SCOTUS Mows Down Yard-Man Inference

welfare planBusinesses looking for areas to cut costs since the economic downturn have occasionally directed their gaze at employee benefits, either by requiring additional contributions from employees or by scaling back benefit levels. These businesses have just received some assistance from the Supreme Court, which recently clarified a longstanding circuit split regarding an employer's right to alter welfare benefits provided to retired employees. In M&G Polymers USA, LLC v. Tackett, No. 13-1010 (2015), the Court held that the law does not presume that retiree benefits are guaranteed for life and ordinary principles of contract law determine whether any such guarantee exists.

The case stems from the Employee Retirement Income Security Act ("ERISA"), which creates two classes of employee retirement benefits: pension plans and welfare plans. Pension plans provide employees with income upon retirement, and are subject to significant legal requirements. Employee welfare plans, on the other hand, provide benefits other than income (such as medical insurance) and are exempt from many of the requirements imposed on pensions.

Ordinarily, an employer is free to change or remove welfare benefits that have not "vested"—meaning that they have not become guaranteed for life at a certain benefit level. Courts have disagreed, however, regarding the extent of retiree benefit vesting under union-negotiated collective bargaining agreements ("CBAs"), and this disagreement most notably developed between the Sixth and Seventh Circuits. Under the so-called "Yard-Man" inference, the Sixth Circuit has long inferred that retirement benefits in CBAs are vested. International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983). Unlike the Sixth Circuit, the Seventh Circuit holds that such benefits are guaranteed only for the CBA existing when the employee retires, under the reasoning that CBAs generally provide benefits only "for the term of the Agreement" or under similar durational provisions. Pabst Brewing Co., Inc. v. Corrao, 161 F.3d 434 (7th Cir. 1998). Other circuits have fallen somewhere in between the extremes set by the Sixth and Seventh Circuits.

A lawsuit regarding ERISA welfare plan can be maintained in numerous venues, including where the welfare plan is administered or where the beneficiary resides. 29 U.S.C. § 1132(e)(2). Given that many employers stretch across multiple federal jurisdictions, the split regarding whether welfare benefits vest often leads to competing litigation. An employer seeking to amend a welfare plan administered in Indianapolis, for example, might file a declaratory judgment action there seeking a judgment that the benefits have not vested. Retired employees living in Cincinnati would likely file a class action in Ohio, in an attempt to take advantage of the Yard-Man vesting inference. The parties would then fight over which litigation should move forward, with the winner of the venue fight also likely prevailing on the merits. E.g., Crown Cork & Seal Co. v. USW, 2004 U.S. Dist. LEXIS 760 (W.D. Pa.) (granting motion to dismiss in favor of parallel litigation in Ohio).

In M&G Polymers, the employer purchased a plant in 2000 that had been the subject of numerous CBAs. The employer then negotiated a master agreement that continued to provide health benefits at no cost to the retired employees. In 2006, the employer decided to require retirees to contribute to their health care costs. Certain retirees brought a class-action suit in Columbus, Ohio seeking free lifetime benefits. The Sixth Circuit, relying heavily on Yard-Man, held that the retirees had a vested right to lifetime, contribution-free benefits.

The Supreme Court unanimously reversed, rejecting Yard-Man's effect of "placing a thumb on the scale" in favor of vesting. M&G Polymers, No. 13-1010 (slip op. at 10). The Court held that welfare benefit plans must be construed according to ordinary principles of contract law, regardless of whether or not the benefits come from CBAs. The Court noted that even in the Sixth Circuit, welfare benefits unilaterally provided by employers (i.e., not guaranteed by a CBA) generally were not vested. The Court recognized that applying the Yard-Man inference contradicted the longstanding practice in favor of construing welfare plans according to their terms, and against unduly expanding such plans, in order to maintain a benefit system "that is not so complex that administrative costs, or litigation expenses, unduly discourage employers from offering . . . plans in the first place." M&G Polymers, No. 13-1010 (slip op. at 6) (quoting Heimeshoff v. Hartford Life & Accident Ins. Co., 571 U.S. __ (2013) (slip op. at 7)). In other words, if employers can never alter the terms of their benefit plans, then employers might stop offering such plans completely.

Although the Supreme Court unanimously rejected the Yard-Man inference, three justices (Breyer, Kagan, and Sotomayor) joined Justice Ginsburg's concurring opinion providing arguments why the benefits, in the case at bar, nevertheless might have vested by the terms of the agreements at issue. In particular, these justices cited language tying health plan eligibility to pension eligibility as an indication that retirees might have the same vested right to the health benefits that they undeniably had regarding the pension benefits. So although M&G Polymers won an important victory, it appears that the employer will still have some work to do in the court below.

The Supreme Court's important decision in M&G Polymers indicates that employers will now have greater flexibility over health benefits provided to retired employees, even if those benefits stem from CBAs. The concurring opinion by Justice Ginsburg, however, underscores the importance of ensuring that the language of these CBAs and benefit plans do not over-promise benefits that the employer might want to scale back in the future. Before making changes to welfare benefit plans, companies should obtain an assessment from counsel of the companies' rights and obligations, which will now be governed by the express language of the welfare plans and not by judicially created presumptions.

About The Author

Jason Palmer | Faruki Attorney