Everyone knows that the cost of providing medical coverage for employees is an expensive proposition and the cost of providing retiree medical benefits is an extremely expensive proposition. As a result, many employers who had at one time offered their employees lifetime medical benefits have implemented various steps to cut back or eliminate these benefits. This has led to a virtual tsunami of retiree rights litigation. Many of these cases are brought by unionized employees because of the interplay between the language in the plan documents (governed by the Employee Retirement Income Security Act), and the language of the collective bargaining agreements (governed by the Labor Management Relations Act).
For employers operating in multiple jurisdictions, disputes over the employer’s right to alter the benefits of union retirees often have been less about the relative merits of the legal positions of the parties than about which circuit’s precedents would control. In most circuits, the courts overwhelmingly hold that there is no right to vested lifetime benefits unless the language of the collective bargaining agreement manifests a clear intent that they be nonforfeitable. The Sixth Circuit, however, has applied an “inference,” sometimes referred to as a “presumption,” that the employer intended to provide retirees with lifetime benefits unless the language of the collective bargaining agreement provides otherwise. Defending decisions to modify, cut back or eliminate retiree coverage for union retirees has been perceived to be most difficult for employers subject to the jurisdiction of the Sixth Circuit, as well as in a couple of other jurisdictions that have applied this presumption as well.
Over the past several years, however, the Sixth Circuit appears to have exhibited a change in approach that looks more favorably to employers defending these claims. At least some judges in the Sixth Circuit appear to be uncomfortable with existing precedent and to be looking for ways to pare back its application. If the trend continues, the disparity in rulings among the circuits in the retiree benefits arena may eventually yield to a more uniform approach, and the need for strategic jockeying for the “right” forum may be markedly diminished.
The “Yard-Man” Story – Where It All Began
The perceived divide between the law governing retiree benefits cases in the Sixth Circuit and elsewhere emanates from the Sixth Circuit’s decision nearly thirty years ago in Auto Workers v. Yard-Man, Inc.,2 one of the earliest decisions to consider collectively-bargained retiree medical benefits. The facts of Yard-Man are common enough: The company told the union that it was shutting down a factory and would end the payment of retiree medical benefits on the last day of the collective bargaining agreement. The union sued, claiming that the retiree medical benefits were lifetime benefits that could not be terminated. The company responded that retiree benefits did not outlive the termination of the union contract. The key provisions of the contract stated that “[w]hen the former employee has obtained the age of 65 years then…[t]he [c]ompany will provide insurance benefits equal to the active group benefits…for the former employee and his spouse.” The Sixth Circuit found this language ambiguous as to whether or not it established a durational limitation of the benefits. Due to this ambiguity, the court stated that to determine “whether retiree insurance benefits continue beyond the expiration of the collective bargaining agreement depends upon the intent of the parties.”
The court ultimately decided in favor of the union, holding that the retiree medical benefits were intended to outlive the collective bargaining agreement. In support of its conclusion, the court reasoned that
[b]enefits for retirees are only permissive not mandatory subjects of collective bargaining. . . As such, it is unlikely that such benefits, which are typically understood as a form of delayed compensation or reward for past services, would be left to the contingencies of future negotiations. . . . The employees are presumably aware that the union owes no obligation to bargain for continued benefits for retirees. If they forego wages now in expectation of retiree benefits, they would want assurance that once they retire they will continue to receive such benefits regardless of the bargain reached in subsequent agreements. Contrary to [the company’s] assertions, the finding of an intent to create interminable rights to retiree insurance benefits in the absence of explicit language, is not, in any discernible way, inconsistent with federal labor law.3
Based on this reasoning, the Sixth Circuit pronounced what was subsequently perceived as a “rule” governing the adjudication of retiree benefits claims in that circuit:
Retiree benefits are in a sense “status” benefits which, as such, carry with them an inference that they continue so long as the prerequisite status is maintained. Thus, when the parties contract for benefits which accrue upon achievement of retiree status, there is an inference that the parties likely inferred those benefits to continue as long as the beneficiary remains a retiree.4
The Sixth Circuit’s determination that an intent to vest union retiree benefits could be inferred when the ERISA plan document or collective bargaining agreement is ambiguous is commonly known as the “Yard-Man inference.”
The Apparent Erosion of the Yard-Man Inference in the Sixth Circuit
For many years, the outcome of retiree benefits cases was perceived to be largely affected by whether the Yard-Man inference was applied. In addition to the Sixth Circuit, the inference was adopted by the Eleventh Circuit5 and adopted in a more limited fashion by at least one other circuit.6 Most other circuits have rejected application of the inference.7 Recent rulings in the Sixth Circuit suggest, however, that the distinctions in the adjudication of retiree benefit cases among courts adopting and rejecting the Yard-Man inference may not be as pronounced as originally perceived.
There have been a number of rulings in the Sixth Circuit in recent years that, without purporting to overturn Yard-Man, significantly narrow its scope and application, and perhaps even undermine its premise and rationale. These cases fall into two different categories: those that limit the circumstances and the manner in which the Yard-Man inference applies in the first place, and those that limit the scope of the lifetime medical benefits to which union retirees are entitled where retiree benefits are determined to have vested under the Yard-Man standard.
Limits on the Applicability of the Yard-Man Inference
In recent years, the Sixth Circuit has taken care to draw strict boundaries concerning the type of cases to which the Yard-Man inference will apply. To start with, the Sixth Circuit has established that the Yard-Man inference does not apply outside of the context of retiree health benefits. In Price v. Board of Trustees Indiana Laborer’s Pension Fund,8 for example, the court declined to apply the Yard-Man inference to occupational disability benefits. Even with respect to retiree health benefits, moreover, the court has held that the inference only applies to individuals who have actually achieved retiree status by the time an employer attempts to modify the retiree benefits.9
Of greater significance has been the Court’s recent instructions as to the limited impact of the inference in resolving disputes over contractual intent. The court already had cautioned some time ago that “[t]here is no legal presumption that benefits vest and that the burden of proof rests on plaintiffs,”10 and that the Yard- Man inference is irrelevant where the collective bargaining agreement or plan documents expressly address the duration of retiree health benefits.11 More recently, however, it went much farther in limiting the application of the rule in Yolton v. El Paso.12 Although the court ultimately ruled in Yolton in the employees’ favor on their claim for retiree benefits, it clarified that the Yard-Man rule in no way alters the normal rules of contract construction. The court stated in relevant part:
Under Yard-Man we may infer an intent to vest from the context and already sufficient evidence of such intent. Absent such other evidence, we do not start our analysis presuming anything. . . . This Court has never inferred an intent to vest benefits in the absence of either explicit contractual language or extrinsic evidence indicating such an intent. Rather, the inference functions more to provide a contextual understanding about the nature of labor-management negotiations over retirement benefits. . . . When other contextual factors so indicate, Yard-Man simply provides another inference of intent. All that Yard-Man and subsequent cases instruct is that the Court should apply ordinary principles of contract interpretation.13
Read literally, the court’s analysis could call into question a generation of perceived conflict between the state of the law in the Sixth Circuit and elsewhere over retiree benefit claims. If Yard-Man did not alter the “ordinary principles of contract interpretation,” and independent evidence of contractual vesting is needed to sustain a claim for retiree benefits, then what was all the fuss about?
Limits on the Impact of a Finding of Contractual Vesting
In addition to limiting the applicability of Yard-Man, the Sixth Circuit has significantly limited its impact by holding that even “lifetime” retiree medical benefits are not necessarily limitless or inalterable.
In Reese v. CNH America,14 the court held that even “lifetime” benefits could be altered by the employer in the context of subsequently negotiated collective bargaining provisions. In that case, the court explained that it was effectively bound by the conclusion that the plaintiffs had contractually vested rights to retiree benefits under the Yard-Man inference, because the collective bargaining agreement at issue was nearly identical to the agreement addressed in Yolton, in which the court similarly found for the employees.15 The Court significantly limited the application of the inference, however, noting that “nothing in the text of the [collective bargaining agreement] said that health-care coverage would be fixed and irreducible for all employees who retired under it.”16 The court significantly downplayed the importance of the Yard-Man inference, describing “[t]he precise weight of the Yard-Man ‘inference [as] elusive” and “insufficient to find an intent to create interminable benefits.”17 The court further explained that “[i]n the end, [the Yard-Man inference] may come to nothing more than this: a nudge in favor of vesting in close cases.”18 The Sixth Circuit recently echoed this view in Tackett v. M & G Polymers USA,19 relying on Reese in support of its holding that modifications and changes in benefits are permissible even for contribution-free lifetime benefits.
In other contexts, the Sixth Circuit similarly has found that the Yard-Man inference does not grant retirees limitless benefits. In Wood v. Detroit Diesel,20 for example, the company and the union had entered into a series of agreements purporting to cap the company’s contributions to retiree health care benefits for workers who retired between 1993 and 2004. The company did not renew the capping agreements in a subsequent bargaining cycle. Although the court held that the Yard-Man inference applied, thereby vesting retiree healthcare benefits at the point of retirement, the court also concluded that the agreed upon caps should continue to apply to the retirees, because “the only coherent reading of the Cap Agreements establishes that [the company] retirees are entitled to lifetime, capped health care benefits. For a [company] employee who retired in a given year under one of the Cap Agreements, the cap amount applicable to that year both determined and limited the extent of [the company’s] vested obligations to that retiree.”21
The View from Proskauer
Given the numerous outcomes in the Sixth Circuit over the years favoring unionized employees in suits seeking lifetime retiree benefits, one cannot quarrel with employer counsel who seek to avoid adjudicating such claims in the Sixth Circuit. Insofar as the disparity in outcomes in the Sixth Circuit and elsewhere purport to emanate from the Yard-Man standard, however, it behooves employers and their counsel to take note of the significant evolution in the Sixth Circuit’s articulation of that standard and its underlying rationale.
Whether or not the Sixth Circuit intended it all along, it now appears to be saying merely that, in determining how to construe an ambiguous collective bargaining agreement, a court should take note of the surrounding circumstances in which collective bargaining agreements are negotiated in evaluating a claim for vested retiree benefits – including the fact that retiree benefits are not mandatory subjects of bargaining. If the Court is to be believed, these considerations do not, in the absence of other extrinsic evidence, support a finding of contractual vesting, and do not negate the impact of extrinsic evidence favoring a finding that there was no contractual vesting.
Furthermore, the Sixth Circuit, like other courts, appears willing to make practical judgments as to the impact of a finding that employees are contractually vested in benefits. Some of the rulings cited certainly provide some hope that the Court will not conclude that “vesting” translates into an inflexible lock-in of benefits that will necessarily bankrupt employers as retiree benefits continue to rise.
Whether or not these developments will one day result in lessened concerns by employers about litigating retiree benefit claims in the Sixth Circuit remains to be seen. But at a minimum, they ought to provide employers with some basis to believe that, on the strength of favorable contractual or extrinsic evidence, they can present a defense in the Sixth Circuit with a reasonable prospect of success. This in turn ought to affect the evaluation of the relative merits of bringing declaratory judgment suits in other jurisdictions in advance of anticipated claims by employees and their unions in the Sixth Circuit, a strategy that has its own complexities and considerations.
One thing is certain: contractual vesting claims will continue to pose a substantial risk to employers seeking to cut back on retiree benefits, particularly in the collective bargaining arena. Therefore, well before devising their litigation strategy, employers should do their best when negotiating collective bargaining agreements to protect their rights to reduce or eliminate these benefits.