Supreme Court Rejects Yard-Man: Ordinary Contract Principles Apply When Interpreting Retiree Medical Promises

January 27, 2015

The Supreme Court has unanimously vacated a Sixth Circuit ruling that a collective bargaining agreement (CBA) vested retirees with lifetime medical benefits. M&G Polymers USA, LLC v. Tackett, No. 13-1010, 2015 U.S. LEXIS 759 (Jan. 26, 2015). In so doing, the Supreme Court rejected the holding in International Union, United Automobile, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F. 2d 1476, 1482 (6th Cir. 1983), that courts could infer that retiree medical benefits vested for life because they were tied to eligibility for pension benefits and were “typically understood as a form of delayed compensation or reward for past services.” According to the Supreme Court, the Sixth Circuit’s “Yard-Man inference” was incompatible with ordinary principles of contract law that apply when interpreting CBAs. After citing a number of proper contract principles that might apply, the Court remanded M&G to the Sixth Circuit “for that court to apply ordinary principles of contract law in the first instance.” 2015 U.S. LEXIS 759 at *25.

Retirees’ Claim that M&G Promised Lifetime Retiree Medical Benefits

M&G’s 2000 CBA with its union employees provided that certain retirees, along with surviving spouses and dependents, would “receive a full Company contribution towards the cost of [healthcare] benefits,” that such benefits would be provided “for the duration of [the] Agreement” and that the CBA would be subject to renegotiation in three years.

After the CBA expired, M&G required retirees to contribute to the cost of their healthcare benefits. Various retirees sued, claiming that the CBA created a vested right to lifetime, contribution-free healthcare benefits. The district court dismissed the suit for failure to state a claim, but the Sixth Circuit reversed and remanded, on the reasoning of Yard-Man.

On remand, the district court conducted a bench trial and ruled for the retirees, concluding that the Court of Appeals had definitely resolved that the CBA created a vested right to retiree medical benefits. The Sixth Circuit affirmed, ruling that the district court properly presumed that “in the absence of extrinsic evidence to the contrary, the agreements [the 2000 CBA and its predecessors] indicated an intent to vest lifetime contribution-free benefits.” 733 F.3d 589, 600 (6th Cir. 2013).

Supreme Court Rejects “Yard-Man Presumption” and Identifies Relevant Contract Principles

The outcome of M&G in the Supreme Court was forecast during oral argument, when the retirees made little effort to defend the “presumption” of relief relied upon by the district court and the Sixth Circuit. Writing for a unanimous Supreme Court, Justice Thomas emphasized that collectively-bargained ERISA plans are interpreted according to ordinary principles of contract law. The Court held that the “Yard-Man inference” violates ordinary contract principles “by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” 2015 U.S. LEXIS 759 at *18.

The Supreme Court noted that ERISA does not require any vesting of welfare plan benefits; that employers are generally free to adopt, modify or terminate welfare plans and have large leeway to design welfare plans; and that ERISA welfare plans are ordinarily enforced as written. The Court also cited a number of “traditional principles of contract interpretation” that militate against vested lifetime retiree medical benefits, including:

  • The principle that courts should not construe ambiguous writings to create lifetime promises;
  • The rules of contractual interpretation that require a clear manifestation of intent before conferring a benefit or obligation;
  • The principle that contractual obligations will cease, in the ordinary course, upon termination of the CBA; and
  • The rule that when a CBA is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.

Id. at *22-24.

Also rejecting the “Yard-Man inference,” but not satisfied with the contract principles enunciated in Justice Thomas’ opinion, Justice Ginsberg (joined by Justices Breyer, Sotomayor and Kagan) filed a concurring opinion that cited factors that might support lifetime vesting, including:

  • The intentions of the parties, to be gathered from the whole instrument, must prevail.
  • To determine what the contracting parties intended, a court must examine the entire CBA in light of relevant industry-specific customs, practices, usages and terminology.
  • When the contract is ambiguous, a court may consider extrinsic evidence to determine the intentions of the parties.
  • Obligations of the employer after expiration of the CBA may arise from its implied terms.
  • Because the retirees have a vested, lifetime right to a monthly pension, a provision stating that retirees “will receive” healthcare benefits if they are “receiving a monthly pension” is relevant.
  • Also relevant is a clause providing that if a retiree dies, his or her surviving spouse will continue to receive the retiree’s healthcare benefits until death or remarriage.

Id. at *25-26.

Impact of M&G

All in all, M&G is a win for employers, but whether retiree medical benefits vest still remains a question of interpreting the CBA and the ERISA benefit plan. The invalidation of Yard-Man will help employers, but the CBA’s language as a whole and – if the agreement is ambiguous – appropriate evidence of the parties’ intent remain key to resolving whether the employer has retained the right to amend, modify or terminate retiree medical benefits.

An express reservation in a CBA of the employer’s right to amend or terminate retiree medical coverage is best for the employer, but not easy to get from unions. Durational language limiting retiree medical coverage to the term of the CBA can limit the employer’s obligation to continue providing retiree medical benefits, unless the durational language is diluted by other language in the CBA that indicates retiree medical coverage continues beyond the contract term.

Employers considering changes to their collectively-bargained retiree medical programs will need to make a careful analysis of the CBA language as well as plan language, bargaining history and other relevant evidence. Yard-Man is no longer “a thumb on the scale” in favor of vested retiree benefits, but litigation over these issues will continue.

For further information, please contact any of the authors of this article, James P. McElligott Jr., Maria P. Rasmussen and Carolyn M. Trenda, or any other member of the McGuireWoods employee benefits team.