Supreme Court Strikes Down Presumption of Lifetime Retiree Medical Benefits

The New Year holiday is barely over and 2015 has delivered its first significant development affecting manufacturers and their labor unions.  On January 26, 2015, in M&G Polymers U.S.A. v. Tackett, a unanimous United States Supreme Court took the Sixth Circuit Court of Appeals to the woodshed with the wholesale repudiation of its thirty-year old Yard-Man doctrine, giving employers a new weapon to control the costs of retiree medical benefits.

A Little Background

Many collective-bargaining agreements between employers and the unions representing their employees have traditionally provided for post-employment benefits, most notably pensions, medical and life insurance for retirees, and other benefits.  But most collective-bargaining agreements have relatively short terms, usually between two and five years.  When that contract expires, the employer and the union meet to negotiate new terms.  Any newly negotiated or lawfully implemented changes to post-employment benefits will take effect with the new agreement, unless those benefits have vested. 

Here is where the Sixth Circuit’s Yard-Man Doctrine comes into the picture.  Unlike employee pension plans which are subject to mandatory vesting under ERISA, an employee’s rights under a retiree medical plan do not vest unless and until the employer specifies that they vest.  In Yard-Man, the Sixth Circuit created a presumption that in the absence of an express statement to the contrary, retiree medical benefits were presumed to vest immediately when the employee retired.  In other words, once an employee retired under a collective-bargaining agreement which provided for cost-free medical benefits, the employer could not take away those benefits for the life of the retiree and her or his covered dependents.

As the cost for providing medical benefits to retirees soared, manufacturers sought to shift or eliminate those costs.  In response, retirees sought to prevent those changes through litigation.  In every other Circuit Court outside of the Sixth Circuit, the litigation focused on whether the parties intended such benefits to vest or not.  In the Sixth Circuit, however, vesting became the presumption.

The Supreme Response

M&G Polymers was typical of such litigation.  When the company sought to require retirees to contribute to the cost of their health insurance, a group of retirees sued to prevent the change, arguing that the company had promised lifetime, contribution free medical benefits to them.  The district court dismissed the action finding that the collective-bargaining agreement was unambiguous and did not grant such benefits for life.  Relying on Yard-Man, the Sixth Circuit reversed and sent the case back to the district court for trial.  After a bench trial, the district found for the retirees and issued a permanent injunction preventing the company from changing retiree medical benefits.  The Sixth Circuit affirmed.

A surprisingly unified Supreme Court rejected the Sixth Circuit’s reasoning and with it the Yard-Man Doctrine.  The Court held that the presumptions created by Yard-Man and its progeny were not grounded in traditional principles of contract interpretation.  Writing for the Court, Justice Clarence Thomas wrote, “Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.  That rule has no basis in ordinary principles of contract law.  And it distorts the attempt to ‘ascertain the intention of the parties’.”  [Citations omitted.]

Impact

The Supreme Court’s rejection of the Yard-Man presumption gives manufacturers a clear road to seek to ease the burden presented from the staggering costs of retiree medical insurance.  For those manufacturers in the Sixth Circuit previously barred from changing post-employment medical benefits, the door is now open to negotiate changes to their bargaining agreements or modify their retiree medical plans.  For others, the Supreme Court has made it clear that the intention of the parties governs the decision.

Manufacturers seeking to implement such changes, however, should be mindful that their individual circumstances govern.  The Supreme Court’s M&G Polymers decision makes clear that no presumptions will determine whether changes may or may be made.  But this should not be read to say that an employer may make those changes in all cases.  As the Court stated, the work of the court in such litigation will be to “ascertain the intention of the parties.”  This will necessarily require examination of the parties’ contract language and negotiation history over the life of the parties’ relationship.