Supreme Court Considers Whether Free Retiree Benefits Continue

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When an employer may require retirees to contribute toward bargained-for retiree health benefits may boil down to the rules of general contract interpretation, according to a Nov. 10, 2014, oral argument before the U.S. Supreme Court.

“Most of the justices were leaning toward rules of general contract interpretation,” Amy Covert, an attorney with Proskauer in New York City, told SHRM Online. The justices didn’t want to put a “thumb on the scale in favor of employers or employees” with default contract presumptions.

Yard-Man

And there was a “lack of support for [International Union, United Automobile Workers of America v. ] Yard-Man,” [716 F.2d 1476 (6th Cir. 1983)], she added. Yard-Man held that any retirement health benefits obtained through a collective bargaining agreement (CBA) are, when the contract is silent, presumed to extend beyond the expiration of the contract.

“Unions always try to bring claims” of retiree health benefits in the 6th U.S. Circuit Court of Appeals because of Yard-Man, Covert observed. While the justices seemed to indicate Yard-Man’s days may be numbered, “it’s not clear what’s next,” she remarked.

The 3rd and 5th Circuits have exactly the opposite presumption as Yard-Man. So, in those circuits, if  

the contract is silent, retiree health benefits are presumed to expire, noted Stuart Gerson, an attorney with Epstein Becker & Green in Washington, D.C. He expected Yard-Man to fall and extrinsic evidence allowed in to interpret contracts.

Alden Bianchi, an attorney with Mintz Levin in Boston, said he “just wanted a rule one way or another,” so that there was “a uniform rule nationwide.”

A more sensible approach compared to Yard-Man would be for the burden to lie with the person who is arguing that something that is not explicit in contract language is intended to be there, Nancy Ross, an attorney with Mayer Brown in Chicago, noted. The court may end up “saying no presumptions are applied here, even the liberal justices didn’t strongly defend a presumption,” Ross added. While Yard-Man may fall by the wayside, lower courts also may be left with a “lot of leeway,” she said, cautioning that a judge’s view on how benefits came into a contract can never fully be eliminated.

Class Action

The case at hand involves M&G Polymers USA, which informed retirees in December 2006 that the company was instituting a cap on how much it would contribute to their health care costs and that retirees would be required to contribute to the cost of their health care.

The retirees and their union filed a class action, alleging that language in the CBA referring to a “full company contribution towards the cost of benefits” gave them a vested right to health care benefits for life without any contributions.

The district court granted M&G Polymers’ motion to dismiss, but the 6th Circuit, relying on Yard-Man, reversed. The district court on remand conducted a bench trial and ruled that the retirees had a vested right to free health care benefits for life. The 6th Circuit affirmed.

Oral Argument

During the Supreme Court hearing, Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan all suggested that the CBA in this case was not silent. “So you have some language; they have some language,” Kagan remarked.

“Your Honor, at a minimum, that’s why we’re entitled to reversal and a remand, if this court declines to require a clear statement as part of ordinary contract interpretation. I think we would at a minimum be entitled to have [a] look at the language without the Yard-Man inference,” said the company’s attorney, Allyson Ho, with Morgan Lewis in Dallas.

“I thought your position here was that what the contract says under ordinary principles of contract interpretation is not the point. The point is that in the first court of appeals case, they mention Yard-Man at least four times and said the Yard-Man presumption controls, and that’s what the district court thought,” remarked Justice Anthony Kennedy.

“Yes,” Ho said.

“The principal question here is whether the Yard-Man presumption should play a significant part in the interpretation of this contract, and you say no,” he added.

“Correct,” Ho responded.

“Unless, of course, the Yard-Man presumption is normal contract interpretation,” Justice Antonin Scalia said.

“Normally we would expect to see the obligation on the party who wants the benefit to seek the clear language, to seek the promise, as opposed to the party who doesn’t,” Ho later said. And she added, “Silence says there is no promise of vesting here, because that is an extraordinary obligation for a company to take on.”

“You know, the nice thing about a contract case of this sort is you can’t feel bad about it. Whoever loses deserves to lose,” Scalia remarked, and the chamber laughed. “I mean, this thing is obviously an important feature. Both sides knew it was left unaddressed, so, you know, whoever loses deserves to lose for casting this upon us when it could have been said very clearly in the contract. Such an important feature. So I hope we’ll get it right, but, you know, I can’t feel bad about it.” More laughter.

Retirees’ Argument

Julia Clark, an attorney in Washington, D.C., representing the retirees, said, “Our argument is simply that contract disputes relating to retiree health benefits should be decided like every other dispute under a CBA. To determine what the parties intended without applying any presumptions.”

“Isn’t that what Justice Scalia believes?” asked Justice Stephen Breyer. “I tend to agree with him. He said the other side is arguing the same thing, and says since both sides want to argue the same thing, maybe we can just agree with them.”
 
The chamber laughed.

“That’s music to my ears, your Honor,” Clark said.

“Well, it may be music, but Yard-Man says that retiree health care benefits are not subject to the stricture of ordinary contract interpretation. … I think you would have to vacate if we’re going to say apply the normal principles of contract interpretation,” he added.

“I have two answers to that. Let me start with what Yard-Man actually did,” Clark answered. “If you read the entire opinion … it details a number of contract provisions in that contract which the court found supported the intention of both parties to create a benefit that would last beyond the expiration of the collective bargaining agreement.”

For example, the retiree benefit was described with words like “continues.”

“The court took that, rightly so, to suggest that the retiree would have a lifetime benefit,” she noted.

“I know you’re saying that you win without Yard-Man, but it still seemed to mean something to the 6th Circuit,” Chief Justice John Roberts Jr. said.

“We believe … that this court could affirm this decision on normal principles of contract interpretation,” Clark said.

Company’s Rebuttal

In the company’s rebuttal, Ho said, “I think at a minimum we’re not hearing a lot here today defending Yard-Man. I think there can be little serious question that Yard-Man infected every aspect of the proceedings below. Indeed, it was dispositive. So I think at a minimum we’re entitled to a vacatur and remand for ordinary contract principles to be applied.

“I think it will be important if this court remands for consideration of ordinary contract interpretation, that it’s clear that what the 6th Circuit has been doing under that banner is anything but; that looking at putting text on a par with extrinsic evidence is not ordinary contract interpretation; that ignoring contract expiration clauses, unless they specifically reference health care benefits, is not ordinary,” Ho concluded.

This case is M&G Polymers USA v. Hobert Freel Tackett, No. 13-1010.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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