Retiree Medical Benefits Vest for Life and Survived CBA Termination

The Seventh Circuit Court of Appeals, in Stone v. Signode Industrial Group, LLC, has upheld a district court's decision that an employer was obligated to continue providing lifetime health care benefits to its retirees, even after the employer terminated the operative collective bargaining agreement ("CBA") that provided the benefits.

Background. In Stone, the employer sponsored a medical benefit plan for its retired union employees, the terms of which were provided under the controlling CBA. The CBA's Continuation of Coverage provision stated that the retirees' medical benefits would continue "so long as the individual remains retired from the Company or receives a Surviving Spouse's benefit, notwithstanding the expiration of this Agreement." (Emphasis added)

In 2015, the employer terminated the CBA and subsequently stopped providing health care benefits to its retirees and their families. Two retired employees responded by suing the employer in federal district court, contending that their lifetime health care benefits provided under the CBA had vested and could not be terminated.

District Court. Upon reviewing the CBA, the district court found that although its terms provided for the unilateral termination of the agreement, it did not give the employer a right to unilaterally terminate vested benefits that were intended by the parties to survive the expiration of the agreement. Therefore, the district court issued a permanent injunction ordering the employer to reinstate the retirees' health care benefits. The employer responded by appealing the district court's decision to the Seventh Circuit.

Seventh Circuit.  The Seventh Circuit began its analysis of the matter by noting that ERISA does not require welfare benefits to be vested, and that vesting of welfare benefits is determined according to ordinary principles of contract law. The court further explained that employers, employees and unions are free to agree that welfare benefits will continue after the expiration of the agreement, noting that "a [CBA] may provide in explicit terms that certain terms continue after the expiration of the agreement."

In the instant case, the Seventh Circuit found that the CBA unambiguously provided retirees with vested lifetime health care benefits.  In view of the language used in the Continuation of Coverage provision, the court concluded that the CBA "made clear that the promised health care benefits vested, i.e., they would survive the termination of the underlying agreement."  

The employer asserted that the CBA contained a Term Provision which gave it the right to terminate the agreement along with the retiree health care benefits provided thereunder. The Seventh Circuit disagreed, finding that the CBA's Coverage Provision, which established the promised retiree health care coverage, "would run independently" from the Term Provision and that the "duration of the [retiree health care] coverage was not limited to the term of the Agreement." The court explained that the CBA's Term Provision was "nothing more than a durational limit" that gave the employer the right to terminate the CBA alone, and not the retiree health care benefits. The court further observed that the employer's proposed interpretation of the CBA's Term Provision would result in the "impractical conclusion that no health care benefits program could create vested benefits if it ever contemplated the expiration of the agreement." Accordingly, the court refused to treat the Term Provision as a "loophole that nullified the plain promise that benefits would survive the expiration of the agreement."

As a final matter, the Seventh Circuit determined that even if the vesting provisions at issue in the case were to be viewed as ambiguous, extrinsic evidence (i.e., industry usage and the interactions between the parties) supported the court's conclusion that the retiree health care benefits had vested. In particular, the court referenced provisions from other CBAs existing within the employer's industry, and statements made by the employer's benefits program administrator who helped negotiate the CBA with the union.  

Ultimately, the Seventh Circuit upheld the district court's conclusion that the CBA provided for lifetime health care benefits, and affirmed its permanent injunction ordering the employer to reinstate the retirees' benefits.

Stone v. Signode Industrial Group, LLC is available at: http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2019/D11-20/C:19-1601:J:Hamilton:aut:T:fnOp:N:2433054:S:0