Alerts and Updates

U.S. Supreme Court Rules for Employer in Retiree Medical Benefits Case

January 27, 2015

The Supreme Court reversed the Sixth Circuit decision, finding that Yard-Man violates ordinary contract principles "by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements."

In M&G Polymers USA, LLC v. Tackett, the United States Supreme Court addressed the claims of retirees that certain expired collective bargaining agreements created a right to lifetime contribution-free healthcare benefits for retirees, their surviving spouses and their dependents. Writing for a unanimous court in an opinion issued on January 26, 2015, Justice Thomas ruled in favor of the employer and thereby provided employers offering retiree medical benefits under expired collective bargaining agreements with additional arguments to make with respect to the potential curtailment of such benefits.

Following its purchase of a plant in 2000, M&G Polymers USA, LLC (M&G) entered into a master collective bargaining agreement and Pension, Insurance and Service Award Agreement (P&I Agreement). The P&I Agreement provided that certain retirees, along with their surviving spouses and dependents, would "receive a full Company contribution towards the cost of health care benefits," that such benefits would be provided "for the duration of the Agreement" and that the agreement would be subject to renegotiation in three years.

Following the expiration of those agreements, M&G announced that it would require retirees to contribute to the cost of their healthcare benefits. The retirees sued M&G, contending that the P&I agreement created a vested right to lifetime contribution-free healthcare benefits that could not be taken away from the retirees.

After the district court ruled in favor of M&G, the Sixth Circuit Court of Appeals (which covers Kentucky, Michigan, Ohio and Tennessee) reversed based on its reasoning in the 2009 Yard-Man case. Yard-Man involved a similar claim that an employer had breached a collective-bargaining agreement when it terminated retiree benefits. The Sixth Circuit found in Yard-Man that the retiree medical benefit provisions were ambiguous as to the duration of those benefits and, therefore, looked to other provisions of the agreement. Yard-Man (and its progeny of cases) made a number of significant inferences in an attempt to ascertain the intention of the parties; chief among those, the inference that the absence of a termination provision specifically addressing retiree benefits expresses an intent to vest those benefits for life, as well as the inference that the parties intended such benefits to vest for life because such benefits are not mandatory subjects of collective bargaining.

Following the Sixth Circuit's reversal on the basis of its Yard-Man precedent, the district court conducted a trial and ruled in favor of the retirees and against M&G, issuing a permanent injunction ordering M&G to reinstate contribution-free healthcare for similarly situated retirees. The Sixth Circuit Court of Appeals affirmed, stating that "in the absence of extrinsic evidence to the contrary, the agreements indicated an intent to vest lifetime contribution-free benefits."

The Supreme Court reversed the Sixth Circuit decision, finding that Yard-Man violates ordinary contract principles "by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements." The Court found that Yard-Man's assessment of likely behavior in collective bargaining is too speculative and too far removed from the context of any particular contract to be useful in discerning the parties' intention. Significantly for employers, the Supreme Court states that "when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life." Rather, ordinary contract principles should apply to such benefits.

While the M&G Polymers opinion does not rule on whether M&G must ultimately continue to offer contribution-free healthcare to retirees going forward—that issue is remanded to the Sixth Circuit to review under the correct legal principles—it strikes down Yard-Man and the various inferences that it imposed with respect to the elimination of contribution-free retiree medical benefits. The M&G Polymers opinion also impacts Seventh Circuit Court of Appeals (which covers Illinois, Indiana and Wisconsin) precedent that provided for pro-employer inferences with respect to the vested status of retiree medical benefits. Ordinary contractual principles will likely be applied to M&G and other similarly situated employers going forward with no presumption in either direction.

About Duane Morris

The Employee Benefits and Executive Compensation attorneys at Duane Morris will continue to monitor the Sixth Circuit for its decision in the M&G Polymers case. They also assist employers with respect to their retiree medical benefit needs.

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