On January 26, 2015, the U.S. Supreme Court changed the landscape for vesting of collectively bargained retiree medical benefits with its 9-0 decision in M&G Polymers v. Tackett. Overturning the Sixth Circuit’s Yard-Man presumption, that such benefits should vest for life, the Court held that collective bargaining agreements (CBAs) should be interpreted using “ordinary contract principles” without putting a “thumb on the scale” in favor of retiree vesting. However, the instructions that “courts should not construe ambiguous writings to create lifetime promises,” and “an employer’s commitment to vest such benefits is not to be inferred lightly,” may tilt the scale in the other direction.
The Employee Retirement Income Security Act (ERISA) provides vesting requirements for pension benefits, but not for health and welfare (H&W) benefits. ERISA leaves any H&W vesting to the discretion of employers. Where benefits are collectively bargained, the vesting of H&W benefits is determined by the collective bargaining process. Retiree medical benefits, an interesting hybrid of retirement and H&W, have generated tremendous controversy and litigation.
Most CBAs expire at a certain date and the benefits thereof likewise expire. For pension benefits, which are required to be vested, retirees will continue to collect the benefits they have earned for life, even after the expiration of the CBA.
A CBA can specify that retiree medical benefits “vest” (that is, last for life) or that they do not vest, and may expire or be curtailed when the CBA expires, or sooner. However, most CBAs have no specific language as to whether retiree medical benefits vest. Perhaps this is because the employers and unions believed the standard durational language, that any portion of the agreement may be modified by the parties after the expiration date, controlled retiree medical benefits as well as all other benefits.
Typically, such modification would be the result of collective bargaining. So, when retirees claim their benefits are “vested,” they not only challenge the employer’s right to curtail the benefits, but also the union’s right to bargain for wages, job security or other benefits in exchange for modifications to the retiree medical benefits. Under federal law, however, unions generally do not have a legal obligation to represent the retirees, and some courts have been skeptical of subsequent agreements that curtail retiree benefits.
This issue has only become more important over time; with skyrocketing medical costs resulting in liabilities that may far exceed what employers and unions had planned, often the parties are contracting to decrease or terminate retiree medical benefits entirely.
Prior to M&G Polymers, there was a federal circuit split over how to interpret collective bargaining agreements to determine whether retiree medical benefits are vested after the expiration of the CBA. International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc. (Yard-Man) controlled in the Sixth Circuit. Yard-Man and its progeny created a presumption in favor of vesting retiree medical benefits. The Sixth Circuit reasoned that such benefits would be partly illusory if they could be taken away and inferred that parties to the agreement would want the benefits to be vested.
Yard-Man was the most pro-vesting standard imposed in any of the federal circuits. For instance, the Third Circuit generally requires a clear statement that health care benefits are intended to survive the termination of the CBA in order to find that such benefits are vested. The Second and Seventh Circuits require at least some language in the CBA that can reasonably support an interpretation that health care benefits should continue indefinitely.
M&G Polymers v. Tackett
M&G Polymers entered into a CBA and Pension, Insurance, and Service Award Agreement with the union, which provided for retiree medical coverage with a full employer contribution to be provided “for the duration” of the agreement (with future renegotiations). After these agreements expired, M&G decided to require retirees to contribute to the cost of their health coverage. Several retirees sued, arguing that they had a vested right to retiree medical benefits with no contribution requirement. The district court initially dismissed the case, but the Sixth Circuit, on appeal, applied Yard-Man and reversed. On remand, both the district court and the Sixth Circuit ruled in favor of the retirees. In M&G Polymers, the Court disagreed, holding the Sixth Circuit’s use of Yard-Man was “incompatible with ordinary principles of contract law.”
Critique of Yard-Man
The main focus of the Court’s opinion was its critique of the Yard-Man inferences, which favor vesting. The Court began by noting that collective bargaining agreements must be interpreted according to ordinary principles of contract law, when not inconsistent with federal labor policy. The Sixth Circuit analysis distorts the attempt to ascertain the intention of the parties by placing a thumb on the scale in favor of vesting. The Sixth Circuit’s “assessment of likely behavior in collective bargaining is too speculative and too far removed from the context of any particular contract to be useful in discerning the parties’ intention.” The Sixth Circuit relied on its own suppositions about the intentions of the parties and improperly applied those theories indiscriminately.
The Supreme Court found fault with the Sixth Circuit’s refusal to apply general durational clauses to retiree benefits (on the theory that various inferences outweigh routine duration clauses); the Court found that this distorted the text and conflicted with the principle that a written contract is presumed to encompass the parties’ entire agreement.
Traditional Contract Principles
The Supreme Court disagreed with the Sixth Circuit’s analysis that unvested benefits create a partially illusory promise because they benefit some, but not all, retirees. Illusory promises have no substance and therefore cannot provide consideration for a contract. However, under the Supreme Court’s guidance, a partly illusory promise is not illusory at all. If it is only partly illusory, then it has some substance. If a promise benefits some retirees, then it is sufficient to provide consideration. This is particularly common in the CBA context, where agreements are negotiated on behalf of broad categories of individuals and may not benefit every member.
The Court laid out a number of principles of contract construction applicable to the vesting analysis. For example, courts should not construe ambiguous writings to create lifetime promises. Also, contracts that are silent on duration will not ordinarily be treated as “operative in perpetuity” but rather as “operative for a reasonable period of time.” The Court also instructed that contractual obligations will generally cease upon the termination of the bargaining agreement. Such agreements may provide for lifetime benefits, in specific terms, but courts cannot infer this when a contract is silent. And, “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.”
Taken together, these principles of construction provide a framework under which the typical CBA will not result in vesting. The vast majority of CBAs contain general limits on duration, but very few directly address vesting of retiree medical benefits. If vesting is not to be inferred lightly, and if ambiguous writings should not create lifetime promises, then it would seem that most CBAs should not result in vesting.
The Supreme Court vacated the lower court decision and remanded the case for the Sixth Circuit to review under “ordinary principles of contract law.”
The concurring opinion of Justice Ginsburg (joined by Justices Breyer, Sotomayor and Kagan) encouraged the lower courts to look at the entire agreement to discern the intent of the parties. Justice Ginsburg stated that when a contract is ambiguous, a court may consider extrinsic evidence to determine the intent of the parties. According to Justice Ginsburg, a determination of vesting can be made from a CBA’s explicit and implied terms. However, Justice Ginsburg agreed that the analysis must be done “without Yard-Man’s ‘thumb on the scale in favor of vested retiree benefits.’”
What Does M&G Polymers Mean?
The Yard-Man standard is dead. However, the Court did not reach a conclusion as to whether the benefits in this case were vested. The many various ways that durational limits are expressed in CBAs, and the many various statements suggestive of vesting in such CBAs, ensures that courts will be fleshing out the implications of M&G Polymers for years to come.
Potential Implications for Employers
For employers and unions currently negotiating CBAs, the clear message is to be explicit about whether they intend to assume liability for unalterable lifetime retiree medical benefits. For existing CBAs, M&G Polymers will likely generate much litigation as to the application of “ordinary contract principles” to the many variations of specific contractual language.