Battling for benefits: when companies cut health care benefits for union retirees, trial attorneys may be the former workers' last hope for security and justice.

In past years, one reason an employee spent his or her entire career at one company was the promise of lifetime health coverage after retirement. However, with health care costs rising sharply over the last 25 years, many companies have sought to lower costs by not only reducing employee benefits but also cutting them for retirees.

Companies have unilaterally increased retiree contributions, imposed higher deductibles, capped benefits, or eliminated retiree health care coverage altogether. In addition to rising costs, a 1993 change in accounting standards required companies to book the full (accrual) value of their post-retirement health care obligations rather than accounting for them on a pay-as-you-go (cash) basis. (1) As a result, cutting retiree health benefits is no longer limited to companies near bankruptcy. Profitable companies also slash these benefits to show investors healthier balance sheets (leading to higher compensation for executives).

Companies see little downside to cutting benefits. If a company loses a court challenge, it will be required only to restore the benefits and pay the retirees' attorney fees. If the cuts are upheld, the savings can be substantial--for large companies, they may amount to hundreds of millions of dollars. Even a settlement may significantly reduce corporate liability. And with so many companies cutting benefits, the risk of a public relations "hit" for leaving retirees without health coverage has lessened.

For retirees, cuts in health benefits often dramatically reduce their standard of living. In one case, after working for over 40 years, employees of a leading tire manufacturer retired expecting lifetime health benefits to be paid by the company. In 2000, the company unilaterally capped its contribution at $2,700 per year, per retiree household. (2) By 2005, a two-person household was paying nearly $850 a month for coverage, which exceeded the retirees' modest monthly pension. Due to preexisting medical conditions, many retirees were unable to obtain other, affordable coverage and must either pay costly premiums or live with the prospect that a catastrophic illness will exhaust their life savings.

Nonunion employees have had limited success in challenging employer cuts. Courts have found company-conferred retiree health benefits to be "gratuitous" and terminable at will by the employer. For example, the Sixth Circuit ruled against about 85,000 nonunion GM retirees even though the company promised them that their benefits would be for life. (3)

Former union employees have fared better in court challenges. Since unions are not likely to agree to clauses that "reserve" the company's right to cut benefits (clauses routinely included in nonunion plans), courts find it easier to hold that collectively bargained health benefits are vested or, at a minimum, that the contract language is ambiguous and requires examining "extrinsic evidence" to discern its meaning. For union members, courts have most often held that a document unilaterally drafted by the company cannot affect vested rights that were collectively bargained. (4)

The following discussion highlights the legal landscape and practical considerations that union retirees and their advocates should consider when deciding whether to challenge cuts to health insurance benefits.

Breach of contract

Both union and nonunion retirees may sue for benefits under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, which preempts state law relating to employee benefit plans. (5) While ERISA mandates the vesting of pension benefits, it does not require vesting for health plans or other "welfare" benefit plans. (6) This does not mean, however, that the parties cannot make these benefits vested by agreement or "private design." (7) Retirees may bring suit under ERISA to enforce compliance with "the terms of [any] employee benefit plan," (8) and if a plan's terms require that benefits be paid for life, courts will enforce the terms.

Retirees whose benefits were negotiated as part of a union's collective bargaining agreement may also bring suit under [section] 301 of the Labor Management Relations Act, which confers jurisdiction in suits alleging violations of labor contracts. (9)

Before filing suit, ERISA plaintiffs should review plan documents to determine whether a claims procedure applies to disputes growing out of across-the-board amendment or termination of the retiree health plan. If the court finds the dispute is subject to the plan's claims procedure, plan participants or beneficiaries must exhaust administrative remedies before bringing suit under ERISA. (10) Courts recognize exceptions to this doctrine, including futility (11) and denial of meaningful access to the administrative review procedure. (12) In addition, when union retirees sue, courts face the threshold question of whether they must first exhaust a grievance procedure in the unions contract. Precedent holds that retirees and surviving spouses do not ordinarily have to exhaust grievance procedures, as the union is no longer their representative and their benefits are not a mandatory subject of the bargaining process. (13)

When a court finds a failure to exhaust administrative remedies, usually the suit is stayed or dismissed without prejudice while the affected retirees complete the claims procedure. (14)

For retirees to prevail on an ERISA or [section] 301 claim, the right to "lifetime" benefits must find its "genesis" in the labor contract or "documents governing the ERISA plan." A "governing plan document" need not take some special form or be called "the plan." Plan documents may come in a variety of forms, including the plan itself, summary plan descriptions (SPDs), collective bargaining agreements (for union employees), insurance company documents, and early retirement releases. The usual rules of contract construction apply in analyzing such documents. (15)

Retiree claims have the best chance for success when the language of the plan documents is "unambiguous" in favor of vesting. For example, "[Retirees and surviving spouses] shall not have such coverage terminated or reduced (except as provided in this program) so long as the individual remains retired from the company or receives a surviving spouse's benefit, notwithstanding the expiration of this agreement, except as the company and union may agree otherwise." (16)

On the other hand, retirees will have difficulty succeeding when plan language states that benefits are terminable and that retirees have no right to lifetime benefits. For example, "[I]nsurance coverage ... may be amended or discontinued at any time," or "[T] he company does, as it always has, reserve the right to change the plan and, if necessary, discontinue it." (17)

When the language in plan documents is "ambiguous," cases require more detailed analysis. For example, the Sixth Circuit found that the following provision by itself unambiguously granted lifetime benefits: Retirees shall have health care benefits "continued for themselves, their spouses, surviving spouses, and eligible dependents." However, the court then found that this language was rendered ambiguous by another provision, which stated that "these benefits will be provided at no cost to the employees or retirees for the term of this agreement except where the plan specifically provides otherwise." (18) Similarly, the Third Circuit found that a reservation of right to "amend, modify, or discontinue the plan in the future in conformity with applicable legislation" was ambiguous. (19)

If a court finds that plan language is ambiguous, it will consider extrinsic evidence to determine the parties' intent. This evidence can take many forms.

Oral or written statements to retirees. Company representatives will often meet with retirees or prospective retirees to explain their future pension and insurance benefits. If the company officials fail to discuss the length of each benefit or lead retirees to believe their benefits will be "for life," this may supply strong evidence for plaintiff retirees. (20)

Contract negotiations. Statements, proposals, and counterproposals from the people who negotiated the collective bargaining agreement often shed light on the parties' intent. (21) Industry-wide bargaining (coordinated bargaining between a union or unions and a group of companies that compete in an industry) or pattern bargaining (lead negotiations with one company within an industry that establishes a pattern, which is then followed by other companies) may also indicate intent. (22)

Continued insurance benefits during strikes. In a strike or lockout situation, there is usually no collective bargaining contract in effect. During the strike, the employer may terminate health insurance for active employees but continue retiree insurance. If retirees received benefits after the labor agreement expired, they can argue that this supports their claim to a vested, lifetime benefit. (23)

Cost analysis for plant shutdown. In preparing for a plant shutdown, employers often "cost-out" retiree insurance on a "lifetime" basis. Memos, letters, notes, and other documents prepared in this process that specifically state that benefits will continue "for life" will support retiree plaintiffs.

Uncontested benefits changes for past retirees. Where past retirees have accepted a decrease in benefits without protest, courts may consider this evidence that they did not regard their benefits as vested. However, an increase in benefits may not support a company's claim that benefits were not vested--since courts presume that retirees would not object to additional coverage. (24)

Failure to disclose benefit limits in SPDs. In some circuits, the description of benefits contained in a summary plan description can take precedence over the terms of the plan if there is a conflict between them. (25) Even if a court does not consider SPD misrepresentations binding, the failure to comply with SPD requirements may provide extrinsic evidence that supports the retirees. For example, assume an employer claims that retiree benefits were meant to terminate at shutdown--but the plan itself is ambiguous and the SPD fails to name shutdown as a "circumstance" that causes benefits to terminate. The employer's failure to disclose this--a disclosure that is required by ERISA--suggests that it was never intended as a disqualifying condition. (26)

Other claims

Several other employer actions may support plaintiffs who claim the right to retiree health benefits.

Breach of fiduciary duty. Another possible ERISA claim is alleging that a fiduciary breached its duty to administer the plan "in accordance with its terms." (27) This may be most useful for plaintiffs who want to recover from an individual or parent corporation that did not sign the labor contract.

Breach of duty not to misrepresent. If the plan language unambiguously gives the employer a right to reduce or terminate retiree health benefits, an alternative cause of action may arise if it misrepresents to the retirees that the benefits are "for life." A fiduciary's duty to inform "entails not only a negative duty not to misinform, but also an affirmative duty to inform when the trustee knows that silence might be harmful." (28)

Estoppel. Even if the labor contract unambiguously precludes awarding benefits, plaintiffs could argue that employer misrepresentations give rise to a promissory estoppel or equitable estoppel claim. These misrepresentations are usually oral or found in the SPD. To prevail under estoppel principles, plaintiffs need to show that the defendant made a material misrepresentation on which they reasonably relied to their detriment; some courts also require "extraordinary circumstances." (29)

Courts generally deny estoppel relief when the plaintiffs fail to show reasonable reliance--particularly if they knew or had notice of an actual plan provision that contradicted the employer's misrepresentation. (30)

Practical considerations

Class certification. Courts frequently certify retiree health benefit cases as class actions under Federal Rule of Civil Procedure 23 (31)--even certifying a class in an ERISA suit where class members received different SPDs. (32) If different labor agreements govern distinct groups of retirees, the court can certify subclasses to address issues of differing proof. (33)

However, including misrepresentation claims in a class action complaint may present problems for plaintiffs, since a court could hold that the requisite "commonality," "typicality," or "cohesiveness" is lacking. How a misrepresentation may have been perceived or whether there was reasonable reliance on it may turn on individual, rather than class, circumstances. (34) This problem may be overcome if the representations all stem from the same source (for example, a meeting or brochure). If class certification is denied, counsel should consider bringing a mass action, naming many plaintiffs in the same suit.

Forum choice. Usually, the "natural plaintiffs"--the retirees faced with reduction or termination of their health benefits--get to select the forum in which to challenge these cuts. If the plan was collectively bargained, the Fourth, Sixth, Eleventh, and perhaps the First and Ninth circuits favor union retirees because they use the "Yard-Man inference." Because retiree benefits are "permissive" subjects of bargaining, a union cannot require an employer to bargain over the benefits of past retirees. The Yard-Man court thus found, "[I]t is unlikely that such benefits, which are typically understood as a form of delayed compensation or reward for past services, would be left to the contingencies of future negotiations." (35)

Under the Yard-Man inference, collectively bargained retiree benefits are presumed to be for life unless there is specific language to the contrary. The circuits following Yard-Man consider retiree health coverage to be a kind of "status benefit," allowing employees to infer that these benefits continue "so long as the prerequisite status [for example, retirement] is maintained." (36)

In recent years, some aggressive employers have initiated declaratory judgment actions against their own retirees (frequently naming unions as codefendants). In these cases, the companies seek to certify a class of their own retirees in order to preempt an action by the employees and ensure that the legal issues will be litigated in their forum of choice, such as one that has not adopted the Yard-Man inference. To ensure this result, some companies have filed suits on the same day that they announced benefit cuts.

To combat these tactics, some retirees have filed parallel lawsuits in the courts they prefer, precipitating a venue fight. Typically, the employer argues that there is a "first-filed" rule, under which its suit--the first one filed--should be the vehicle for resolving the dispute. The retirees, on the other hand, rely on precedent holding that district courts have broad discretion in considering claims for declaratory judgment, and that the "first-filed" rule does not apply when the defendant brings a "preemptive suit" to deprive the natural plaintiffs of their choice of forum. (37)

Ripeness and standing. An unsettled area of the law is whether certain types of changes to retiree health care plans (for example, switching to managed care or shifting costs to retirees while simultaneously adding benefits) are actionable. If the changes have a detrimental impact on the plan as a whole, a claim is ripe. (38) While a specific change may not be onerous (for example, imposing a modest monthly contribution), failing to challenge this may encourage companies to make steeper cuts in the future and provide a "waiver" defense in any subsequent legal challenge.

Another unsettled area is whether benefits become vested when the participant becomes eligible for retirement or when he or she actually retires. (39)

One threshold question involves the union's standing to sue. While it may bring a [section] 301 action for employees or retirees, (40) courts have held that a union is not a proper plaintiff under ERISA to recover benefits for its former members. (41)

Jury trial. When retirees have survived summary judgment and presented their case to a jury, they have usually been successful--in fact, there are no reported jury verdicts against plaintiffs in these cases. However, current case law is virtually unanimous in denying jury trials when an ERISA violation is the only count. (42) When union retirees include [section] 301 counts in their complaint or counterclaim, most courts treat such claims for damages as a breach-of-contract action and grant jury trials, (43) although the Sixth Circuit has found these claims to be equitable, with no right to a jury trial. (44)

Injunctive relief. Retiree health benefit cases are costly and time-consuming, often taking years to reach final judgment. Termination or reduction of coverage for the months or years before final judgment may cause substantial hardship for retirees living on modest incomes. In such circumstances, retirees may seek a preliminary injunction to restore their benefits while the case is proceeding. (45)

Attorney fees. Under federal labor law, unions have a duty to represent only active employees, not retirees. Because of the cost involved in bringing these suits, many unions cannot afford to hire counsel for retirees. In these cases, retirees may turn to their own trial lawyers to represent them.

Upon settlement or judgment, attorney fees maybe paid through a common fund. ERISA gives courts the discretion to award reasonable attorney fees and costs to the prevailing party. (46) This award is typical but not automatic, as it is in a Title VII or [section] 1983 case. (47)

Next year, under the new Medicare prescription drug law, companies that provide retiree health benefits may be eligible to receive a tax-free subsidy of up to $1,330 per participant. (48) Nevertheless, companies will probably keep cutting back on the costs of retiree health benefits, (49) and litigation in this area will continue.

Notes

(1.) See EMPLOYERS' ACCOUNTING FOR POST-RETIREMENT BENEFITS OTHER THAN PENSIONS, Statement of Accounting Standards No. 106 (Financial Accounting Standards Bd. 1990), available at http://72.3.243.42/ st/summary/stsum106.shtml (last visited Oct. 26, 2005).

(2.) This case was the subject of a story on the PBS program Now. See The Broken Promises: Disappearing Retiree Health Benefits (PBS television broadcast, Apr. 1, 2005), available at www.pbs. org/now/thisweek/index_040105.html#video (last visited Oct. 26, 2005).

(3.) Sprague v. Gen. Motors Corp., 133 F.3d 388 (6th Cir. 1998) (en banc).

(4.) Int'l Ass'n of Machinists v. Masonite Corp., 122 F.3d 228, 233 (5th Cir. 1997).

(5.) 29 U.S.C. [subsection] 1001-1461 (2000).

(6.) See Shaw v. Delta Air Lines, 463 U.S. 85, 91 (1983).

(7.) See, e.g., Maurer v. Joy Tech., 212 F.3d 907, 917 (6th Cir. 2000); Int'l Ass'n of Machinists, 122 F.3d 228,233.

(8.) 29 U.S.C. [subsection] l132(a)(1)(B), 1132(a)(3) (2000).

(9.) See, e.g., Allied Chem. & Alkali Workers v. Pittsburgh Plate Glass Co., 404 U.S. 157, 181 n.20 (1971) ; Weimer v. Kurz-Kasch, Inc., 773 F.2d 669, 673 (6th Cir. 1985); UAW v. Yard-Man, Inc., 716 F.2d 1476, 1479 (6th Cir. 1983).

(10.) See, e.g., Kennedy v. Empire Blue Cross & Blue Shield, 989 F.2d 588, 593 (2d Cir. 1993); Smith v. Blue Cross & Blue Shield United, 959 F.2d 655, 658 (7th Cir. 1992).

(11.) Berger v. Edgewater Steel Co., 911 F.2d 911, 916-17 (3d Cir. 1990).

(12.) Curry v. Contract Fabricators Profit Sharing Plan, 891 F.2d 842, 846 (11th Cir. 1990).

(13.) See, e.g., Hazen v. W. Union, 518 F.2d 766, 769 (6th Cir. 1975).

(14.) See, e.g., Hutchinson v. Wickes Cos., 726 F. Supp. 1315, 1322 (N.D. Ga. 1989); Evans v. Midland Enters., 704 F. Supp. 106, 107 (M.D. La. 1989).

(15.) Yard-Man, 716 F.2d 1476, 1479.

(16.) United Steelworkers v. Connors Steel Co., 855 F.2d 1499 (11th Cir. 1988); Weimer, 773 F.2d 669, 673 (agreement provided: "The company shall pay the cost ... [of the designated benefits] as long as such employee remains retired and unemployed, either by the company or by anyone else.").

(17.) Musto v. Am. Gen. Corp., 861 F.2d 897, 903-05 (6th Cir. 1988); Moore v. Metro. Life Ins. Co., 856 F.2d 488, 490, 492 n.1 (2d Cir. 1988) (language stated that "the company reserves the right at any time to change or discontinue this [plan]."); In re Unisys Corp. Retiree Med. Ben. ERISA Litig., 58 F.3d 896, 900, 903-04 (3d Cir. 1995) (reservation of right to terminate or amend "at any time" and "for any ... reason" is unambiguous).

(18.) UAW v. BVR Liquidating, 190 F.3d 768, 770, 774 (6th Cir. 1999).

(19.) Alexander v. Primerica Holdings, 967 F.2d 90, 92-93 (3d Cir. 1992).

(20.) BVR Liquidating, 190 F.3d 768, 771 & n.6, 774 (retirees' "affidavits state that company agents informed retirees that their health care benefits would be lifetime benefits").

(21.) Id. at 774 (relying on "affidavits of the negotiators"); United Steelworkers v. Newman-Crosby Steel, 822 F. Supp. 862, 866 (D.R.I. 1993) (statements of the negotiators).

(22.) Rossetto v. Pabst Brewing Co., 217 F.3d 539,546 (7th Cir. 2000).

(23.) See, e.g., Bower v. Bunker Hill, 725 F.2d 1221, 1225 (9th Cir. 1984); compare UAW v. Skinner Engine Co., 188 F.3d 130, 144-45 (3d Cir. 1999) (where coverage had been continued for both active employees and retirees).

(24.) See, e.g., UAW v. Cadillac Malleable Iron Co., 728 F.2d 807, 808-09 (6th Cir. 1984).

(25.) See, e.g., Burstein v. Ret. Acct. Plan for Employees of Allegheny Health Educ. & Research Found., 334 F.3d 365,378 (3d Cir. 2003); Edwards v. State Farm Ins., 851 F.2d 134, 136 (6th Cir. 1988).

(26.) See, e.g., Bower, 725 F.2d 1221, 1224.

(27.) 29 U.S.C. [section]1104(a) (2000).

(28.) Bixler v. Cent. Penn. Teamsters Health & Welfare Fund, 12 F.3d 1292, 1300 (3d Cir. 1993).

(29.) Varity Corp. v. Howe, 116 S. Ct. 1065 (1996); In re Unisys, 58 F.3d 896, 900.

(30.) See In re Unisys, 58 F.3d 896, 900, 907-08; Skinner Engine, 188 F.3d 130, 151 ("There is absolutely no evidence in this record that shows that any of the appellants considered the promise of lifetime health and life insurance benefits in timing their retirements.").

(31.) See, e.g., Shultz v. Teledyne, 657 F. Supp. 289, 295 (W.D. Pa. 1987).

(32.) Musto v. Am. Gen. Corp., 615 F. Supp. 1483, 1493 (M.D. Tenn. 1985).

(33.) IUE v. Unisys Corp., 858 F. Supp. 1243 (E.D.N.Y. 1994) (approving class settlement and discussing subclasses).

(34.) See, e.g., Sprague, 133 F.3d 388,398; Frahm v. Equitable Life Assurance Soc'y, 137 F.3d 955,957 (7th Cir. 1998).

(35.) 716 F.2d 1476, 1482.

(36.) Id.

(37.) See, e.g., Wilton v. Seven Falls Co., 515 U.S. 277, 288 (1995); BASF Corp. v. Symington, 50 F.3d 555, 558 (8th Cir. 1995); Tempco Elec. Heater Corp. v. Omega Eng'g, 819 F.2d 746, 749-50 (7th Cir. 1987) ; Pac. Employers Ins. Co. v. M/V Capt. W.D. Cargill, 751 F.2d 801, 804 (5th Cir. 1985).

(38.) See Diehl v. Twin Disc, 102 F.3d 301, 310-11 (7th Cir. 1996).

(39.) See Terrell v. Dura Mech. Components, 934 F. Supp. 874, 879-82 (N.D. Ohio 1996) (concluding benefit is vested upon attaining retirement eligibility).

(40.) See, e.g., Steelworkers v. Canron, Inc., 580 F.2d 77, 80-81 (3d Cir. 1978); UAW v. Textron, 919 F. Supp. 783, 786-87 (M.D. Pa. 1996).

(41.) ALPA v. Pan Am World Airways, 599 F. Supp. 108, 110 n.3 (E.D.N.Y. 1984); UAW Dist. 65 v. Harper & Row, Inc., 576 F. Supp. 1468, 1476 (S.D.N.Y. 1983); Utility Workers v. Consumers Power Co., 453 F. Supp. 447, 450 (E.D. Mich. 1978).

(42.) See, e.g., Pane v. RCA Corp., 868 F.2d 631, 636-37 (3d Cir. 1989) (claim for benefits under [section] 502 (a) (1) (B) is equitable).

(43.) See, e.g., Stewart v. KHD Deutz of Am. Corp., 75 F.3d 1522 (11th Cir. 1996) (finding right to jury trial where union retirees sued); Rexam v. USWA, No. 03-2998 ADM/AJB, 2005 WL 2318957, at *9 (D. Minn. Sept. 22, 2005).

(44.) See, e.g., Golden v. Kelsey-Hayes Co., 73 F.3d 648,659-62 (6th Cir. 1996).

(45.) See, e.g., Steelworkers v. Textron, Inc., 836 F.2d 6, 8-9 (1st Cir 1987).

(46.) 29 U.S.C. [section] 1132(g) (1) (2000).

(47.) Grovesv. Modified Ret. Plan, 803 F.2d 109, 119-20 (3d Cir. 1986). The Ninth Circuit has a stronger presumption favoring fees to prevailing ERISA plaintiffs. See, e.g., Smith v. CMTA-IAM Pension Trust, 746 F.2d 587, 589 (9th Cir. 1984).

(48.) See 20 C.F.R. pt. 418 (proposed).

(49.) See Kaiser Family Foundation, Current Trends and Future Outlook for Retiree Health Benefits: Findings from the Kaiser/Hewitt 2004 Survey on Retiree Health Benefits, available at www.kfforg/medicare/med121404pkg.cfm (last visited Oct. 26, 2005).

WILLIAM T. PAYNE practices labor and employment law in Pittsburgh. JOHN STEMBER and STEPHEN M. PINCUS are attorneys in the Pittsburgh firm of Stember Feinstein.