Guest Article

(From the August 27, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Third Circuit Turns Down AARP's Request to Review Retiree Medical Case

The Third Circuit Court of Appeals has removed another hurdle to the Equal Employment Opportunity Commission (EEOC) finalizing its proposed Age Discrimination in Employment Act (ADEA) exemption for retiree medical benefit plans that coordinate with Medicare. The Third Circuit, sitting en banc, reportedly has rejected AARP's request to review an earlier decision by a three-judge panel that EEOC has the authority to issue the exemption. It is not yet clear whether AARP will exercise its option to appeal the Third Circuit's decision to the U.S. Supreme Court.

Background

At issue is a proposed ADEA exemption, which the EEOC issued in 2003 in response to the Third Circuit Court of Appeals' decision in Erie County Retiree Association v. County of Erie, 220 F.3d 193 (3d Cir. 2000). In Erie County, the Third Circuit ruled ADEA § 4 prohibits employers from reducing or terminating retiree medical benefits at Medicare eligibility. There is an "equal benefit or equal cost" defense to violations of this rule, but on remand the U.S. District Court for the Western District of Pennsylvania concluded employers could not use Medicare program expenditures on behalf of their Medicare-eligible retirees for purposes of asserting this defense.

The Third Circuit Court of Appeals' decision was consistent with the EEOC's interpretation of the ADEA, and the EEOC subsequently initiated a series of related enforcement actions. However, the EEOC then announced it was formally reconsidering its position due to concerns that employers might react simply by eliminating retiree medical benefits for all retirees. This process culminated in the summer of 2003, when EEOC issued a proposed ADEA exemption for "altering, reducing or eliminating employer-sponsored retiree health benefits when retirees become eligible for Medicare or a State-sponsored retiree health benefits program." The EEOC issued the proposed exemption pursuant to ADEA § 9, which specifically gives EEOC authority to issue "reasonable" exemptions that are "necessary and proper in the public interest."

Before the EEOC could issue the proposed exemption in final form, the AARP sued to stop it. The AARP argued the EEOC did not have the authority to issue the exemption, and that the exemption would be against the public interest because it would clear the way for employers that currently provide equal benefits to all retirees to reduce benefits for Medicare-eligible retirees.

The EEOC, backed by an unusual alliance of business groups and labor unions, countered that the exemption is "reasonable" and "in the public interest" because it prevents employers from having to reduce retiree medical benefits for pre-Medicare eligible retirees, or eliminate retiree medical benefits for all retirees, in order to comply with the ADEA.

A federal district court initially sided with the AARP, and permanently enjoined EEOC from implementing the proposed exemption. According to District Court Judge Anita Brody, the EEOC's authority to issue ADEA exemptions is available only to fill explicit or implicit gaps left in the statute by Congress. Judge Brody went on to conclude there is no gap to fill because, "The Third Circuit held that Congress did not allow for ambiguity with regard to the applicability of the ADEA to retiree health benefits."

The EEOC filed a notice of appeal with the Third Circuit Court of Appeals on May 31, 2005. Then, on June 27, 2005, the Supreme Court ruled, "Only a judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction." National Cable & Telecommunications Association et al. v. Brand X Internet Services et al., 545 U.S. 967 (2005) ("Brand X"). Judge Brody subsequently convened a conference call with the EEOC and AARP to discuss the impact of Brand X on her decision, and the parties agreed the district court would re-hear the case.

Judge Brody reached a different conclusion the second time around, based on her interpretation of the Supreme Court's ruling in Brand X. According to Judge Brody's opinion, "Brand X states that the only court decision that forecloses a later, contrary interpretation of a statute by an agency is a decision that determines the only permissible reading of the statute, not merely the best of several alternatives." Even though Judge Brody indicated the Third Circuit Court of Appeals' decision in Erie County was the best interpretation of the ADEA (i.e., that the ADEA generally prohibits retiree medical plans from coordinating with Medicare eligibility), she concluded it did not represent the "only permissible interpretation of the ADEA." As a result, Judge Brody ruled the Erie County decision does not foreclose the EEOC's proposed exemption.

The AARP asked the Third Circuit Court of Appeals to review the district court's latest decision.

Third Circuit's Decision

A three-judge panel of the Third Circuit Court of Appeals affirmed the district court's decision permitting the EEOC to issue the exemption, but on different grounds. Specifically, the Third Circuit rejected the district court's assertion that ADEA § 9 permits exemptions only when needed to fill explicit or implicit gaps in the statute. Instead, the Third Circuit asserted, "Section 9 clearly and unambiguously grants to the EEOC the authority to provide, at least, narrow exemptions from the ADEA." This includes, according to the Third Circuit, exemptions that "would allow certain employer practices otherwise prohibited by the ADEA."

Of course, the EEOC does not have unlimited authority to issue exemptions. According to ADEA § 9, the EEOC may only issue exemptions that it demonstrates are "reasonable" and "necessary and proper in the public interest." In this case, the Third Circuit concluded the EEOC easily met that burden. As the court put it:

The AARP also argued the proposed regulation violates the Administrative Procedures Act (APA), which requires courts to set aside regulatory actions that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." However, the Third Circuit brushed aside this challenge, finding the proposed exemption "was supported by the [EEOC's] full consideration of the relevant factors, potential effects, and possible alternatives to such a policy, and was not arbitrary or capricious."

The AARP asked the full Third Circuit Court of Appeals to review the three-judge panel's decision, temporarily preventing that decision from being formally issued. Now that AARP's petition has been turned down, the Third Circuit's decision should be issued shortly.

What's Next?

The Third Circuit's final decision will lift the injunction that had been preventing EEOC from issuing the final exemption. However, AARP still has the option of appealing the Third Circuit's decision to the Supreme Court.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.