The Supreme Court recently answered an important question that has lingered over retiree health benefits for years. If a contract gives retirees a right to health benefits but doesn't specify whether those benefits may be amended or terminated, can they ever be modified or taken away? The Court didn't exactly say they could be changed, but it opened the door a little wider to that possibility.

The Yard-Man Inference. A prior case from a federal appeals court (the Yard-Man case) said that, if retiree health benefits were collectively bargained but the collective-bargaining agreement (CBA) didn't specify whether they could be modified, there was a "presumption" or "inference" that the parties intended for those benefits to last for life, without modification. It didn't matter if the CBA itself expired at some point. The right to unmodified benefits was deemed to continue.

This created a problem for employers who had agreed to provide retiree health benefits at a time when the cost of those benefits wasn't a big concern, only to find out later that, notwithstanding rising health-care costs, they couldn't pass on any greater share of those costs to the retirees, much less take away the benefits altogether.

Placing a Thumb on the Scale. The Supreme Court rejected this so-called Yard-Man presumption, saying, in effect, that it went too far in making up contract terms that weren't really part of the deal. "Yard-Manviolates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements. That rule has no basis in ordinary principles of contract law. . . . [It] is too speculative and too far removed from the context of any particular contract to be useful in discerning the parties' intention."

Look at the Whole Agreement. The Court didn't fully answer the question whether retiree health benefits could be modified or terminated (absent a clear reservation of rights), but they left some possible hints. One of those hints is found in another criticism the Court noted about the Yard-Man presumption, namely that it fails to take into account the terms of the whole agreement between the parties. Those terms might include a general expiration provision in the agreement, suggesting that the contract terms were only enforceable until the agreement expired.

No Lifetime Promises. The Court also noted a recognized rule of contract interpretation that says an ambiguous contract generally should not be interpreted to create lifetime promises. Rather, contracts that don't specify an ending point should only be operative for a "reasonable" period of time.

Ordinary Principles of Contract Law. Bottom line, the Court concluded there should be no presumption regarding the duration of benefits in these types of cases because the regular rules that apply when interpreting contracts are enough. "We reject the Yard-Man inferences as inconsistent with ordinary principles of contract law."

Open Questions. Although this case was generally favorable for employers (particularly those that continue to offer retiree health coverage), it still leaves some open questions.

  • The Court didn’t resolve whether this particular contract created a lifetime right to benefits. They just sent the case back to the court of appeals to figure that out without applying the Yard-Manpresumption.
  • Because this case involved benefits that were collectively bargained, it’s not clear whether the same analysis will apply in cases that do not involve collectively bargained benefits, although the Court gave no indication that its analysis was limited to collectively bargained arrangements.

Always Reserve the Right to Modify. This case will be helpful in resolving questions about arrangements that do not contain a clear reservation of rights. But it also emphasizes how important it is to ensure that contracts and plan documents expressly reserve the right to modify or terminate benefits, or make clear how long benefits are intended to remain unmodified. Years of costly litigation could be avoided by adding a sentence or two to the contract or plan.

A copy of the Court’s opinion in the case (M&G Polymers v. Tackett) is here.