US Supreme Court Rejects Presumption that Memoranda of Understanding Create Vested Rights to Retiree Health Benefits

In California, public employee unions and retirees have brought numerous lawsuits that claim Memoranda of Understanding (MOUs) between public employers and unions create vested rights to lifetime health care benefits for retired employees.

In a case with great significance for California employers, on January 26, the United States Supreme Court issued a decision that clarified the rules to be used in determining whether MOUs give rise to vested rights.

In M&G Polymers USA, LLC v. Tackett, the Supreme Court struck down a Sixth Circuit rule that presumed that MOUs, despite their limited duration, created vested rights to lifetime retiree health care.  Instead, the Supreme Court directed lower courts to use standard contract principles to determine whether the parties to an MOU intended that retiree healthcare obligations extend beyond the term of the MOU.

In M&G, the Supreme Court rejected the Sixth’s Circuit’s “Yard-Man” rule, which created a series of presumptions in favor of vesting. The Court found that Yard-Man “violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective bargaining agreements.”

The Supreme Court rejected the Yard Man assumptions, that (1) benefits tied to retiree status create an inference “that the parties likely intended those benefits to continue as long as the beneficiary remains a retiree,”  (2) that “retiree benefits are a form of deferred compensation,” and (3) the parties did not intend routine durational clauses to apply to retiree benefits (citations and quotations omitted).

Instead, the Supreme Court articulated traditional contract interpretation principles to be applied in determining whether the parties intended that an MOU create vested rights beyond the term of the MOU:

• Where the words of a contract are clear and unambiguous, its meaning is to be ascertained in accordance with its plainly expressed intent.
• Although a Court may look to known customs or usages in a particular industry to determine the meaning of a contract, the parties must prove those customs or usages using affirmative evidentiary support in a given case.
• Courts should not construe ambiguous writings to create lifetime promises.
• Contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.
• A collective bargaining agreement may explicitly provide for continuation of benefits after expiration. But where 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.

In a concurrence, four Justices agreed that general contract interpretation principles should apply, articulating them as follows:

• Under the “cardinal principle” of contract interpretation, “the intention of the parties, to be gathered from the whole instrument, must prevail.”
• The Court must examine the entire agreement in light of relevant industry-specific “customs, practices, usages and terminology.”
• When the intent of the parties is unambiguously expressed in the contract, that expression controls, and the court’s inquiry should proceed no further.
• But where the contract is ambiguous, a court may consider extrinsic evidence to determine the intentions of the parties.
• No rule requires “clear and express” language in order to show that the parties intended health-care benefits to vest. Rather, there may be “implied terms” within an expired agreement.
• If after considering all relevant contractual language in light of industry practices, a court concludes that the contract is ambiguous, it may turn to extrinsic evidence – for example, the parties’ bargaining history.

In California, M&G is important because California public employee unions and retirees filed a number of lawsuits claiming that MOUs created vested rights to lifetime retiree health benefits.  A number of these cases were filed following the California Supreme Court decision in Retired Employees Association of OrangeCounty, Inc. v. County of Orange, 52 Cal.4th 1171 (2011) (REAOC).

In REAOC, the Court held that public employees or retirees who assert a vested right to lifetime retiree health benefits face a heavy burden of proof. But the Court also made statements suggesting that MOUs, depending on the evidence, may give rise to vested rights to retiree healthcare.

Following REAOC, some appellate courts permitted lawsuits to go forward past the pleading stage where the complaint identified an MOU that was approved by ordinance or resolution, and recited extrinsic evidence that the parties intended the creation of a vested right. See Sonoma County Association of Retired Employees. v. Sonoma County, 708 F.3d 1109, 1115-1117 (9th Cir. 2013); IBEW, Local 1245 v. City of Redding, 210 Cal.App.4th 1114, 1120 (2012).

In contrast, other courts have refused to find that resolutions or MOUs gave rise to vested rights to retiree healthcare.  Retired Employees of Orange County, Inc. v. County of Orange, 741 F.3d 1137 (2014) (on remand in REAOC, court held that vested rights were not created by yearly resolutions that pooled active and retiree health care premiums (and thus lowered retiree premiums);  Dailey v. City of San Diego, 223Cal.App. 4th 237, 254 (2013) (retiree health benefits, because negotiable, were subject to imposition by the City after impasse);  San Diego Police Officers’ Assn. v. San Diego City Employees Retirement System, 568 F.3d 725, 740 (2009) (retiree medical benefits “were longevity-based benefits that continued only in so far as they were renegotiated as part of a new agreement and were not protectable contract rights.”).

In the past, some commentators have suggested that federal and California courts apply different rules to determine the existence of vested rights.  In fact, the analysis by the Supreme Court in M&G in strikingly similar to the analysis by the California Supreme Court in REAOC.  For example, in REAOC, the California Supreme Court similarly rejected that a statutory scheme is “intended to create private contractual or vested rights,”  imposed a “heavy burden” on employees or retirees to prove that the parties intended to create a vested right, but in appropriate circumstances, permitted resort to “parties’ practice, usage, and custom in interpreting the agreement.”  52 Cal. 4th at 1179, 1185, 1190.