No Country for Old People

By Thomas Brom

In the film adaptation of Cormac MCCarthy's No Country for Old Men, hired killer Anton Chigurh uses a captive bolt pistol?known as a cattle gun?to murder several people, as well as to punch out cylinder locks on doors. That nightmare vision of methodical dispatch must be particularly haunting to many stunned retirees after a series of recent court decisions eroded what's left of medical benefits promised by their employers.

According to a study last year by Phyllis C. Borzi?nominated by President Obama in March to become assistant secretary of labor for employee-benefits security?employer-sponsored health benefits are the primary source of coverage for 3.8 million early retirees, and provide supplemental coverage for 12 million additional Medicare-eligible retirees. But the percentage of companies offering retiree health benefits continues to decline?just 29 percent in 2006 still offered benefits to early retirees, and only 19 percent provided supplemental coverage to those age 65 or over.

Disputes over health benefits are regulated by the Employee Retirement Income Security Act (ERISA) and, if benefits are negotiated as part of a collective bargaining agreement, by section 301 of the Labor Management Relations Act (LMRA). Though pension plans are subject to mandatory vesting rules, health benefits are not. The key issue is whether, and under what circumstances, an employer has the right to unilaterally change retiree benefits.

According to James P. Baker at Jones Day in San Francisco, the federal circuits are "all over the lot" on that question. In the Third and Fourth circuits, for instance, an employee must identify a "clear and express" statement by the employer promising vested benefits. But in the Sixth Circuit the clear-statement rule doesn't apply because of an inference that collectively bargained retiree medical benefits vest. In all circuits, an employer's express reservation-of-rights clause to amend, modify, or terminate benefits will usually trump any vesting claim.

Until recently the Ninth Circuit, along with the Sixth Circuit (home to thousands of former autoworkers in Michigan, Ohio, Kentucky, and Tennessee), were the most open to finding evidence of vesting health benefits. But recent rulings in both circuits threaten to leave even more retirees without employer-sponsored coverage.

Last September a panel of the Ninth Circuit ruled sua sponte that retired Oregon mill workers lacked standing to sue under either ERISA or LMRA because they failed to show that promised benefits were vested (Poore v. Simpson Paper Co., 544 F.3 1062 (9th Cir. 2008)). Neither party had even briefed jurisdictional issues. "This ruling was a gift to employers," says Jay E. Sushelsky, co-counsel for amicus curiae AARP Foundation Litigation in Washington, D.C.

In an unusual action, the same panel permitted appellants to re-brief several cases it had not considered. Sushelsky argued as an amicus that the panel's conflation of standing with the merits of the case "casts a blind eye to the implications of its holding, which will exclude an untold legion of legitimate ERISA claims in which the entitlement to benefits does not in any way depend upon establishing that the benefits sought are 'vested.' " A ruling in the case is pending.

The news was no better in the Sixth Circuit. In January the court rejected claims of so-called in-service vesting by union employees at Caterpillar who had reached retirement age under one collective bargaining agreement but chose to continue working under terms of another (Winnett v. Caterpillar Inc., 553 F.3d 1000 (6th Cir. 2009)). Aspects of that litigation continue in the trial court and before the Sixth Circuit.

For retirees, it only gets worse. In 2007 AARP was on the losing end of a Third Circuit decision upholding a 2004 Equal Employment Opportunity Commission regulation that exempts employers from liability for age discrimination if they reduce or abandon medical benefits for retirees who become Medicare-eligible at age 65 (AARP v. EEOC, 489 F.3d 558 (3rd Cir. 2007)). That's right, the EEOC says it's OK for employers to discriminate against older retirees by dropping supplementary coverage. The Supreme Court denied AARP's petition for certiorari (128 S. Ct. 1733 (2008)).

For tax and balance-sheet reasons, some employers have chosen to spin off liability for legacy benefits rather than terminate them. Tax-exempt voluntary employee benefit association trusts (VEBAs) eliminate ongoing cash flow and accounting liability at the cost of a single, up-front investment. "VEBAs can be a useful tool for providing retiree medical benefits," says Jeffrey Lewis, a partner in Oakland's Lewis, Feinberg, Lee, Renaker & Jackson and a member of the plan committee that oversees a VEBA. "But they are only as beneficial as their funding assumptions."

Unfortunately, those funding assumptions aren't always realistic. A case in point is the General Motors VEBA trust, announced in 2005 as part of a collective bargaining agreement with the United Auto Workers (UAW). Under terms of the agreement, GM would unload $57 billion in retiree health care liability for $30 billion in cash and securities. Because the union can't bargain for retirees it no longer represents, it filed a class action, along with representatives of 500,000 retired members, to prevent GM from modifying health care benefits according to the agreement it had just reached. Got that? GM then filed an answer and affirmative defenses, the parties quickly settled on the original terms, and the court issued preliminary approval of the settlement binding all plaintiff class members. Though dissident retirees objected to the terms and the process, the court's approval was upheld on appeal (Int'l Union, UAW v. General Motors Corp., 497 F.3d 615 (6th Cir. 2007)).

Critics of the GM VEBA charge that the trust is underfunded by 40 percent and tied to the performance of GM stock through a convertible note sold to the union. In October 2007 Stephen F. Diamond, an associate professor at Santa Clara University School of Law acting on behalf of two UAW members, filed a request with the SEC for a cease-and-desist order pending an investigation of the note sale. Diamond alleged that the UAW had made materially misleading statements associated with the note sale, and also that it failed to disclose to its members the risks associated with the VEBA trust. The SEC has not reported any action on the request.

After further negotiations with the UAW this year, GM announced that any future VEBA contributions would be in both cash and stock. But should GM eventually file for Chapter 11?an increasingly likely possibility after Chrysler's bankruptcy in April?retirees would be represented by a committee appointed by the court. The retirees then would stand in line with other unsecured creditors for GM's cash, and-according to Diamond?they would most likely discover that the convertible note and GM common stock both had fallen precipitously in value, if not become worthless.

"Everything I predicted has come true, but much more quickly than I anticipated," says Diamond. "The structure of this VEBA forces retirees to depend on the well-being of the company?which is precisely what VEBAs are intended to avoid."

By all accounts, retired autoworkers will be lucky to salvage a fraction of any health benefits held in VEBA trusts. "GM's VEBA shows that the long-standing social contract between the company and its workers is breaking down," says Dean M. Gloster, a partner at Farella Braun + Martel in San Francisco who represents salaried retirees in the bankruptcy proceedings of supplier Delphi. "And the courts are increasingly favorable to employers in analyzing the language of retiree-benefits plans."

Baker at Jones Day says that only the Supreme Court can sort out the many conflicting decisions between the federal circuits in retiree medical-benefit cases. In the current milieu, employers that shift legacy-benefits liability to a VEBA rather than simply terminate coverage seem magnanimous. For those retired workers caught without medical benefits before age 65, the country offers little more than the specter of Anton Chigurh: Early retirement by cattle gun.

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