In an age of escalating healthcare costs, collectively bargained retiree medical coverage presents special problems for employers. Has the retirees’ right to medical benefits “vested,” so that the employer cannot restructure deductibles, co-payments, and premiums? Ultimately this is a question of interpreting the collective bargaining agreement (CBA) and the ERISA benefit plan. A recent case from the Fourth Circuit Court of Appeals illustrates some of the legal principles – and legal maneuvering – involved.

In Quesenberry v. Volvo Trucks North America Retiree Healthcare Benefit Plan, No. 10-1491, 2011 U.S. App. LEXIS 14161 (4th Cir. July 11, 2011), the court held that the CBA permitted the employer to modify retiree medical benefits only if the employer first pursued a process that limited the employer’s ability to make unilateral changes in benefits.

Coverage “For the Duration of this Agreement.”

In 2005, the employer and UAW Local 2069 negotiated a CBA with a 2008 expiration date. The CBA provided that the employer would pay the full cost of health plan coverage for retirees “for the duration of this Agreement.”

Notice and negotiations where VEBA underfunded.

The 2005 CBA also provided for a voluntary employees’ beneficiary association trust (VEBA), funded by the employer, to be used if the cost of the health plan exceeded negotiated limits. If the employer determined that assets in the VEBA would be exhausted within a 12-month period, the employer and the union would negotiate benefit reductions. If no agreement was reached, the employer could unilaterally impose premiums on the retirees pursuant to a formula.

Employer unilaterally restructures benefits, sues, and loses after a jury trial.

At the end of the 2005 CBA, the employer refused to negotiate further retiree health benefits, insisting that bargaining for retired employees is a permissive, rather than a mandatory, subject of collective bargaining under the National Labor Relations Act. Without giving notice of any expected exhaustion of VEBA assets and without attempting to negotiate benefit reductions, the employer unilaterally restructured retiree coverage, including new deductibles, increased co-payments and co-insurance, and new monthly premiums.

Immediately after giving notice of the changes to retirees, the employer filed suit in North Carolina seeking a declaratory judgment that the employer had the right to unilaterally modify retiree medical benefits under both the Labor Management Relations Act (LMRA) and ERISA. A few weeks later, retirees filed a class action in federal court in Abingdon, Virginia seeking to enjoin the employer from changing their benefits under the same laws and requesting a jury trial on their claim for breach of the CBA under the LMRA.

The employer tried to transfer the Virginia case to North Carolina, arguing that the employer had filed suit first. The Virginia district court denied the motion to transfer because the facility was located in southwestern Virginia and the great majority of impacted retirees lived in southwestern Virginia.

The employer unsuccessfully objected to the retirees’ request for a jury trial on the grounds that the retirees wanted equitable relief in the form of a court order restoring their former health plan. The district court ruled, however, that the retirees were entitled to a jury trial because they also sought legal relief in the form of monetary damages due to the employer’s alleged breach of the CBA.

The case was therefore tried to a jury that found in favor of the retirees on the grounds that the CBA required the employer to follow the notice and negotiation process before modifying retiree medical benefits.

The employer appealed to the Court of Appeals on the grounds that the “durational language” gave the employer the right to change retiree medical benefits after the 2005 CBA expired. The employer also argued that the retirees had no right to a jury trial.

Court of Appeals holds that mechanism for bargaining trumps “durational language.”

The CBA contained no reservation of the employer’s right to unilaterally amend or terminate coverage, but the Fourth Circuit has previously held that the phrase “duration of this agreement” limits the employer’s obligation to provide health benefits to the term of the CBA. Dist. 29, United Mine Workers v. Royal Coal Co., 768 F.2d 588, 590 (4th Cir. 1985).

Unfortunately for the employer, other language in the CBA convinced the Court of Appeals that the parties intended that retiree medical benefits extend beyond the term of the 2005 CBA, and that the employer could not make unilateral changes to its retiree health plan without following the “negotiated mechanism” in the CBA.

The court reasoned that the issue was a matter of contract interpretation, depending on the parties’ intent as expressed in the CBA. The court decided that the mechanism for negotiations, which was not expressly limited to the term of the 2005 CBA, had no meaning unless the parties intended that coverage continue beyond the expiration of the 2005 bargaining agreement.

The court held that the employer’s unilateral amendments violated the CBA because it was “almost inconceivable” that the negotiating process of the CBA could have been triggered before the expiration of the 2005 CBA, despite the durational language. In the court’s view, the employer was obligated to follow the amendment process described in the CBA.

Court of Appeals does not decide jury trial question.

Because the Court of Appeals concluded that the CBA determined the issue as a matter of law, the court did not decide whether or not the retirees were entitled to a jury trial on their LMRA claim. This is an issue that has divided the Courts of Appeal.

Two Circuits have ruled that a jury right exists under the LMRA when retirees seek monetary relief which the courts deemed to be “legal relief.” Senn v. United Dominion Industries, 951 F.2d 806 (7th Cir. 1992); Stewart v. KHD Deutz, 75 F.3d 1522 (11thCir. 1996). Cases in the Sixth Circuit, however, have ruled that suits for retiree medical benefits seek essentially equitable relief for which there is no right to jury trial. Bittinger v. Tecumseh Prods. Co., 123 F.3d 877 (6th Cir. 1997); Golden v. Kelsey-Hayes Co., 73 F.3d 648 (6th Cir. 1996).

What Employers Can Learn from this Case:

  • ERISA does not require vesting of healthcare benefits, see Inter-Modal Rail Employees Ass’n v. Atchison, Topeka & Santa Fe Ry. Co., 520 U.S. 510, 515 (1997), but employers can create vested rights to medical benefits depending on the terms of their health plans and collective bargaining agreements.
  • Because employers are not required to vest such benefits, the intention to vest must be found in “clear and express language.” Gable v. Sweetheart Cup Co., Inc., 35 F3d 851, 855 (4th Cir. 1994); see also Yolton v. El Paso Tennessee Pipeline Co. 435 F.3d 571 (6th Cir. 2006).
  • An express reservation of the employer’s right to amend or terminate retiree medical coverage is best for the employer, but not easy to get from the union.
  • In the Fourth Circuit, durational language limiting retiree medical coverage to the term of the contract can limit the employer’s obligation to continue providing retiree medical benefits, unless the durational language is diluted by other language in the CBA that indicates retiree medical coverage continues beyond the contract term.
  • All the words in a collective bargaining agreement matter. Courts interpret contracts as a whole and do not view individual terms of the CBA in isolation.
  • Employers anticipating litigation over changes to retiree medical plans sometimes initiate suit for declaratory relief in order to have the case considered in a favorable forum, as the employer did in Quesenberry. Unless the forum selected has a strong connection to the parties and the issues, however, the mere fact that the employer files first is not likely to carry to the day.
  • Although the Fourth Circuit did not rule on the jury trial question, the district court’s decision in Quesenberry held that jury trials are available for retiree medical claims under the LMRA. If CBA language is ambiguous on the vesting issue, trial will be necessary to resolve the issue, and extrinsic evidence (including testimony from retirees) will likely be admitted.
  • Before modifying retiree medical benefits unilaterally, employers need to carefully consider whether a jury trial is likely on the facts of their case.