For the past quarter century, because of conflicting legal authority, employers who offer health care to their retirees, particularly in a unionized setting, have struggled to determine whether they can alter those benefits. In most of the nation, federal courts permit changes to retiree medical benefits upon the termination of the collective bargaining agreements that provide the benefits, absent specific language that mandates vesting of such benefits. In the territory covered by the United States Court of Appeals for the Sixth Circuit (covering Ohio, Michigan, Kentucky, and Tennessee), a presumption of vesting is afforded to retirees, making it much more difficult, if not impossible, for employers to alter retiree medical benefits. This state of affairs has led to wide-ranging results. For example, employers that operate in multiple states (and their unions) have engaged in forum shopping in their favored jurisdiction. The high cost of health care has forced employers with no other alternative to attempt to discharge retiree medical liabilities in bankruptcy, which in turn led to amendments to the Bankruptcy Code. Other employers have settled their liability by transferring significant sums to independent trusts, such as VEBAs, which then have the responsibility for providing retiree medical benefits.

On January 26, 2015, the U.S. Supreme Court, in M&G Polymers USA, LLC, et al. v. Tackett, et al., 13-1010, 574 U.S. ___ (2015)(slip copy), changed the game by invalidating the Sixth Circuit’s presumption of vesting for retiree medical benefits. That presumption grew out of the Sixth Circuit’s decision in UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), which held that retiree health coverage provided for under a collective bargaining agreement is presumed vested for life unless otherwise stated. This presumption was in conflict with the Third Circuit, which presumes the opposite, and the Second and Seventh Circuits, which require some contractual language indicating the intent to vest retiree health benefits. After M&G Polymers, there is no longer “a thumb on the scale in favor of vested retiree benefits in all collective bargaining agreements.”

This does not mean that employers may now modify or terminate retiree medical benefits unilaterally, or even with union agreement for those already retired. Instead, the presumption of vesting is gone, and principles of contract interpretation control. We know from experience that the documents that provide retiree medical benefits are often not a model of clarity. So, as with most other Supreme Court decisions, it will ultimately be up to the lower courts to shape the law. But M&G Polymers does appear to signal a seismic shift that employers will undoubtedly use to test the boundaries of their rights, both in court and at the bargaining table.

Background of the Case

The facts surrounding the M&G Polymers case are not unlike the legions of retiree medical benefit cases that came before it.  M&G purchased a unionized plant in 2000 and entered into a collective bargaining agreement with the union. Following the expiration of the collective bargaining agreement, M&G announced that it would require retirees to contribute to the cost of their retiree health benefits. Retirees filed suit, alleging that the agreement’s language created a vested right to lifetime retiree health provided by M&G. A detailed discussion of the facts of this case is featured in our May 27, 2014 alert. The district court dismissed the complaint for failure to state a claim, but the Sixth Circuit reversed based on its long-standing Yard-Man presumption. In Yard-Man, the appellate court presumed that an employee who works and then retires under a collective bargaining agreement has a vested right to retiree health benefits provided under the agreement, even after the agreement expires, unless the agreement specifically states otherwise. On remand, the district court ruled in favor of the M&G retirees and issued a permanent injunction ordering the reinstatement of contribution-free health care benefits for retirees. The Sixth Circuit affirmed, and the U.S. Supreme Court granted certiorari on May 5, 2014 on the sole question of whether theYard-Man presumption was appropriate.

The Supreme Court held that the Sixth Circuit’s Yard-Man presumption “violates ordinary contract principles” and distorts the attempt to “to ascertain the intention of the parties.” The Court “reject[ed] the Yard-Man inference as inconsistent with ordinary principles of contract law” and remanded to the appellate court to review the agreement under ordinary principles of contract law. Specifically, the Court rejected the appellate court’s claim that Yard-Man’s analysis was grounded in the principals of contract law, as it found no record of any industry custom or usage that customarily vested retiree benefits. It took note that “[w]orse, the Court of Appeals has taken the inferences in Yard-Man and applied them indiscriminately across the industries.” The Court also held that the Sixth Circuit failed to consider traditional contract principles when it refused to apply a collective bargaining agreement’s termination date to retiree health provisions.

Employer Insights

What do employers do now? First, they should revisit strategies related to retiree medical benefits. Documents should be reviewed and revised where possible to strengthen the employer’s arguments with respect to vesting. Employers should re-evaluate their strategy with respect to retiree medical benefits and ask the question, “does the new-found power provided by the M&G Polymers case provide us with an opportunity to achieve changes that were previously thought too risky or that we did not have the power to achieve before?"

All employers, including those in the public sector, should engage in this analysis. Although it could be argued that the Sixth Circuit’s Yard-Man presumption did not directly apply to public sector collective bargaining agreements (because public sector employers are not subject to ERISA), the Supreme Court’s reasoning in striking down theYard-Man presumption under contract law principles certainly extends to the interpretation of public sector collective bargaining agreements that provide for retiree health benefits. We have a wealth of experience with these issues in the public sector, and fully expect that M&G Polymers will be viewed by state courts (including those in Illinois) as a significant decision that has at least some impact on retiree health benefits in public sector collective bargaining agreements.

The legal principles are now not much different than they were in 1986 when our co-author Mike Richardson wrote one of the first published articles on the treatment of retiree medical benefits under ERISA, Securing Employee Welfare Benefits Through ERISA, 61 Notre Dame L. Rev. 551 (1986), or when our partner Dave Radelet litigated one of the first declaratory judgment actions that led to the first independent retiree medical VEBA in 1994. But the analysis, strategy, and execution have become far more complex and nuanced, calling for strategies and approaches that are uniquely tailored to each situation. With more than 25 years of experience advising employers on retiree medical benefits, our attorneys can help you answer the questions, “how come?”, “why not?” and “how?”; help you analyze your potential liability; design a strategy to address it; and be there with you to execute your unique response to this truly game-changing decision. Please contact us to find out more about how we can assist you with your retiree medical issues.