Pension & Benefits News Successor can’t terminate retirees’ contractually vested health benefits
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Friday, April 12, 2019

Successor can’t terminate retirees’ contractually vested health benefits

By Pension and Benefits Editorial Staff

Absent a contractual obligation, noted a federal district court in Illinois, "employers are ‘generally free . . . for any reason at any time, to adopt, modify or terminate welfare plans." However, an employer "may create vested welfare benefits by contract," and that is exactly what happened under the collective bargaining agreement (CBA) at issue here, which provided that benefits continue "so long as the individual remains retired from the Company or receives a Surviving Spouse’s benefit, notwithstanding the expiration of this Agreement." Granting summary judgment for two retirees and their union in a suit seeking to enforce the CBA’s provision of healthcare benefits, the court found that, contrary to the defendants’ argument, another section of the CBA provided for unilateral termination of the agreement, but did not provide them the right to unilaterally terminate vested benefits, which survived the expiration of the agreement.

The two employees worked for Acme Packaging before retiring after 46 and 37 years of employment, respectively. After retiring, they continued to receive healthcare benefits under a CBA negotiated by their union in 1994.

Bankruptcy and new owner. After Acme went into bankruptcy, it reached new CBAs with the union in 2001 and again in 2002, which the bankruptcy court approved. After emerging from bankruptcy in 2003, Acme was acquired by defendant Illinois Tool Works. Although Illinois Tool Works closed the Riverdale plant where the employees had worked, and the CBA had expired in 2004, Illinois Tool Works continued to provide benefits under the agreement.

Another new owner terminates CBA. In 2014, Illinois Tool Works spun-off part of its business and transferred its obligations under the relevant CBA (along with other assets and liabilities), to defendant Signode Industrial Group. In 2015, Signode announced it was terminating the CBA.

CBA Sections 6 and 7. It was undisputed the parties here are party to the relevant CBA, which provides in Section 6: "Any Pensioner or individual receiving a Surviving Spouse’s benefit who shall become covered by the Program established by the Agreement 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 the Union may agree otherwise."

The agreement also stated, in Section 7, that it "shall remain in effect until February 29, 2004, thereafter subject to the right of either party on [120] days written notice served on or after November 1, 2003 to terminate the [agreement]."

Lawsuit. The union and the retirees filed suit against Signode and Illinois Tool Works, seeking to enforce the healthcare benefits under the CBA. The parties filed cross-motions for summary judgment.

Contractually creating vested rights. Reviewing the issue, the court explained that, "unlike pension benefits under ERISA, insurance benefits, such as the benefits at issue in this case, do not automatically vest," but the employer "may create vested welfare benefits by contract." Absent a contractual obligation, "employers are ‘generally free . . . for any reason at any time, to adopt, modify or terminate welfare plans." However, rights that accrued or vested under the agreement will, as a general rule, survive termination of the agreement.

Here, the CBA provided that benefits continue "so long as the individual remains retired from the Company or receives a Surviving Spouse’s benefit, notwithstanding the expiration of this Agreement." In other words, said the court, "retired employees are entitled to lifetime benefits even after the agreement expires. This language is sufficient to vest the benefits provided by the agreement, absent language to the contrary, such as a reservation of rights clause."

Section 7 applied to termination of agreement, not benefits. The defendants argued that Section 6 limited lifetime benefits with the language "except as the Company and the Union may agree otherwise," which they argued incorporated Section 7’s language allowing unilateral termination. Not so, said the court, because "section 7 does not mention termination of benefits, only termination of the agreement," and the Supreme Court has held that benefits vested during an agreement’s term generally survive termination of the agreement.

While the defendants also argued that the Seventh Circuit has held that termination provisions like Section 7 serve to limit "lifetime" benefits to the term of the agreement, those cases were inapposite because the provisions there were different from the termination provision at issue here, explained the court. In those case, the provisions expressly limited the duration of benefits to the duration of the agreement. By contrast, the agreement here provides for lifetime benefits and does not provide for the right to terminate benefits. "The provision of lifetime benefits without provision for their termination constitutes vested benefits," said the court. The plaintiffs were therefore entitled to summary judgment.

SOURCE: Stone v. Signode Industrial Group, LLC (N.D. Ill.), No. 17C5360, March 13, 2019.

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