In M&G Polymers USA, LLC v. Tackett, 135 S. Ct. 935 (2015), the Supreme Court of the United States addressed the interpretation of collective bargaining agreements (CBAs) that include post-retirement welfare benefits, such as retiree health or life insurance benefits.  The Supreme Court ruled that the U.S. Court of Appeals for the Sixth Circuit’s long-standing inference of vested retiree welfare benefits, termed the Yard-Man inference, is inconsistent with ordinary principles of contract law governing CBAs.  The Yard-Man inference arose in a 1983 Sixth Circuit case, UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), which held that courts should presume that retiree welfare benefits provided in CBAs were vested or guaranteed for the life of any employee who retired under a CBA.  The Supreme Court struck down the Yard-Man inference, holding that the inference was inconsistent with ordinary principles under contract law, the Employee Retirement Income Security Act of 1974 (ERISA), and the Labor Management Relations Act of 1947 (LMRA).

Background

Prior to Tackett, a circuit split existed regarding the interpretation of CBAs that provide retiree welfare benefits.  Federal courts generally interpret these agreements pursuant to ERISA (which governs employee benefit plans) and the LMRA (which governs labor agreements).  Under ERISA, benefits provided to retired employees under a pension plan vest upon receipt of the benefit.  In contrast, while employers may agree to provide retired employees with vested or unalterable health or life insurance benefits, neither ERISA nor the LMRA requiresuch vesting.  The federal circuits have disagreed over how to interpret CBAs that are silent as to the duration of retiree welfare benefits or that contain only general durational clauses.

Under the Yard-Man inference and its progeny, courts in the Sixth Circuit held that, absent specific language to the contrary, the parties to a CBA intended union retiree benefits to vest upon an employee’s retirement.  Most other circuits, however, rejected the Yard-Maninference and instead required some affirmative contract language to vest union retiree welfare benefits.

The facts in Tackett are similar to those in many other cases that address union retiree welfare benefits.  M&G Polymers and a union entered into a series of CBAs, and each CBA included language that retirees “will receive a full Company contribution towards the cost of” health benefits.  Each CBA also included a general durational clause stating that the employer would provide the “program” of welfare benefits “for the duration of this Agreement.”  After the expiration of the most recent CBA, M&G Polymers sought to require retirees to contribute to their health benefits in the face of rising health costs.  The union retirees initiated a lawsuit, alleging that the term “will receive” in the CBA established a right to vested lifetime health benefits for the retirees.

District Court and Sixth Circuit Decisions

In Tackett, the district court initially dismissed the union retirees’ lawsuit for failure to state a claim, but the Sixth Circuit reversed and found that, in light of the Yard-Man inference, the retirees stated a plausible claim.  The Sixth Circuit ruled that the “will receive” language created a right to vested health benefits despite the general durational clause in the CBA.  On remand, the district court conducted a bench trial and ruled in the retirees’ favor based on the Sixth Circuit’s decision.  The Sixth Circuit affirmed and held that the district court correctly “presumed” that “in the absence of extrinsic evidence to the contrary, the agreements indicated an intent to vest lifetime contribution-free benefits.”  M&G Polymers subsequently sought review with the Supreme Court.

Supreme Court Opinion

In Tackett, a unanimous Supreme Court held that the Yard-Man inference and its progeny conflicted with ordinary principles of contract law.  The Supreme Court first carefully summarized the development of the Sixth Circuit’s law in this area, which started with Yard-Man’sholding that a CBA was ambiguous on the issue of vesting and reasoning that union “retiree benefits are in a sense ‘status’ benefits which, as such, carry with them an inference that they continue so long as the prerequisite status is maintained.”  Two years later, in Policy v. Powell Pressed Steel Co., 770 F.2d 609 (6th Cir. 1985), the Sixth Circuit reversed a lower court ruling for the employer, and held that a CBA unambiguously provided for lifetime benefits.  Over the next two decades, the Sixth Circuit continued to create inferences and rules of contract constriction that effectively predetermined the vesting question in favor of union retirees.

Next, the Supreme Court held that the Sixth Circuit’s approach was inconsistent with “ordinary principles of contract law” and cited six specific examples of inconsistency:

• Thumb on the Scale.  The Supreme Court found that the Yard-Man inference “violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.”  Such a broad inference has no connection to the parties’ intent in specific circumstances.  As the Supreme Court noted, “Yard-Man’s assessment of likely behavior in collective bargaining is too speculative and too far removed from the context of any particular contract to be useful in discerning the parties’ intention.”

• Industry Custom and Usage.  The Supreme Court also criticized Yard-Man’s “assessment of the likely behavior” of parties in the collective bargaining context because this assessment came “not from record evidence, but instead from [the court’s] own suppositions about the intentions of employees, unions, and employers negotiating retiree benefits,” and had been applied “indiscriminately across industries.”

• General Durational Clauses.  The Supreme Court held that the Sixth Circuit ignored the text of the parties’ written agreement and “the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties” by finding that general durational clauses “say nothing” about vesting.

• Purportedly Illusory Promises.  Yard-Man and its progeny relied on CBA language that would apply to only some retirees during the term of the CBA to find vesting.  The Sixth Circuit’s reasoning was that the term was—in the absence of vesting—illusory because some retirees would never receive the benefit of the term.  The Supreme Court correctly observed that the Sixth Circuit had turned the illusory-term analysis on its head and explained that “a promise that is ‘partly’ illusory is by definition not illusory.”  The Supreme Court held further that as long as a contractual provision “benefits some class of retirees, then it may serve as consideration for the union’s promises.”

• Construction of Ambiguous Writings.  The Supreme Court found that by applying the Yard-Man inference, the Sixth Circuit “failed to even consider the traditional principle that courts should not construe ambiguous writings to create lifetime promises.”

• Effect of Contractual Obligations After Termination.  The Supreme Court also found that by applying the Yard-Man inference, the Sixth Circuit “failed to consider the traditional principle that ‘contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.’”

• Linking Health-Benefit Eligibility to Eligibility for a Pension.  The Sixth Circuit has long inferred from the tying of retiree health benefits to receipt of a pension that the parties intended the health benefits to last as long as the pension benefits, i.e., for life.  According to the Supreme Court, this inference was one of several that “affected the outcome” in Tackett.  And as the unanimous Supreme Court concluded, such “inferences [are] inconsistent with ordinary principles of contract law.”

In summary, Tackett’s rejection of the Yard-Man inference means that “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.”  Given the ubiquity of Yard-Man and its progeny in the Sixth Circuit, the Supreme Court held that there was “no doubt” that the Yard-Man inference affected the outcome in Tackett, and, without deciding the ultimate issue of whether the CBAs at issue provided for vested retiree health care benefits, remanded the case to the appellate court with instructions to “apply ordinary principles of contract law in the first instance.”

Practical Impact

By eliminating the circuit split caused by the Yard-Man inference, the Supreme Court provided some long-awaited certainty on how courts across the United States should interpret CBAs and the retiree medical benefits in those agreements.  The arbitrary location of a plant or employer, or a race to the courthouse between the employer and the union, no longer will determine whether such retiree medical benefits are vested or terminable at the end of a CBA.  In particular, courts now have a set of consistent rules for interpretation:

• The Yard-Man Inference No Longer Applies.  The Supreme Court was unambiguous and undivided in its rejection of the Yard-Maninference as “inconsistent with ordinary principles of contract law.”  As a practical matter, this raises the question whether a significant portion (if not all) of Sixth Circuit case law from the past three decades addressing collectively bargained retiree welfare benefits is no longer binding precedent.

• Courts Must Consider General Durational Clauses.  The Supreme Court rejected the Sixth Circuit’s rule that general durational clauses “say nothing about the vesting of retiree benefits.”  Such clauses are now relevant to a vesting determination.

• Contractual Provisions that Apply to a Subset of Retirees Are Not Illusory.  Contrary to rulings by the Sixth Circuit, an employer’s promise of benefits to some retirees, but not others, is not illusory and “may serve as consideration for the union’s promises.”

• Courts Must “Consider” Ordinary Principles of Contract Interpretation.  The Sixth Circuit must “consider” all ordinary contractual principles when interpreting CBAs, including the principles described above regarding the construction of ambiguous writings and the effect of contractual obligations after termination.

In sum, the Supreme Court squarely addressed whether lower courts may infer retiree welfare benefit vesting from silence in a CBA.  They cannot.