Employee Relations. A Farewell to Yard-Man. Craig C. Martin and Amanda S. Amert

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1 Employee Relations L A W J O U R N A L ERISA Litigation A Farewell to Yard-Man Electronically reprinted from Summer 2015 Craig C. Martin and Amanda S. Amert In January, the U.S. Supreme Court finally did away with the interpretive rules arising from the Sixth Circuit s decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., 1 and its progeny. In M&G Polymers USA, LLC v. Tackett, 2 the Court reiterated that ordinary principles of contract law apply to the interpretation of collective bargaining agreements and ERISA plan provisions. In so doing, it resolved a lingering circuit split that has been giving employers headaches for more than 30 years, during which the Court repeatedly rejected numerous cert petitions seeking review of the decision. The Yard-Man Vesting Presumption The original Yard-Man decision arose out of a claim that an employer had breached a collective bargaining agreement when it terminated retiree health benefits upon the expiration of the agreement. 3 The Sixth Circuit identified the central question in that case as whether the governing documents provided lifetime benefits for retirees and concluded that the documents themselves were ambiguous on that point. Nevertheless, the court inferred that the parties would have intended to provide lifetime benefits from the fact that the benefits had been the subject of collective bargaining. 4 This reasoning was later expanded by subsequent Sixth Circuit decisions to the point where, in 2006, the court held that there is a reasonable argument to be made that, while this court has repeatedly cautioned that Yard-Man does not create a presumption of vesting, we have gone on to apply just such a presumption. 5 Notably, the Sixth Circuit only applied this presumption to collectively bargained benefits; for nonbargained plans, the same court requires clear and express language indicating the intent to make retiree health benefits vested for life. 6 The Supreme Court s Holding Going into the Supreme Court s decision, Yard-Man seemed to have at least three strikes against it. First, the Sixth Circuit was alone among Craig C. Martin, a partner in Jenner & Block LLP s Chicago office, is co-chair of the firm s National Litigation Department and long-time member of the firm s governing committee. Amanda S. Amert, who also is a partner in the firm s Chicago office, is chair of the firm s ERISA Litigation Practice. The authors can be reached at cmartin@jenner.com and aamert@jenner.com, respectively.

2 courts of appeals in adopting its presumption of vesting, although the issue of when retiree health benefits may be terminated is a familiar one considered by a number of courts. Second, the presumption that, absent express language to the contrary, such benefits are vested for life was at odds with a number of other, better-established principles of contract interpretation. Third, and perhaps most importantly, the case had developed into the type of judicially crafted doctrine toward which the current Supreme Court has expressed considerable animus. As a result, it came as no great surprise that the Court chose to throw out the Yard-Man line of cases. In so doing, the Court looked to contract treatises and familiar contract interpretation principles, holding: As an initial matter, Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements. That rule has no basis in ordinary principles of contract law. And it distorts the attempt to ascertain the intention of the parties. 7 The Court went on to criticize the basis of the presumption: Because the Court of Appeals did not ground its Yard-Man inferences in any record evidence, it is unsurprising that that the inferences rest on a shaky factual foundation. 8 Furthermore, the Court held that the Sixth Circuit inappropriately concluded that retiree health benefits are a type of deferred compensation, that it failed to apply general durational clauses to limit retiree health benefits, and that it misapplied other traditional principles of contract interpretation. 9 The Court then remanded the case to the Sixth Circuit to determine how, without the Yard-Man rule, to apply ordinary principles of contract law in the first instance. 10 The demise of Yard-Man has been little mourned. It is always good news for employers (and, for the most part, employees) when the Supreme Court does away with an outlier approach to plan interpretation like Yard-Man. Implications The demise of Yard-Man has been little mourned. It is always good news for employers (and, for the most part, employees) when the Supreme Court does away with an outlier approach to plan interpretation like Yard-Man. Outlier doctrines among the courts of appeals

3 impose onerous and conflicting burdens on nationwide employers, which must take into account the fact that plan language would mean one thing if tested in Michigan and its opposite if tested in Illinois. Particularly in the context of collectively bargained benefits, it can be extremely difficult for employers to draft around this type of schism. The relevant language cannot be changed without reopening bargaining, something employers and unions alike are often loathe to do. As a result, employers frequently had no choice but to live with the uncertainty of whether a court may find they inadvertently created lifetime retiree health benefits. Not only did the Court s holding strike down a much disliked doctrine, but it also provides employers with an assortment of potentially useful propositions. First, the Court restated some of the more employerfriendly language from its previous cases: As we have previously recognized, [e]mployers have large leeway to design disability and other welfare plans as they see fit. And, we have observed, the rule that contractual provisions ordinarily should be enforced as written is especially appropriate when enforcing an ERISA welfare benefits plan. That is because the focus on the written terms of the plan is the linchpin of a system that is not so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefits plans in the first place. 11 This point that ERISA plans are voluntary benefits provided by employers and will not be offered if they become too cumbersome or expensive to administer is one that employers repeatedly make, and the re-endorsement of the underlying public policy considerations is welcome from the employers perspective. Employers also will be heartened by the Court s rejection of the Sixth Circuit s holding that retiree health benefits are a form of deferred compensation. Next, the Court set out a series of principles of contract interpretation that should be applied to plan interpretation, all of which generally tend to weigh against a finding of lifetime vesting of retiree health benefits. In so holding, the Court emphasized the traditional principle that courts should not construe ambiguous writings to create lifetime promises as well as the traditional principle that contractual obligations will cease, in the ordinary course, upon termination of bargaining agreement. 12 The Court also sharply criticized the Sixth Circuit s application of the

4 illusory promises doctrine, noting a promise that is partly illusory is by definition not illusory. 13 The Court concluded, when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life. 14 Employers also will be heartened by the Court s rejection of the Sixth Circuit s holding that retiree health benefits are a form of deferred compensation. The Court concluded that premise is contrary to Congress determination that plans that resulted in a deferral of income by employees [are] pension plans, and plans that offer medical benefits are welfare plans, and that [t]hus, retiree health care benefits are not a form of deferred compensation. 15 As the Court noted, the substantial vesting and minimum funding requirements imposed on pension plans do not apply to welfare plans. 16 The importation of the concept of vesting from the pension plan context to the welfare plan context has been the source of a number of expensive lawsuits and likely will rise again as increasing retiree health costs continue to push employers toward finding alternatives to traditional retiree health benefits. The Court s concise rejection of this approach most likely will appear in any number of defendants motion to dismiss briefs in the future. The Court s ruling also demonstrates the fact that ERISA, a famously complex and reticulated statute, provides an excellent framework for striking down judicially created doctrines. This may not always result in employer-friendly rulings, but more often than not, it is plan participants who find themselves advocating for equitable extensions of ERISA s provisions or of plan documents, and employers that wish to limit both to their plain terms. Conclusion Although the Court s opinion did not tie up every loose end in the retiree health universe there remain material differences among other circuit courts approaches it entirely extinguished a lien of cases that have troubled employers for decades, and in so doing, gave employers reason to celebrate. Moreover, it fits into a recent trend of Supreme Court holdings in the ERISA area that, taken together, work to pare the statute back to its provisions. At the end of the day, employers only complaint may be that the decision should have come 30 years sooner. Notes F.2d 1476 (6th Cir. 1983) S. Ct. 926 (2015). 3. Id. at Id.

5 5. Cole v. ArvinMeritor, Inc., 549 F.3d 1064, 1074 (6th Cir. 2008). 6. M&G Polymers, 135 S. Ct. at Id. at 935 (citing 11 Williston 30:2, at 18 (adding emphasis)). 8. Id. at Id. at Id. at Id. at 933 (internal citations, quotations and brackets omitted). 12. Id. at 937 (internal citations omitted). 13. Id. at Id. at Id. at 936 (citing 29 U.S.C. 1002(2)(A)(ii) & 1002(1)(A)). 16. Id. at 929. Posted from Employee Relations Law Journal, Summer 2015, with permission from Aspen Publishers, a WoltersKluwer Company, New York, NY , For more information on the use of this content, contact Wright s Media at

SUPREME COURT OF THE UNITED STATES

SUPREME COURT OF THE UNITED STATES (Slip Opinion) OCTOBER TERM, 2014 1 Syllabus NOTE: Where it is feasible, a syllabus (headnote) will be released, as is being done in connection with this case, at the time the opinion is issued. The syllabus