In 2011, we reported on the case of Retired Employees Association of Orange County v. County of Orange(2011) 52 Cal.4th 1171, in which the California Supreme Court held that vested health benefits may be implied under certain circumstances from a county ordinance or resolution.  (See December, 2011 Client Update).  The Supreme Court, however, declined to determine whether an implied contract existed in the Orange County case and the case was remanded back to the federal district court for further proceedings.   The Ninth Circuit has now answered the question left open by the California Supreme Court. 

The Retired Employees Association of Orange County ("REAOC") represents 4,600 retired employees and their spouses.  From 1985 through 2007, the County of Orange pooled health insurance premium rates for active employees and retirees.  The County faced mounting budgetary concerns and in 2008, the County and various labor unions reached an agreement to reform the County's health care program.  The agreement split the insurance rate pool. Thus, active employee health benefit premiums were calculated separately from those of retired employees.  REAOC did not directly participate in these negotiations. 

In response to the County's decision to terminate the pooled premium, REAOC filed suit and argued that the County's longstanding practice of pooling and the County's representations to employees regarding that practice created an implied contract right to continued pooled premiums.  The district court granted summary judgment for the County on the grounds that public entities are not required to provide specific retirement benefits in the absence of explicit legislative or statutory authority.  On appeal, the Ninth Circuit certified the following question to the California Supreme Court:  Whether a California county and its employees can form an implied contact that confers vested rights to health benefits on retired county employee?  The California Supreme Court held that such an implied contract was possible.

After reaching this holding, the California Supreme Court remanded the case back to the district court.  After taking another look at it, the district court again granted summary judgment in favor of the County.

On appeal, the Ninth Circuit noted that none of the applicable MOUs contained express provisions regarding pooling.  The Ninth Circuit also stated that to suspend legislative control in favor of an implied contract right, the evidence must be "unmistakable" so that "neither the governing body nor the public will be blindsided by unexpected obligations."  A practice or policy extended over a period of time does not turn into an implied contract right without clear legislative intent to create that right.  The Ninth Circuit considered REAOC's evidence and determined that there was no definitive intent or commitment by the County to provide a pooled premium.  Accordingly, the Ninth Circuit affirmed the order granting summary judgment to the County. 

Note:

The REAOC decision marks the latest in a line of recent cases stating that a contractual vested right is only created when the legislative body expressly intends to create a vested right.  Several LCW attorneys, including Steve Berliner of our Los Angeles office and Frances Rogers of our San Diego office have recently litigated vested benefit issues on behalf of our clients.

Retired Employees Association of Orange County, Inc. v. County of Orange (9th Cir. 2014) 742 F.3d 1137.