On October 1, 2012, the Supreme Court of the United States declined to review a decision of the United States Court of Appeals for the Sixth Circuit which upheld a provision of a collective bargaining agreement (“CBA”) requiring the union to indemnify the employer for withdrawal liability.

The employer, Shelter Distribution, Inc. (“Shelter”), and the union, the General Drivers, Warehousemen and Helpers Local Union No. 89, were the parties to a CBA that required the employer to contribute to the Central States, Southeast and Southwest Areas Teamsters Pension Fund (the “Fund”). However, that same provision provided that the union would indemnify Shelter “for any contingent liability which may be imposed under the Multiemployer Pension Plan Amendments Act of 1980” (“MPPAA”). It was MPPAA that introduced the withdrawal liability provisions of ERISA.

In 2001, the union disclaimed its representation of Shelter’s employees. Thereafter, the Fund imposed $57,291.50 in withdrawal liability against Shelter. The Shelter demanded that the union indemnify it and the union refused. The union argued that MPPAA established a public policy prohibiting employers and unions from shifting withdrawal liability because such a shift defeats the purpose of the statute. Both the arbitrator and the district court rejected those arguments.

On March 16, 2012, the Sixth Circuit affirmed those decisions. The court first noted its prior decision in Pfahler v. National Latex Products Co., 517 F.3d 816 (6th Cir. 2007). In Pfahler, the Court noted while ERISA § 410(a), 29 U.S.C. § 1110(a), provides that any “agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility obligation, or duty under this part shall be void as against public policy.” However, ERISA § 410(b), 29 U.S.C. § 1110(b), allows fiduciaries to purchase insurance to cover such liability. In Pfahler, the Sixth Circuit interpreted ERISA § 410(a) as only prohibiting “agreements that diminish the statutory obligations of a fiduciary.” Because indemnification agreements to do not diminish those obligations, but rather, like insurance, merely require third party compensation the Pfahler court held that “it would be illogical to interpret the statute as prohibiting indemnification agreements which accomplish the same thing.”

With the backdrop of Pfahler, the Sixth Circuit held that the same rule applies to agreements for indemnification of withdrawal liability because the union was “the entity analogous to the insurance company described in section 1110(b).” The court further noted that “there was no shifting of the financial liability under the agreement: Shelter was still financially liable to the Fund and the company satisfied its financial obligation. Under the indemnification provision, the Union simply agreed to reimburse Shelter for any financial liability it would incur should any contingent liability be imposed by the pension plan.” Accordingly, the court rejected that this provision violated public policy. To the contrary, the court held that MPPAA’s goal of minimizing the financial burden to a multiemployer plan when an employer withdrew would still be served even if indemnification agreements are allowed, so long as the employer remains primarily liable.

Notably, the Sixth Circuit is the second court of appeals to reject the argument that such indemnification agreements between employers and unions are contrary to public policy. Like the Sixth Circuit, the Third Circuit has previously held that the public policy “behind ERISA and the MPPAA – ensuring that pension funds will be adequately funded, even when employers withdraw from them, and that the employees who are relying on those funds will be protected – will be served even if indemnification agreements between employers and third parties are permitted, so long as the employer remains primarily liable for the funding.” Pittsburgh Mack Sales & Service, Inc. v. Int’l Union of Operating Engineers, Local Union No. 66, 580 F.3d 185, 194 (3d Cir. 2009).

Such indemnification agreements may represent a significant development to those employers who have the leverage to negotiate them with their unions. Withdrawal liability can have severe economic impacts upon employers and may be triggered without any action by the employer, as was the case here as it was the union disclaiming representation of Shelter’s employees that ended Shelter’s obligation to contribute to the Fund, thereby subjecting it to withdrawal liability.

The Sixth Circuit’s decision can be found at Shelter Distribution, Inc. v. General Drivers, Warehousemen & Helpers Local Union No. 89, 674 F.3d 608 (11th Cir. 2012). The Supreme Court’s order denying the petition for a writ of certiorari is in case number 11-1521, 2012 WL 2340882, (U.S. Oct. 1, 2012).