Supreme Court Resolves Circuit-Split for Vesting of Retiree Medical Benefits

February 2015ERISA Alert

On January 26, 2015, in M&G Polymers USA, LLC v. Tackett,1 the U.S. Supreme Court unanimously rejected a presumption that a promise of retiree medical benefits contained in a collective bargaining agreement was intended to confer lifetime benefits. Tackett resolves a split among the circuits as to whether retiree medical benefits are vested after expiration of the collective bargaining, and reverses a long-standing precedent in UAW v. Yard-Man, Inc.2 from the Sixth Circuit which created such a presumption.

In Yard-Man, the Sixth Circuit held that retiree medical benefits would be considered to be "vested" in the absence of an explicit provision in a collective bargaining agreement setting forth the duration of the retiree medical benefits. In other words, an employer's obligation to provide retiree medical benefits would continue beyond the term of the collective bargaining agreement. In reaching its conclusion, the Sixth Circuit claimed to have relied on ordinary principles of contract law.

Other circuits rejected the Yard-Man presumption and adopted varying other standards for determining whether ambiguous language in collective bargaining agreements reflected an intent to provide lifetime retiree medical benefits. In the Second Circuit, while the court will look at the totality of communications to determine the intent of the parties, a plaintiff must point to some written language capable of reasonably being interpreted as a promise to vest such benefits.3

The plaintiffs in Tackett were retirees who worked at a plant that was acquired by M&G Polymers USA (M&G). The collective bargaining agreement provided that M&G would pay all of the medical benefit costs for retirees who met certain criteria. There was no specific provision regarding the duration of the retiree medical benefits.

In 2006, M&G announced that retirees would be required to contribute to the cost of their retiree medical benefits. The retirees sued claiming that they had a vested right to receive retiree medical benefits paid for by M&G.

Applying the Yard-Man presumption, the Sixth Circuit concluded that in the absence of extrinsic evidence to the contrary, the collective bargaining agreement indicated an intent to provide lifetime cost-free retiree medical benefits. In reaching its conclusion, the Sixth Circuit claimed that if the collective bargaining agreement were to be read that the promise of cost-free retiree medical benefits could be terminated at the conclusion of the collective bargaining agreement, the promise would be "illusory" for some employees.

Justice Thomas, writing for the Supreme Court, concluded that the Yard-Man presumption has no basis in ordinary principles of contract law and distorts the attempt to determine the actual intent of the parties. Among other things, the Supreme Court noted that the Sixth Circuit's analysis was not based on any evidence on the record to determine the intent of the parties and that the Sixth Circuit misapplied the "illusory promise" doctrine. According to the Supreme Court, a promise that is partly illusory because it may not benefit all employees covered by a collective bargaining agreement is still an enforceable contract since it does benefit some employees. The Supreme Court also found that the Sixth Circuit failed to consider the principle that courts should not construe ambiguous promises to create lifetime promises and the principle that contractual obligations will cease in the ordinary course.

What's Next?
While employers seeking to cut-back retiree medical benefits continue to confront significant risks, the Tackett decision rejecting the Yard-Man presumption should reduce such risks in the Sixth Circuit and limit the risk of having different outcomes in different circuits. Nevertheless, litigation surrounding attempts to modify or terminate retiree medical benefits is likely to continue in order to determine what evidence is needed to demonstrate the intent of the parties. Tackett is an important reminder that the best way to protect an employer's right to modify or terminate any agreement to provide retiree medical benefits is to negotiate and draft clear and unambiguous language setting forth the terms and duration of any retiree medical benefits.

1 574 U.S. ___ (Jan. 26, 2015, 2015 WL 303218).
2 716 F.2d 1476 (6th Cir., 1983), cert. denied 465 U.S. 1007.
3 See American Fed. of Grain Millers v. Int'l Multifoods Corp., 116 F.3d 976 (2d Cir., 1997) and Joyce v. Curtiss-Wright Corp.,171 F.3d 130 (2d Cir., 1999).

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Fred R. Green at +1 212 592 5910 or [email protected]

Copyright © 2015 Herrick, Feinstein LLP. ERISA Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.