ERISA Welfare Plans Subject to General Principles of Contract Law

When M&G Polymers USA purchased a polyester plant in 2000, it also entered into a collective bargaining agreement and pension agreement that provided that specific retirees would “receive a full Company contribution towards the cost of [health care] benefits.”  The agreements were subject to renegotiation three years later.  After the agreements expired, M&G changed the plan, and required that retirees contribute to health care benefit costs.  Those retirees who received benefits under the initial agreement brought suit (M&G Polymers USA, LLC v. Tackett (2015 135 S.Ct. 926) against M&G for violations of §301 of the Labor Management Relations Act and §501(a)(1)(B) of ERISA.  The retirees claimed that the initial agreement created lifetime contribution free health care benefits. Although the district court dismissed the case for failure to state a claim, the Sxith Circuit Court of Appeals reversed.  The Court of Appeals applied International Union, et al v. Yard-Man, Inc. (716 F.2d 1476) inferring the parties to a CBA intended retiree benefits to vest for life based on the fact that such benefits are not required in CBAs and typically understood to be a form of delayed compensation.  Here, specifically, the Court of Appeals concluded that the agreement vested lifetime rights as the beneficiaries would not have agreed to terms that could have been unilaterally changed later by M&G.  After remand and appeal in favor of the retirees, M&G petitioned for certiorari.

The Supreme Court began by explaining that ERISA welfare plans must be established by written agreement under §1102(a)(1), but the plan sponsors are generally free to adopt, modify, or terminate those plans.  As such, the plans must be enforced as written and interpreted according to ordinary principles of contract law.  Although the Sixth Circuit has insisted that the reasoning from Yard-Man and its progeny relied upon principles of contract law, the Supreme Court disagreed.

First, Yard-Man violates the basic principle of the intent of parties by favoring the retirees regarding vested rights in CBAs.  In Yard-Man, the Sixth Circuit derived its assessment from assumptions regarding the intent of the employees and not evidence in the record.  Although intent of the parties can be inferred from industry practice, no evidence supported the court’s inference.

The Court continued, stating that Yard-Man also ignored general durational clauses in contract law inferring that parties would not leave retiree benefits contingent to future negotiations.  The Court of Appeals also misapplied the concept of illusory promises.  The Yard-Man court held that provisions of the welfare plan were illusory because they benefitted some retirees but not all.  The Court explained that this contradicted the concept of illusory promises.  If some retirees received a benefit, it constitutes consideration, and is not illusory simply because it is inapplicable to all parties to the contract.

Finally, the Yard-Man court failed to consider that courts should not construe ambiguous agreements to create lifetime promises.  Although parties are free to provide lifetime benefits in CBAs, when a contract is silent to the duration, the Court cannot infer those benefits.

The Supreme Court vacated the Sixth Circuit’s decision relying on Yard-Man and its progeny and remanded the case, directing the Sixth Circuit to apply the ordinary principles of contract law to interpret the contract at issue.