In a recently issued opinion, the Second District Appellate Court of Illinois considered the issue of whether a school board can decrease the health insurance benefits provided to retirees under certain collective bargaining agreements after the expiration of those agreements.  The trial court entered judgment in favor of the plaintiffs, which consisted of 107 retired (including soon to be retired) teachers, on this issue. 

Introduction

The plaintiffs alleged breach of contract and promissory estoppel.  The terms of their employment, which included their retirement benefits, were governed by various collective bargaining agreements that had been reached between the defendant school board and the teacher’s union (referred to in the opinions as the “Earlier Contracts.”)  The Earlier Contracts generally provided that the defendant would pay the full cost of a plaintiff-retiree’s health insurance premiums until that individual became eligible for Medicare or reach the age of 65.    The plaintiffs brought their cause of action upon the fact that subsequent agreements (referred to herein as the “Later Contracts”) reached between the teacher’s union and the school board, provided for a decrease in the applicable health benefits previously made available to the retirees. 

Relevant Facts and Procedural History

To demonstrate, the Earlier Contracts provided that the plaintiff-retirees would have continued individual health insurance while defendant paid 100% of the premiums.  The Later Contracts, however, attempted to modify or otherwise reduce the benefits afforded to plaintiff-retirees by decreasing the amount of the defendant’s contribution towards the health insurance premiums.  Specifically, the plaintiffs’ were then subject to contributing towards the costs of the premiums by as much as 15%.  The plaintiffs filed a grievance with the teacher’s union; however, the teacher’s union refused to support the grievance and asserted that the decrease in the defendant’s contribution towards the premiums had been bargained for and approved by the union members.  Once the grievance was denied, and nothing further could be done to exhaust their administrative remedies, the plaintiffs initiated this lawsuit. 

On appeal, the defendant raised four arguments:  (1) that the plaintiffs lacked standing to sue to enforce the Earlier Contracts; (2) that the plaintiffs had no vested right to the retiree health insurance benefits provided in the Earlier Contracts and that said benefits expired when the Earlier Contracts expired; (3) alternatively, if the retiree health insurance benefits had vested and were intended to survive the expiration on the Earlier Contracts, they had been validly modified by the Later Contracts that were at issue; and, (4) the benefits were limited to those retirees who qualified to participate in an early retirement option (“ERO”) under the teacher’s retirement system, thereby asserting that 23 of the named plaintiffs did not qualify for the claimed benefits. 

Collective Bargaining Agreements May be Governed by State or Federal Common Law.  In the absence of sufficient State Law or Precedent, Federal Law Pursuant to Section 301 of the Labor Management Relations Act Applies

Before examination of these arguments, the Illinois Appellate Court had to consider whether this matter was governed by Illinois law or federal common law interpreting Section 301 of the Labor Management Relations Act, 1947 (29 U.S.C. § 185 (2000)).  Plaintiffs filed this cause under Illinois law and Illinois contract law had been applied in the trial court level throughout all relevant times.  The defendants, for the first time on appeal, asserted that there was no Illinois law directly on point.  While this would normally have constituted waiver, on defendant’s part, thereby requiring the strict application of Illinois law over federal law, the Illinois Appellate Court noted the scarcity of Illinois law on point and referenced a plethora of federal law which stood for the proposition that federal common law developed under Section 301 was to be applied in any case requiring interpretation of a collective bargaining agreement.[1]  Federal courts have rejected the view that state courts remain free to apply individualized local rules when enforcing such agreements. The issue of whether health benefits granted to retirees under collective bargaining agreements survive the expiration of those agreements “must be cited as a matter of federal common law developed under the authority of Section 301.”Rossetto v. Pabst Brewing Co. 

Retirees Have Standing to Sue for Violations of Contractual Rights Secured by Previous Collective Bargaining Agreements

To begin, the court considered defendant’s arguments with respect to whether or not the plaintiffs had standing to bring the present lawsuit.  Defendants argued that in order for one to sue on contract there must be privity.  The court held that the plaintiffs had standing because they had sufficiently alleged a direct injury which resulted when the defendant required them to pay for a portion of their health insurance premiums in violation of their previous contractual rights.  Further, the court held that the plaintiffs had privity of contract despite not being signatories to the contracts at issue.  Because the union was the “exclusive and sole negotiation agent for contractually certified employees, which included [these] teachers,” there was privity of contract.  In support, the Illinois Appellate Court relying on the United States Supreme Court opinion in Allied Chemical and Alkali Workers of America, Local Union No. 1 v. Pittsburgh Plate Glass held that “retirees have standing to sue for benefits granted under previous collective bargaining agreements.”

In considering well-established principles of contract law, a retiree’s vested rights may not be altered without his or her consent.  If such benefits are altered to the contrary, Section 301 provides the retiree with a remedy.  Because the promise in the Earlier Contracts to pay certain retirement benefits to a class of employees made them third-party beneficiaries for purposes of Section 301, the Illinois Appellate Court determined that neither standing nor privity was lacking in the case at bar.  As third party beneficiaries, retirees, including those about to retire that have vested rights, can recover for a defendant-employer’s breach of a collective bargaining agreement.

 The Benefits Promised Survived and Exceeded the Duration  of the Subject Collective Bargaining Agreements

The Court then considered whether the benefits granted by the Earlier Contracts terminated when those contracts ended.  The defendant claimed that whatever health insurance benefits were granted to the retirees under the Earlier Contracts were no longer in effect because those contracts had expired.  Federal statutory law does not require an employer to grant health insurance benefits to retirees; however, benefits are vested under contract law when and where the benefits are expressly set forth in contract by an employer.  Accordingly, the starting point is the plain language of the contract itself.  In considering the language of the Earlier Contracts, the court found that the employer clearly expressed the intent that the duration of the retiree health insurance benefits was to extend beyond the expiration date of the Earlier Contracts.[2]  The Earlier Contracts generally stated that the health insurance benefits would be paid either until the retiree became eligible for Medicare or reach the age of 65, whichever was sooner.  Additionally, they contained no exclusionary language or other language reserving the defendant employer’s right to revoke or modify the contents or benefits provided therein.  Thus, the court held that the Earlier Contracts expressed an unambiguous intent to provide continuing health insurance benefits independent of the anticipated duration of the contracts. 

While the defendant correctly asserted that there was a body of federal law that provided or allowed for a presumption that health insurance benefits terminated when the collective bargaining agreement providing for them expired, the court held this distinction would apply only if the collective bargaining agreements at issue were “utterly silent on the question of whether the health insurance benefits provided therein were intended to survive the expiration of the collective bargaining agreement.”  Because the Earlier Contracts were not silent in this regard, as they provided for durational benefits that exceeded the anticipated life of the agreements, the court rejected the defendant’s position.[3]    

Defendant Employer’s Actions and Requirements Evidenced its Intent to Vest Certain Plaintiffs with Retirement Benefits Prior to Actual Retirement

The court next considered the question posed as to when the plaintiffs’ obtained vested rights to the benefits set forth in the Earlier Contracts.  The defendant claimed that certain plaintiffs did not have vested rights to the challenged benefits because they were not retired and had remained working for the defendant even during the time when the Later Contracts had been executed.  In furtherance, the defendant pointed out that these plaintiffs had only provided a “notice of intent” to retire.  However, the Illinois Appellate Court, once again relying on federal law, was disinclined to adopt the defendant’s position. 

Notably, the collective bargaining agreements in the cases cited by defendant did not requireanyone to provide a notice of intent to retire prior to actually retiring.  In contrast, the plaintiffs in the present case were required to submit a notice of intent to retire that was subject to the defendant’s approval.  Additionally, the notices of intent to retire were irrevocable.  Pursuant to the terms contained in the Earlier Contracts, the plaintiffs were required to continue to work after submitting their notice of intent to retire until the date specified for retirement.  Thus, the plaintiff-employees had irrevocably chosen to cease working on a date specified and accepted the retirement benefits offered to them under the Earlier Contracts.  The court found that the defendants, by requiring a notice of intent to participate in early retirement which was then subject to its approval, took affirmative measures providing the future retirees with vested rights in the Earlier Contracts. 

Defendant Could Not Modify the Contractual Rights Secured by the Prior Collective Bargaining Agreements in the Absence of Additional Consideration and Continued Employment May Not Constitute Acceptance of Decreased Benefits

In considering whether the defendants and the teacher’s union could modify the benefits despite the plaintiffs’ vested rights, the court held that at the threshold, the defendants had not established that the later retirees had in fact taken any actions affirmatively indicating that they wished to be bound by the Later Contracts.  However, as indicated above, the later retirees had a pre-existing obligation to perform in accordance with the Earlier Contract as they had to continue to work for the defendant-employer until their date of retirement approached.  As a general rule, a pre-existing contractual obligation cannot provide consideration.  Thus, continuing to work merely constituted performance under the Earlier Contract and did not demonstrate acceptance or consideration for modification of the Earlier Contracts.  Similarly, membership in the teacher’s union was a pre-existing duty rather than an affirmative undertaking and the court could not infer that the plaintiffs were actively engaged in the teacher’s union and agreeing to the subsequent modifications.  The court noted the general rule, “upon vesting, benefits become forever unalterable.”  Accordingly, an employer may not unilaterally modify or reduce vested benefits.

Defendant’s Failure to Require Compliance with Condition Precedent Constituted Waiver and Its Failure to Demand or Recognize the Need for Strict Compliance Was a Mistake of Law Insufficient to Negate Intent to Waive Compliance

Last, the Illinois Appellate Court considered whether 23 of the plaintiffs should be excluded from the early retirement benefits defined in the Earlier Contracts.  Here, the defendant contended that judgment should be entered in its favor with respect to 23 of the plaintiffs because they did not properly qualify for the benefits at issue under the Earlier Contracts which required teachers intending to retire to participate in the early retirement option (“ERO”) as set out in a the Pension Code (40 ILCS 5/16-101 et seq., (West 2008)). 

Plaintiffs denied that participation in the ERO was not a condition of participation in the early retirement plan.  Moreover, the Plaintiffs asserted that defendant waived this argument by failing to raise it as an affirmative defense, and by voluntarily approving the notices of intent to retire submitted by the 23 plaintiffs.  Indeed, a defendant’s failure to raise an affirmative defense in its answer forfeits its ability to later argue that defense.  However, the Illinois Appellate Court was more convinced by the fact that the defendant-employer seemed to waive this provision by its affirmative measure of approving the irrevocable notices of intent submitted by the 23 plaintiffs although they were not ERO participants as provided for in the Pension Code.  The Court deemed this conduct as unambiguously indicating that the defendant did not intend to require the early retirees to comply with this provision. 

Defendant sought to resuscitate this defense by arguing that its failure to understand that participation in the ERO was required was a “mistake of fact” which could negate the intent necessary for a finding of waiver.  However, the Illinois Appellate Court disagreed and stated that defendant’s mistake was one “of law” in that it had approved the plaintiffs for participation in its early retirement plan by its own mistake in interpreting its contract to mean that participation in the ERO was not required.  Misinterpretation of one’s own contract cannot be excused as a mistake of fact.  Thus, the defendant forfeited the application of the alleged condition precedent and the court refused to exclude the 23 plaintiffs from the benefits afforded by the Earlier Contracts.

Conclusion

In closing, benefits that are clearly and unequivocally established in collective bargaining agreements are compensation for which union employees, such as the plaintiffs, agree to work.  Having provided the defendant with the benefit of that performance, the defendant could not disavow its obligation to provide the plaintiffs with the benefits they previously bargained for.  For the above stated reasons, the Illinois Appellate Court affirmed the trial court’s ruling in its entirety and established precedent in Illinois common law that has the potential of affecting school districts throughout the State of Illinois and possibly other matters involving collective bargaining agreements.