The U.S. Supreme Court vacated an appellate court’s decision that an employer owed retirees covered by a collective bargaining agreement (CBA) lifetime health care benefits, finding the basis for the decision was inappropriate.

The high court said the 6th U.S. Circuit Court of Appeals decision in M&G Polymers USA v. Tackett rested on principles that are incompatible with ordinary principles of contract law. The appellate court based its decision on the reasoning of its earlier decision in International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc.

When M&G Polymers purchased the Point Pleasant Polyester Plant in 2000, it entered a CBA with the union representing those employees. The agreement provided that certain retirees, along with their surviving spouses and dependents, would “receive a full company contribution towards the cost of [health care] benefits”; that such benefits would be provided “for the duration of [the] Agreement”; and that the agreement would be subject to renegotiation in three years.

Following the expiration of those agreements, M&G announced that it would require retirees to contribute to the cost of their health care benefits. Retirees sued M&G and related entities, alleging that the agreement created a vested right to lifetime contribution-free health care benefits.

A federal district court dismissed the complaint for failure to state a claim, but the 6th Circuit reversed based on the reasoning Yard-Man. On remand, the district court ruled in favor of the retirees, and the appellate court affirmed that decision.

The Supreme Court noted that the Employee Retirement Income Security Act (ERISA) governs pension and welfare benefits plans, including those established by (CBAs), and while it establishes minimum funding and vesting standards for pension plans, it exempts welfare benefits plans—such as the retiree health benefits in the CBA addressed in the current case—from those rules. The high court previously found in Black & Decker Disability Plan v. Nord that “[E]mployers have large leeway to design . . . welfare plans as they see fit.” Thus, the Supreme Court interprets CBAs, including those establishing ERISA plans, according to ordinary principles of contract law.

According to the Supreme Court’s opinion, the 6th Circuit did not use ordinary principles of contract law in Yard-Man, but made its own inferences. First, the appellate court inferred from the existence of termination provisions for other benefits provided for in the CBA that the absence of a termination provision specifically addressing retiree benefits expressed an intent to vest those benefits for life. The court also relied on “the context” of labor negotiations to resolve the ambiguity, inferring that the parties would have intended such benefits to vest for life because they are not mandatory subjects of collective bargaining, and they are “typically understood as a form of delayed compensation.”

The Supreme Court noted that characterization is contrary to ERISA, in which Congress specifically defined plans that “resul[t] in a deferral of income by employees” as pension plans, and plans that offer medical benefits as welfare plans. Thus, retiree health care benefits are not a form of deferred compensation.

The high court also said the appellate court inferred that parties would not leave retiree benefits to the contingencies of future negotiations, and that retiree benefits generally last as long as the recipient remains a retiree. The 6th Circuit’s subsequent decisions went even further, requiring a contract to include a specific durational clause for retiree health care benefits to prevent vesting.

The Supreme Court said these decisions distort the text of the agreement and conflict with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties. The appellate court failed to consider the traditional principle that “contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.” According to the Supreme Court opinion, the 6th Circuit also failed to consider the traditional principle that courts should not construe ambiguous writings to create lifetime promise.

The Supreme Court ultimately rejected the Yard-Man inferences as being consistent with ordinary principles of contract law. It said the appellate court should be the first to review the agreements at issue under the correct legal principles, and remanded the case for the 6th Circuit to apply ordinary principles of contract law.