For over three decades the Supreme Court let a Sixth Circuit decision stand that retiree health care benefits are presumed to vest.  In M&G Polymers USA v. Tackett the Court said no longer.  Such a promise must be based on more than a presumption.

In M&G Polymers USA v. Tackett the Supreme Court held unanimously that ordinary principles of contract law apply to determining whether lifetime contribution-free retiree health insurance benefits are vested or terminate when the collective bargaining agreement (CBA) expires.  This case was decided under the federal Labor Management Relations Act, which does not apply to state and local governments.  But the same question arises under public sector CBAs, and arbitrators and courts may look to this decision for guidance.  

The CBA in this case said that those who retire at a certain age with certain years of service “will receive” fully paid for health insurance.  When the CBA expired M&G announced that retirees would have to contribute to the cost of health insurance.  Retirees sued claiming M&G had promised them lifetime contribution-free health insurance.  The Sixth Circuit agreed with the retirees applying the Yard-Man inference, from a 1983 Sixth Circuit decision, International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, that the retiree benefits vest for life.

Justice Thomas, writing for the Court, criticized the Yard-Man inference on many grounds but most fundamentally that it “violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.”  The Yard-Man court failed to consider the intent of the parties based on evidence in the record, didn’t apply the CBA’s general durational clause, and incorrectly applied the illusory promises doctrine (even though if the benefits didn’t vest some retirees would still benefit).  The Yard-Man court also erred in refusing to consider the traditional principles that courts “should not construe ambiguous writings to create lifetime promises” or “contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.”  The Court instructed the Sixth Circuit to review the CBA “under the correct legal principles.” 

Retiree health insurance benefits, particularly lifetime, contribution-free benefits, are expensive.  Public sector employers, like private employers, are trying to modify, if not eliminate, such contract language.  Public sector CBAs use similar language describing the granting of such benefits and may not specifically include a duration clause for them.  While arbitrators and courts interpreting public sector contracts are not obligated to follow the Court’s decision in this case, it will likely be persuasive, if not binding, authority.