Employers may unwittingly create implied vested contractual rights to retirement and healthcare benefits for their employees in perpetuity.

In Sonoma County Ass’n of Retired Employees v. Sonoma County, No. 10-17873 (February 26, 2013), the Ninth Circuit vacated a district court’s dismissal of a lawsuit brought by a group of retired non-union county workers seeking to enforce an alleged agreement by the county’s board of supervisors to provide them lifetime healthcare benefits.  The retirees contended that the board broke its word to pay for “all or substantially all” of the retirees’ healthcare benefits in perpetuity when it cut the county’s healthcare benefit contributions to $500 a month for retirees in 2008, a change that was aimed at reining in the county’s ever-rising health care costs.  The retirees asserted state law breach of contract and promissory estoppel claims, as well as claims under the Contract Clauses and Due Process Clauses of the California and U.S. Constitutions.

 In 2010, the district court dismissed the suit with leave to amend, ruling that the county never expressly promised to continue retiree healthcare benefits in perpetuity, and that extrinsic evidence of such a promise could not bind the county.  The retirees filed an amended complaint, this time adding more facts and attaching evidence of an alleged express agreement with implied terms providing for healthcare benefits in perpetuity, including board resolutions, memoranda of understanding, and ordinances.  The district court remained unpersuaded on the retirees’ second try, and dismissed the complaint without leave to amend.

 The retirees appealed.  While the appeal was pending, the California Supreme Court held in 2011 in Retired Employees Ass’n of Orange County, Inc. v. County of Orange that a vested right to healthcare benefits for retired county employees can be implied under certain circumstances from an express contract created by county ordinance or resolution.  We previously reported on this decision here.

 On appeal, the Ninth Circuit, relying on Retired Employees Ass’n of Orange County, found that plaintiffs had plausibly alleged in their amended complaint that the county had entered into an express contract, which included implied terms providing healthcare benefits to retirees that vested for perpetuity.  But the Ninth Circuit determined that the retirees had not plausibly pointed to a county ordinance or resolution that created that alleged express contract with the implied terms.  It nonetheless held that the plaintiffs should be permitted another shot at amending their complaint to state a claim for an implied right to lifetime healthcare benefits based on an express contract created by county ordinance or resolution.

 Notably, the Ninth Circuit did observe that the retirees faced a “heavy burden” of establishing that the county intended to create a compensation contract with them by ordinance or resolution, and demonstrating that implied terms in that contract provided for vested healthcare benefits in perpetuity.  It cautioned that any court considering such a claim must “identify ‘a clear basis in the contract or convincing extrinsic evidence’ establishing that a contract exists and clearly delineating the contractual obligation at issue.”

 This case is significant to public employers because it lends additional heft to retirees seeking to rely on extrinsic evidence to assert implied vested contractual rights to lifetime retirement and healthcare benefits.  While private employers are generally governed by ERISA, courts may look to the relevant state law in determining whether a contractual claim could be stated under ERISA common law.  Meeting the financial obligations created by such implied rights would add substantial cost burdens to employers who never intended to assume such obligations in perpetuity.  Employers may be able to avoid creating implied vested contractual rights by carefully describing the limits of a retiree benefit, and by expressly stating that neither a benefit nor a method of calculating that benefit is vested, but instead can change from year to year.