19 February 2016
Strategies for providing effective health benefits to employees have shifted dramatically in the past two decades. Nevertheless, some companies continue to bear the burdens of legacy benefit liabilities.
Until recently, courts had a practice of interpreting benefits arrangements in collective-bargaining agreements (“CBAs”) to ensure lifetime coverage—often defying the company’s expectations in the process. But the legal environment has changed. Now is the time for companies to press ahead in reducing legacy costs on their balance sheets.
Before 2015, plaintiffs filed claims for lifetime health benefits in the Sixth Circuit, whenever possible, because that court’s decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), created an “inference” that, absent express evidence to the contrary, retiree benefits were intended to vest for life. Then, the US Supreme Court decided M & G Polymers USA, LLC v. Tackett, 135 S. Ct. 926 (2015). In that decision, the Court soundly rejected the Yard-Man inference and held that “ordinary principles of contract law” should govern the temporal scope of CBA benefits arrangements. That decision intensifies the burden on plaintiffs to show a meeting of the minds on lifetime benefits for cases brought in the Sixth Circuit and also in jurisdictions less favorable to unions. But Tackett did not resolve how “ordinary principles of contract law” should be applied to the familiar terms of CBAs.
Last week, the Sixth Circuit issued a sweeping decision that confirms that “ordinary principles of contract law” rarely will require a company to freeze outdated benefits in place.
In Gallo v. Moen Inc., No. 14-3633 (6th Cir. Feb. 8, 2016), a class of retirees who had worked at a shuttered Ohio factory alleged that they had been promised lifetime health benefits. They claimed that an agreement entered into at the time of the plant’s closure provided that healthcare coverage “shall continue” for beneficiaries “as indicated” under the final CBA. The retirees alleged that Moen violated that agreement when it later altered the retirees’ benefits.
The district court sided with the retirees, in a pre-Tackett ruling, invoking Yard-Man’s “nudge in favor of vesting.” Moen appealed, and the Sixth Circuit reversed. Applying the “ordinary principles of contract law,” the court found “nothing in … any of the CBAs [that] says Moen committed to provide unalterable healthcare benefits … for life.” Concluding, therefore, that the contract was ambiguous, the court examined the contract for evidence of the parties’ intent.
Upon a close examination, the court found no evidence that the parties had agreed to lifetime benefits. At the outset, the court observed that the last CBA was explicitly a three-year agreement, and that courts “should not expect to find lifetime commitments in time-limited agreements.” Indeed, the court noted that no other courts have found “a promise of lifetime unalterable healthcare benefits based on CBA language of this sort in a time-limited agreement.”
The court also emphasized that interpretations of contracts should not make any terms superfluous, and that reading the CBA to include lifetime benefits would violate that canon. The CBA, for example, stated that various benefits would “continue,” indicating that lifetime benefits had not vested in similarly worded CBAs. Furthermore, the CBA explicitly vested pension benefits for life. If the CBA vested healthcare benefits, then neither provision would have been necessary.
The court rejected the plaintiffs’ arguments to the contrary. Although the contract did use the future tense when referring to benefits, the court wrote that “the use of the future tense without more … does not guarantee lifetime benefits.” And the court refused to look beyond the four corners of the contract, because “[a]bsent ambiguity from this threshold inquiry, no basis for going beyond the contract’s four corners exists.”
Judge Stranch dissented. She agreed that ordinary contract principles must govern, but stated that she would have applied that standard in a manner favoring the plaintiffs.
Gallo shows how far the law has moved since Tackett. The days of granting “nudges” in favor of vested benefits have come to a close. As a result, many companies that have previously deferred the modernization of their legacy benefits obligations will want to reevaluate the applicable agreements, as now may be the right time to press ahead with long-overdue changes.