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PLANT CLOSINGS: Health Benefits for Life?

Oklahoma Employment Law Letter - May 2010

By Tony Puckett

A recent case provides a good primer on the issue of continuing retiree medical benefits after a plant closes and a collective bargaining agreement (CBA) ends. A class of 184 retired employees sought to require their former employer to provide them with health care benefits for life, despite the company’s bankruptcy and the closure of the plant at which they had worked.

Retired employees’ health benefits

The retired employees had worked for Philips Display, and then LG Philips Displays, in a cathode ray tube (CRT) manufacturing facility in Ottawa, Ohio. The CRTs were manufactured for television sets. After flat panel television displays gained popularity, the manufacturing facility was closed on December 31, 2002, thus setting the stage for the legal dispute over ongoing retiree health care benefits. The employees argued that their former employer had agreed to provide lifetime health care benefits to retirees.

To decide the issue, the court reviewed the CBA covering employees at the plant and the summary plan descriptions (SPDs) of the health insurance plans for active and retired employees incorporated into the CBA. The CBA provision on retiree health insurance benefits stated:

Employees who retire on or after January 1, 1998, who are at least age fifty-five (55) and who meet the terms of the existing plan are entitled to purchase health insurance coverage on the same terms and at the same employee contribution levels as in effect for active employees.

The CBA also included a schedule for employee insurance plans, which provided that the group insurance plans would remain in effect until September 28, 2003. The schedule stated that no matter involving the group insurance plan would be subject to grievance or arbitration but instead would be governed by the terms and conditions of the health insurance plan.

The retiree medical plan SPD stated:
Although the company presently intends to continue the plan indefinitely, Philips Electronics North America reserves the right to alter any of its provisions, to change the amount of contributions or to terminate all or any part of it, as the company in its sole discretion deems necessary, without prior notice to any covered person.

Finally, the group health insurance plan’s SPD applicable to employees stated:
The company reserves the right to charge for coverage or to end or amend medical coverage for you or your dependents at any time subject to the provisions of the applicable [CBA].

Retiree health benefits end

On March 15, 2006, LG Philips filed for bankruptcy. A short time later, the company informed retirees receiving medical benefits that the retiree medical plan would be discontinued effective May 31, 2006. The retirees then sued, arguing the company was obligated to provide them, their spouses, and their dependents with “vested lifetime retiree health insurance benefits.”

The court said that, unlike pension plan rights, “there is not a statutory right to lifetime health benefits.” The court noted that parties agree to vest a health insurance plan through a CBA or an SPD. The starting point for determining whether an employee is entitled to vested retiree health insurance benefits is the language of the CBA and the SPDs.

If a welfare benefit plan isn’t vested, then “an employer is generally free to modify or terminate any retiree medical benefits that [it] provided pursuant to the CBA” after it expires. However, if a welfare benefit plan has vested, then “the employer’s unilateral modification or reduction of those benefits constitutes a [Labor Management Relations Act (LMRA)] violation.” If basic rules of contract interpretation fail to resolve any ambiguities in the CBA’s language, then the court may look to extrinsic evidence to determine the parties’ intent. To decide what was intended, the court examined the “explicit language” of the CBA.

The court held that there was no evidence of an intent by Philips to vest employees with retiree health insurance benefits. The court found the SPDs clearly reserved the company’s “right to charge for coverage or to end or amend medical coverage. . . at any time.” The only limitation the court found in the CBA was that group insurance had to remain in effect until September 28, 2003.

The court rejected the testimony of three former employees who represented the union during negotiations with the employer. They testified that they believed retiree health insurance benefits were vested for life. The court found their testimony unpersuasive, however, because they didn’t provide any explanation of the basis for their beliefs. Schreiber v. Philips Display Components Co., 187 LRRM 3505 (E.D. Mich.).

Learn from this case

The key lesson from this case is to avoid any language indicating an intent to vest health insurance benefits for life when you’re negotiating insurance provisions in a CBA. This employer clearly signaled the opposite intent in the language of its CBA. In fact, it explicitly laid out its right to discontinue health insurance benefits for employees or retirees at any time, subject only to the terms of the CBA.

The only applicable contract term was the duration clause, which the employer complied with since it didn’t terminate retiree health care benefits until two and a half years after the CBA expired. Although negotiations for most CBAs don’t contemplate the closing of a business, this case demonstrates the importance of providing an ending date for all of your contractual obligations, particularly for costly benefits like retiree health care.