ambiguous writings to create lifetime promises. Third, in the ordinary course, contractual obligations will end upon termination of the bargaining agreement. The case was remanded to the Sixth Circuit to apply these traditional contract principles in the first instance.

Justice Ruth Bader Ginsburg, in a brief concurrence joined by Justices Stephen Breyer, Sonia Sotomayor, and Elena Kagan, offered some additional thoughts on contract interpretation in the context of retiree medical cases. Although Justice Ginsburg agreed that courts must apply ordinary contract principles, she rejected the idea that healthcare benefits can be vested only through “clear and express” language—a position that several courts of appeals have taken. Justice Ginsburg also suggested that lower courts should examine the entire agreement to determine whether the parties intended for retiree healthcare benefits to vest and, where ambiguity exists, consider extrinsic evidence to determine the parties’ intent.

Although the facts and circumstances will vary from case to case, by eliminating a long-standing split in the circuits, M&G Polymers should bring a measure of uniformity to retiree medical benefits litigation in the collective bargaining context and minimize the forum shopping triggered by the Yard-Man presumption. The decision may also impact cases in the nonunion setting by reinforcing the importance of the text in determining contractual obligations to provide retiree medical benefits.