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Guest Article
(From the March 28, 2005 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.) Employer May Have Created Vesting Rights in Retiree Medical Benefits, Seventh Circuit RulesIn its most recent contractual vesting case the Seventh Circuit Court of Appeals observed, "A 'lifetime' can be a slippery concept in the context of retiree benefits litigation under" ERISA. Bland, et al. v. Fiatallis North America, Inc., et al., No. 04-2703 (7th Cir. March 15, 2005). Certainly, the Seventh Circuit is doing its part to prove that aphorism. The Seventh Circuit last year concluded that an employer did not create a vested right to retiree medical benefits by using the term "lifetime" in retiree communications materials. Vallone v. CNA Financial Corp., 375 F.3d 623 (7th Cir. 2004). But in Bland, the same court ruled a company may not be able to reduce or eliminate retiree medical benefits for certain retirees because it used similar "lifetime" language in summary plan descriptions (SPDs). The difference between the two cases is that the communications materials at issue in Vallone specifically reserved the company's right to change or eliminate benefits at any time, whereas the SPDs at issue in Bland did not include a reservation of rights clause. The lesson from these two cases is clear. Unless employers want to create a contractual obligation to provide retiree medical benefits for life or any other specific period of time, they should avoid using the term "lifetime" or other durational terms to describe such benefits. Also, all SPDs and other communication materials should include prominent reservation of rights clauses. Bland Case Background At or before retirement, the company provided plaintiffs with SPDs for their retiree medical and dental benefits. A total of five SPDs are at issue in the case, and each includes language suggesting these benefits will continue until the retiree and his or her spouse dies. For example, one SPD states "... coverage remains in effect as long as you or your surviving spouse are living." Another SPD promises, when the retiree dies, "the surviving spouse will have basic coverage continued for his or her lifetime at no cost." Significantly, none of the SPDs includes an express reservation of rights clause. In 2000, the company notified plaintiffs that it was changing their retiree medical benefits. (Unlike the previous SPDs, the new plan documents the company provided to the plaintiffs "warned that benefits could be modified even after retirement.") The effect of the changes, which were implemented on February 1, 2001, was to "greatly" increase the cost of coverage for retirees. The retirees sued under ERISA, claiming the company had granted them vested rights to unreduced retiree medical benefits for life. A federal district court granted summary judgment to the company. The Seventh Circuit Court of Appeals agreed to review the district court's decision to determine "whether the plan documents contain language that unambiguously vested ERISA contract rights or that is so ambiguous as to require a trial on the issue of vesting." Seventh Circuit's Decision The Seventh Circuit started its analysis by noting that welfare benefit plans specifically are not subject to ERISA's vesting requirements. ERISA § 201(1). Also, as the Supreme Court has ruled, employers generally can "adopt, modify or terminate welfare plans" at any time, and for any reason. However, it is possible for employers to create vested rights in these plans by contract. According to the court of appeals, in the Seventh Circuit there is "a presumption against vesting when there is 'silence' that 'indicates that welfare benefits are not vested.'" (The Seventh Circuit covers Illinois, Indiana, and Wisconsin.) But in order to overcome this presumption there only needs to be some ambiguity with respect to vesting. The court of appeals determined there is ambiguity in this case because, unlike the Vallone case, the "lifetime" language in the various SPDs is not limited by any reservation of rights clauses. As a result, the court of appeals ruled summary judgment was not appropriate and returned the case to the district court level for further proceedings. What's Next? The court of appeals decision does not mean the retirees have won, but it does mean they can continue to pursue their claim. At trial, they will need to prove the company's intent to create vested rights to retiree medical benefits. However, the documents do not have to "use the word 'vest' or some variant of it," or "'state unequivocally' that the employer is creating rights that will not expire" to prove the company's intent. Instead, the basic principles of contract interpretation will apply. Because the court of appeals determined the relevant SPD language is ambiguous, the trial court may permit the retirees to offer extrinsic evidence of the company's intent, if available. The plaintiffs have expressed interest in using documents prepared by different law firms, at the company's request, that may have addressed the vesting issue. The district court originally determined most of these documents were protected by attorney-client or work product privileges. However, the court of appeals indicated the "extraordinary need" exception to the work product privilege may be available in this case.
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