With healthcare costs rising and continued increases expected, plan sponsors frequently target retiree health benefits for reduction or elimination, as these benefit costs tend to be particularly large and easily segregated. Because welfare benefits are not subject to any vesting requirements under ERISA, there is no statutory impediment to elimination or reduction of these benefits. However, disappointed retirees frequently mount challenges to the reduction of elimination of these benefits by bringing class actions predicated on contractual or common law principles that they seek to incorporate into ERISA.

As the U.S. Court of Appeals for the Seventh Circuit recently observed, an employer’s commitment to pay lifetime health benefits to retirees may have severe consequences and lead to “desperate arguments:” In fact, “that commitment in the UAW’s collective bargaining agreements with the Detroit automakers helped drive those companies to the brink of bankruptcy – and General Motors and Chrysler over the brink.” Boeing Co. v. International Union of United Automobile, Aerospace & Agricultural Implement Workers of America (UAW), 600 F.3d 722, 726 (7th Cir. 2010).

Given the high stakes-nature of these claims, we take this opportunity to review some notable decisions in retiree benefit cases from this past year. Three discuss contractual vesting claims in the collective bargaining arena; two involve efforts by plan sponsors to obtain declaratory judgment relief; and one addresses the statute of limitations for retiree benefit claims.

Contractual Vesting Claims in the Collective Bargaining Area

The collective bargaining arena presents unique issues with respect to retiree benefit claims, typically when provisions for retiree benefits do not continue from one collective bargaining agreement to the next. As in previous years, the case law from this past year generated mixed results.

  • Caps on employer contributions survive expiration of collective bargaining agreements

In Wood v. Detroit Diesel Corp., 607 F.3d 427 (6th Cir. 2010), the Sixth Circuit held that caps on retiree health care contributions that were agreed to in earlier collective bargaining agreements continued to apply beyond 2004 for employees who retired between 1993 and 2004, even though the agreements capping the benefits were not renewed in the 2004 bargaining cycle. In so ruling, the Court reasoned that this was “the most sensible reading” of the original agreements, accounting obligations, and precedents.

The caps were originally implemented in 1993 as a result of the promulgation of FAS 106, which required companies to account for retiree health care costs on an accrual basis and to recognize a liability for the present value of future retiree health expenditures, among other things. To avoid the large liability that would result from FAS 106 if the collective bargaining agreements (CBAs) were not amended, Detroit Diesel and the UAW implemented a cap in 1993, established a Voluntary Employee Benefit Association (VEBA), and entered into subsequent cap agreements, the latest of which expired in 2004. In the 2004 CBA, the parties implemented a new health care program for post-2004 retirees, but did not enter into additional agreements for caps or relating to employer contributions to the VEBA. Retirees who had retired between 1993 and 2004 were notified they would have to pay for above-cap health care costs beginning in January 2006, resulting in monthly costs of up to $800 for some retirees. The retirees sued in 2005 under the LMRA and ERISA, contending that they were entitled to fully funded, lifetime health benefits.

The Sixth Circuit held that the “only coherent reading” of the agreements was that they were intended to effect a “broad shift” away from entitlement to fully funded, lifetime health care benefits, to a capped dollar benefit. In reaching this result, the Court applied the Circuit’s Yard-Man inference, pursuant to which a court presumes that the parties intended retiree welfare benefits to continue for life, notwithstanding the expiration of a CBA. See UAW v. Yard-Man, 716 F.2d 1476, 1482 (6th Cir. 1983). Although normally this inference tends to favor the participant’s claim, in this instance the Court held that someone who had already retired under a cap agreement was vested only in benefits under that agreement, despite the subsequent expiration of the CBA. The absence of any statement in the cap agreement that retirees might have to pay out-of-pocket costs did not change the Court’s opinion, as the burden of proving intent to vest rested on plaintiffs.

  • Seventh Circuit finds intent to vest but remands for further factual development

In Temme v. Bemis Co., 622 F.3d 730 (7th Cir. 2010), a class of retirees sued under the LMRA and ERISA with respect to their medical benefits, after Bemis changed the insurance provider, deductibles, and co-pays, and later discontinued all prescription coverage. The district court granted summary judgment in favor of defendants, finding that that a 1985 plant closing agreement (PCA) did not include a promise of lifetime retiree medical coverage.

On appeal, the Seventh Circuit determined that the PCA, when read in conjunction with the 1985 (last effective) CBA, showed an intent to vest lifetime retiree medical benefits, but remanded the case for further proceedings instead of ruling outright for the plaintiffs.

The Seventh Circuit determined that the PCA must be read in conjunction with the CBA because it was a necessary document in gaining a complete understanding of the agreement between the parties. After reviewing both documents, the Court determined that the PCA was negotiated with the purpose of creating enduring rights, had no termination date, and specified no method through which retiree benefits could end. The Seventh Circuit nevertheless remanded to the district court to determine: (i) whether the insurance contract referred to in the CBA included an express reservation of rights to modify or terminate the benefits, and, if so, whether the parties intended that clause to be abrogated or modified by the vested nature of the benefits; (ii) the precise nature of the 2005 and 2007 modifications; and (iii) whether plaintiffs could meet the burden of showing that the modification “brought their benefits below a level reasonably commensurate with the coverage they had enjoyed” from 1985 to 2005. The Court noted that it was likely that the parties intended that Bemis would continually provide medical coverage at a level “substantially commensurate” with the benefits provided under the CBA, but with freedom to impose cost-saving measures that did not substantially reduce benefits.

  • Ninth Circuit concludes that early retirees’ rights to fully paid medical coverage to age 65 survived expiration of collective bargaining agreements

In Alday v. Raytheon Co., 620 F.3d 1219 (9th Cir. 2010), the Ninth Circuit held that a series of CBAs that provided for payment of health insurance premiums for early retirees until age 65 survived the expiration of the CBAs because the CBAs included a specific duration to pay this obligation, but did not specify a similar duration for other coverages. In so ruling, the court rejected Raytheon’s reliance on reservation of rights clauses in the plan documents, holding that “[w]hatever termination rights Raytheon reserved for itself in the Plans with respect to benefits do not apply to Raytheon’s existing obligation to provide premium-free medical insurance coverage.”

Efforts by Plan Sponsors to Obtain Declaratory Judgment Relief

Not surprisingly, given the stakes of “guessing wrong” with respect to the legality of plans to reduce or terminate retiree benefits, some plan sponsors try to obtain advice guidance from the courts through declaratory judgment actions. Courts have generally limited the opportunity to use this vehicle by closely scrutinizing the jurisdictional basis for such actions.

  • District court determines it lacks jurisdiction over ERISA declaratory judgment action and transfers case to venue chosen by “natural plaintiffs”

 In Newpage Wisconsin System Inc. v. United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union, AFL-CIO/CLC, No. 10-CV-41, 2010 BL 162198 (W.D. Wis. July 16, 2010), an employer and retiree health plan sought a declaratory judgment that changes to retiree benefits did not violate ERISA, the LMRA, or the CBAs. The suit was asserted against a defendant class of retirees and the union. The court concluded that it lacked subject matter jurisdiction over the ERISA claims, and dismissed the LMRA claims in favor of a pending Ohio action brought by the union and retirees against the company. With respect to the ERISA claims, the district court held that declaratory-plaintiffs may not bring claims seeking a declaration that ERISA plan amendments comply with ERISA, because such a suit does not implicate the enforcement of ERISA rights, and thus ERISA jurisdiction does not exist. Although the court acknowledged that it had jurisdiction over the LMRA claim, it rejected the employer’s suggestion that it exercise its discretion under the declaratory judgment act to retain the case and extend “supplemental jurisdiction” over the ERISA claim, noting that the declaratory judgment claim was neither a state law nor a federal law claim. The court concluded that the case should proceed in the Ohio court, the chosen forum of the “natural plaintiffs.”

  • District court sets stage for trial regarding modification of benefits

 In Maytag Corp. v. International Union, UAW, No. 08-CV-291, 2008 BL 270156 (S.D. Iowa Nov. 10, 2010) (unpublished), the district court denied Maytag’s motion for summary judgment seeking a declaration that its unilateral modification of retiree medical benefits would not violate its collective bargaining obligations. The court determined that there were material issues of disputed fact concerning: (i) which plan documents it could consider to evaluate the existence of reservation of rights language; (ii) whether the supplemental insurance agreements (SIAs) included unambiguous vesting language in specific clauses, e.g., in a durational clause, a coordination of benefits clause, and a substitution of benefits clause; (iii) whether the SIAs, considered in their entirety, could resolve the ambiguity in those clauses regarding intent to vest; and (iv) whether extrinsic evidence showed that the parties did not intend to vest retiree medical benefits. The court also rejected the union’s argument that there was no genuine controversy between it and the company, and that the company thus had no standing in this declaratory judgment action, finding that the parties had asserted adverse positions regarding the company’s right to modify retiree benefits.

Statute of Limitations for Retiree Benefit Claims

The case discussed below demonstrates the potential efficacy of a statute of limitations defense in retiree benefits claims.

  • Sixth Circuit concludes that the statute of limitations barred claim of subclass

In Winnett v. Caterpillar, Inc., 609 F.3d 404 (6th Cir. 2010), the Sixth Circuit held that retiree claims against Caterpillar for allegedly breaching its promise to provide “lifetime cost-free retiree health care” were barred by the applicable six year statute of limitations. The Court concluded that, even though the challenged benefit caps did not become operative until 2004, the claims accrued by 1998 or 1999, when the retirees had notice of changes to the collective bargaining agreement that prospectively authorized the benefit caps.

Proskauer’s Perspective

Given the state of the economy, and the potential for increased health care costs arising from Obama Healthcare, we would expect employers to look with increased frequency for opportunities to reduce costs by cutting retiree health care benefits. As a result, we would expect class action lawsuits by retirees challenging changes to their health care benefits to remain prevalent and costly for employers. Litigation outcomes will remain unpredictable due to splits among the courts as to the enforceability of “lifetime” promises, the scope of documents relevant to determine the parties’ intent, and whether retiree benefits are presumed to be “vested.” As is typically the case with ERISA litigation, the best defense is through preventive maintenance – in this case, careful plan draftsmanship. Plan sponsors should strive to avoid language that can give rise to expectations of lifetime benefits and to insert effective reservation-of-rights clauses. Insofar as the exposure to retiree benefit claims may already exist due to pre-existing plan language, employers should stay abreast of the evolving law in this area, so they can best assess their risks and make informed judgments. Even seemingly “desperate arguments” may give rise to useful defenses.