ERISA-Supreme Court Rules That There Is No Presumption That Retiree Health Benefits Are Vested

In M & G Polymers USA, LLC v. Tackett, No. 13-1010 (U.S. Supreme Court 2015), the Supreme Court overturned the long standing “Yard-Man” inference of the Sixth Circuit Court of Appeals that retiree health benefits created under a collective bargaining agreement are vested.

In this case, when petitioner M&G Polymers USA, LLC (“M&G”) purchased the Point Pleasant Polyester Plant in 2000, it entered a collective bargaining agreement and related Pension, Insurance, and Service Award Agreement (the “P & I Agreement”) with the local union. The P & I Agreement provided that certain retirees, along with their surviving spouses and dependents, would “receive a full Company contribution towards the cost of [health care] benefits”; that such benefits would be provided “for the duration of [the] Agreement”; and that the agreement would be subject to renegotiation in three years. Following the expiration of those agreements, M&G announced that it would require retirees to contribute to the cost of their health care benefits. The retirees then sued M&G and related entities, alleging that the P & I Agreement created a vested right to lifetime contribution free health care benefits. The District Court dismissed the complaint for failure to state a claim, but the Sixth Circuit reversed based on the reasoning of its earlier decision in the Yard-Man case. On remand, the District Court ruled in favor of the retirees, and the Sixth Circuit affirmed.

Upon reviewing the case, the Supreme Court held that the Sixth Circuit’s decision rested on principles that are incompatible with ordinary principles of contract law. ERISA governs pension and welfare benefits plans, including those established by collective-bargaining agreements. ERISA establishes minimum funding and vesting standards for pension plans, but welfare benefits plans–which provide the types of benefits at issue here–are exempt from those rules. The Supreme Court said that it interprets collective-bargaining agreements, including those establishing ERISA plans, according to ordinary principles of contract law, at least when those principles are not inconsistent with federal labor policy. When a collective-bargaining agreement is unambiguous, its meaning must be ascertained in accordance with its plainly expressed intent.

Continuing, the Supreme Court found a number of deficiencies in Yard-Man and subsequent cases expanding it. These deficiencies include that the Sixth Circuit failed to consider traditional contract principles, including the rule that courts should not construe ambiguous writings to create lifetime promises and the rule that contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.The Supreme Court concluded by that that, although there is no doubt that Yard-Man and subsequent cases affected the outcome here, the Sixth Circuit should be the first to review the agreements under ordinary principles of contract law. As such, the Supreme Court vacated the Sixth Circuit’s affirmation and remanded the case.

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