Retiree Health Care Benefits Ruled Vested

The plain language of a contract between a union and an employer provided for a vested right to health care benefits for retirees, even beyond the termination of the contract, the 7th U.S. Circuit Court of Appeals decided.

In 1994 and 2002, the United Steelworkers and Acme Packaging Corp. entered into agreements (collectively referred to as the "agreement") that provided health care benefits for retirees from Acme's Riverdale, Ill., facility. The agreement's coverage provision stated that retiree health care benefits could not be "terminated or reduced … notwithstanding the expiration of this agreement, except as the company and the union may agree otherwise." The agreement's termination provision stated that the agreement was effective until Feb. 29, 2004, but could be terminated thereafter by either party with 120 days' written notice to the other party.

By 2014, through a series of transactions, Signode Industrial Group LLC acquired the Riverdale facility, which had been shuttered in 2004, and assumed Acme's obligations under the agreement.

Effective Jan. 1, 2016, Signode terminated the agreement and stopped providing retiree health care benefits.

A retiree filed a class-action lawsuit against Signode for breaching the agreement in violation of the Labor Management Relations Act of 1947 and the Employee Retirement Income Security Act (ERISA), and the district court ordered Signode to reinstate the benefits. On appeal, the 7th Circuit affirmed the district court's ruling, holding that although the agreement was terminated, Signode was obligated to continue providing retiree health care benefits because the agreement's coverage provision vested the benefits.

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Whether health care benefits vest—that is, may not be terminated prospectively—is based on ordinary principles of contract law. In general, if a collective bargaining agreement is silent as to the duration of the benefits, it is presumed that the benefits terminate when the agreement expires. Although ERISA does not require vesting of health care benefits, an agreement or contract may provide express or implied vesting. Prior legal opinions, industry standards and the parties' past practices may be considered to determine whether the parties intended for the benefits to vest.

The 7th Circuit held that the obligation to provide benefits survived the agreement's termination. The court pointed to the plain language of the coverage provision, which specifically states that benefits would continue to be provided "notwithstanding the expiration of this agreement."

Signode argued that the agreement's termination provision would be rendered meaningless if the obligation to provide benefits survived the agreement's termination. Unpersuaded, the court noted that the purpose of the termination provision was merely to set forth the rules for terminating the agreement and that the "notwithstanding clause" did not prevent the termination of the agreement.

The court also explained that the coverage provision was not ambiguous. Even if it were, there was extrinsic evidence, including two circuit court decisions and a former Acme employee's testimony that the parties intended to vest the retirees' health care benefits, according to the 7th Circuit.

In 1998, the 11th Circuit reviewed another steelworkers' contract that included the same language used in the coverage provision and held that the benefits were vested.

In 1989, the 4th Circuit found that materially identical contract language used in a coverage provision resulted in vested benefits.

An Acme employee and benefits administrator who negotiated the terms of the agreement with the union testified that he believed the agreement vested health care benefits for the life of retirees but only for employees who retired under the agreement, and informed employees as such.

Stone v. Signode Industrial Group, 7th Cir., No. 19-1601 (Nov. 20, 2019), motion for rehearing denied (Jan. 3, 2020).

Professional Pointer: Employers should close the door on implicit vesting requirements or ambiguous terms that may be interpreted as requiring vesting of health care benefits. When drafting collective bargaining agreements and other contracts, employers should consider adding language that expressly provides for the termination of health care benefits upon contract expiration and any other specific conditions under which benefits may be suspended or permanently terminated.

Jason Douthit is an attorney with Bullard Law PC, the Worklaw® Network member firm in Portland, Ore.