Buyer Beware: Successor Employer Required by Court to Continue Retiree Health Benefits Under Language in Contract

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By: Mark Nelson

Mergers and acquisitions can be complicated transactions, particularly when the entity to be acquired has employees covered by a collective bargaining agreement with a union.  In a recent case, a federal court in Chicago ruled that a successor owner of a business unlawfully terminated health benefits for retired employees under a collective bargaining agreement entered into by the business it acquired.

The plaintiffs were two retired employees who worked for a packaging company for more than 35 years and were members of the union.  After retirement, they continued to receive health care benefits under a collective bargaining agreement (CBA) their union negotiated in 1994.  The packaging company went into bankruptcy and it negotiated new CBAs with the union in 2001 and 2002, which were approved by the bankruptcy court.  After emerging from bankruptcy in 2003, the packaging company was acquired by the first successor, which closed the plant where the retirees had worked.  After the plant closed and the CBA expired, the first successor continued to provide benefits under the expired CBA’s terms.  In 2014, the first successor sold part of its business and transferred its obligations under the relevant CBA to the second successor.  Shortly thereafter, the second successor terminated the CBA.

The retirees and the union filed suit against both the first and second successor to enforce the health care benefits provided under the CBA.  The case focused on two provisions in the CBA.  Specifically, Section 6 of the CBA provided:  “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 by the 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.”  In addition, Section 7 stated the CBA “shall remain in effect until February 29, 2014, thereafter subject to the right of either party on [120] days written notice served on or after November 1, 2003 to terminate the [agreement].”

The court noted that “unlike pension benefits under ERISA, insurance benefits, such as the benefits at issue in this case, do not automatically vest” and an employer “may create vested welfare benefits by contract.”  The defendants argued that Section 6 of the CBA limited lifetime health benefits because the phrase “except as the Company and the Union may agree otherwise” incorporated Section 7’s language permitting unilateral termination.  The court disagreed, noting that Section 7 referred only to termination of the CBA, and did not apply to health benefits under Section 6.

The defendants also argued that the U.S. Seventh Circuit Court of Appeals had previously ruled that “lifetime” benefits were limited to the term of the CBA.  The court readily distinguished the defendants’ authority because the agreements at issue therein expressly limited the duration of the benefits to the duration of the contract.  But in the current case, the court ruled that the “provision of lifetime benefits without provision for their termination constitutes vested benefits.”  As a result, the court granted summary judgment for the plaintiffs.

When a merger or acquisition involves a collective bargaining agreement, employers would do well to perform a thorough legal analysis of the terms and history of existing and predecessor collective bargaining agreements and contract negotiations (as well as pending and past grievances and unfair labor practices).  Doing so is critical to understanding (and minimizing or avoiding) any potential risk.  Employers with questions should consult with able counsel. 

Stone v. Signode Industrial Group, LLC, No. 17 C 5360, (N.D. Illinois) March 13, 2019.