Retiree medical disputes have launched the careers of a thousand ERISA lawyers. Over the course of the last fifteen years, a tsunami of retiree medical lawsuits have crashed onto the dockets of our nation's federal courts. At last count, there were approximately 200 published federal court decisions adjudicating these disputes. This rising tide of retiree medical litigation did not happen by accident. It was propelled by two inexorable forces: (1) economics and (2) changing accounting standards. The deteriorating economics of retiree medical benefits is easy to understand. Over the course of recent years, the costs of providing employees with medical benefits has grown geometrically while retiree medical plan costs have risen even faster. When many employers first offered retiree medical coverage during the 1960s, business was great and the workforce was young. As the looming Social Security crisis has taught all of us, fewer active employees are at work to supply benefits to an ever-increasing number of retirees. This ratio has declined from sixteen to one in 1970, to four to one in 1991, and is projected to be two to one within the next twenty years.
Most employers pay retiree medical costs out of their general assets. Employers do not pre-fund retiree medical expenses because there is no fully satisfactory tax-free pre-funding vehicle currently available. Compounding this serious economic problem was the introduction of a new accounting rule. In 1992, the Financial Standards Accounting Board issued Standard 106. This new rule requires employers to begin accruing an expense against current income for the expected future cost of retiree medical benefits and to recognize on their financial statements a liability representing the full expected cost for providing these benefits. In response to FAS 106, General Motors ("GM") booked a twenty-three billion dollar loss on its 1992 earnings to account for its retiree medical obligations.
In light of these facts, employers have aggressively pursued ways in which to contain retiree medical costs. The most common cost containment method is through cost sharing, which brings us to Mr. Sprague's dispute with General Motors. The recent en banc decision of the Sixth Circuit in Sprague v. General Motors, 1998 Fed.App. 0004P (6th Cir.), Jan. 7, 1998, carefully reviews the most important legal theories underpinning claims for lifetime medical benefits and proffers a number of important insights that may prove useful in resolving future disputes.
Robert Sprague was one of 114 salaried retirees (hereinafter referred to as "Plaintiffs" or "Sprague") who filed suit in 1989 to challenge the legality of certain changes that General Motors made to his health care plan. The thrust of Mr. Sprague's complaint was that GM had committed to provide salaried retirees and their spouses with lifetime medical coverage entirely at GM's expense. According to Sprague, once he retired, his lifetime medical benefits vested. Once vested, GM had no right to change them. Between the filing of the complaint in August 1989 and the Sixth Circuit's final decision in 1998, the Sprague case generated six separate published decisions (four district court decisions and two court of appeals decisions). In its January 7, 1998, decision, the Sixth Circuit autopsied each of Sprague's four theories of recovery. Mr. Sprague presented three tried and true retiree medical theories and one new theory. The three tried and true theories were: (1) the unilateral contract theory; (2) the bilateral contract theory; and (3) the estoppel theory. Mr. Sprague's new theory is what ERISA afficionados might call a "Son of Varity" theory as Sprague used the rationale found in a recent Supreme Court decision (Varity Corp. v. Howe, 116 S.Ct. 1065 (1996)) to allege that GM breached its fiduciary duty as administrator of the health plan by failing to affirmatively inform early retirees that their health care benefits could be changed.
1987, GM announced that it was changing its health plan effective in 1988 for both salaried and retired employees. An annual $200 deductible for individuals and $250 for families was added. Participants in the fee-for-service plan were required to make 20% co-payments on medical services, up to an annual maximum co-payment of $500. Fee-for-service participants could find themselves responsible, therefore, for an additional $700 per year (for individual coverage) or $750 per year (for family coverage) that was previously paid for by GM. In addition, vision and hearing aid coverage was eliminated. At the same time, however, some benefits and coverages were improved.
According to Plaintiffs' unilateral contract theory, the following promise made by General Motors at various times and in various plan descriptions vested at retirement:
Your basic health care coverages will be provided at GM's expense for your lifetime. "Your Benefits In Retirement" (1977).
Most of these same GM booklets, however, also put plan participants on notice of GM's right to amend, modify or terminate the health plan at any time:
General Motors believes wholeheartedly in this Insurance Program for GM men and women, and expects to continue the Program indefinitely. However, GM reserves the right to modify, revoke, suspend, terminate, or change the Program, in whole or in part, at any time . .. "The General Motors Insurance Program For Salaried Employees" (1965, 1968, 1971).
According to Plaintiffs, their medical benefits vested when they retired as a matter of federal common law and, having vested, the medical benefits could not be changed without the Plaintiffs' consent. The underlying rationale is simple: The Plaintiffs viewed the retiree medical arrangement as a unilateral coffer by GM that the employees accepted by working at GM and that became vested and unalterable by GM when the employee retired. Under this theory, an express reservation of the right to amend or terminate a retiree medical plan self-destructs once an employee retires.
In rejecting this theory, the Sixth Circuit explained that welfare benefits (health, dental, vision, life insurance, etc.), unlike pension benefits, do not generally vest. See 29 U.S.C. ' 1051(1). Employers 'are, of course, generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans. Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995).
The Sixth Circuit concluded:
Because vesting of welfare plan benefits is not required by law, an employer's commitment to vest such benefits is not to be inferred lightly; the intent to vest 'must be found in the plan documents and must be stated in clear and express language.' Wise v. El Paso Natural Gas Co., 986 F.2d 99, 937 (5th Cir.), cert. denied 510 U.S. 870 (1993); see also, In Re Unisys Corp. Retiree Medical Benefits ERISA Litigation, 58 F.3d 896, 902 (3d Cir. 1995) (same) . . . It is the plaintiff's burden to prove GM's intent to vest. Id.
Plaintiffs had attempted to meet this burden by asserting that although they admitted that the plan document itself gave GM the right to amend or terminate these benefits, some plan summaries failed to contain this amendment or termination language. Since some of the summaries told the retirees that their health coverage would be paid 'at no cost' to the retirees and 'for their lifetimes,' this language created an ambiguity within the summaries that could only be resolved by the use of extrinsic evidence. The Sixth Circuit quoted Musto v. American General Corp., 861 F.2d 897 (6th Cir. 1988), cert. denied, 490 U.S. 1020 (1989) in deconstructing this claim, stating:
To read this summary as saying that the plan can never be changed in such a way as to mandate retiree contributions for continued medical coverage is to read into the summary something its authors did not put there (a promise to provide lifetime 'paid up' medical insurance), while reading out of the summary something that clearly was put there (an express reservation of right to change the plan). Musto, 861 F.2d at 906. As the Third Circuit explained in a similar case, 'the promise made to retirees was a qualified one: the promise was that retiree medical benefits were for life provided the company chose not to terminate the plans, pursuant to clauses that preserve the company's right to terminate the plan under which those benefits are provided.' Unisys Corp., 58 F.3d at 904, n.12; see also Wise, 986 F.2d at 934.
The failure to include this reservation of rights in some of the summary plan descriptions did not, by negative implication, alter the terms of the plan itself. The Sixth Circuit observed that the reason for this was obvious:
By definition, a summary will not include every detail of the thing it summarizes.: GM's failure to include in some summaries a notice of its right to change the plan does not trump the clearly-stated right to do so in the plan itself.. . . ERISA does not mandate the inclusion within a summary plan description of the amendment rights or procedures.
Between 1974 and 1988, General Motors offered to its salaried employees a series of early retirement incentive programs. According to the bilateral contract theory, the statements GM made in connection with these early retirement programs, and the documents the early retirees signed, created binding bilateral contracts. These bilateral contracts, according to Plaintiffs, provided for the vesting of the retirees' health care benefits, were enforceable either as modifications to the health plan or stood as separate ERISA plans themselves.
The Sixth Circuit made short shrift of the bilateral contract theory, stating:
Congress intended that plan documents and SPDs exclusively govern an employer's obligations under ERISA plans. Moore, 856 F.2d at 492. We recognize that 'this may not be a foolproof informational scheme, although it is quite thorough. Either way, it is the scheme that Congress devised. Curtiss-Wright, 514 U.S. at 84. . . Therefore, the 'clear terms of a written employee benefit plan may not be modified or superseded by oral undertakings on the part of the employer. Musto, 861 F.2d at 910. . . The plaintiffs may not invoke oral statements by GM personnel in order to modify the terms of the written plan. Neither can we accept the argument that the plan was modified or superseded either by the written 'statements of acceptance' signed by some of the named plaintiffs or by the written representations received by some from GM. That the defendants' statements were made in writing is irrelevant as they do not profess to be plan amendments.' Borst v. Chevron Corp., 36 F.3d 1308, 1323 (5th Cir. 1994), cert. denied, 514 U.S. 1066 (1995). . . The statements of acceptance were not ERISA plans themselves. . . Altering a welfare plan on the basis of non-plan documents and communications, absent a particular showing of conduct tantamount to fraud, would undermine ERISA. Moore, 856 F.2d at 489.
Plaintiffs' estoppel theory was simple: (1) GM had represented to the retirees, both orally and in writing, that they would receive lifetime health benefits; (2) the retirees reasonably relied upon GM's representations by continuing to work for GM up to the time of retirement; and (3) the retirees detrimentally relied on GM's promises because they were now receiving diminished health plan coverage and could no longer work for another employer to earn satisfactory retiree health coverage.
The estoppel theory was presumptively dead on arrival as it had previously been rejected by this same court in Musto, 861 F.2d at 910. To breathe life into an estoppel claim, Mr. Sprague would have had to convince the court to create a federal common law rule to "fill in" a gap that would further ERISA's aims. The important ERISA gap that would be filled in is the over-arching ERISA goal of benefit security. Unfortunately for Mr. Sprague, the Sixth Circuit could find no gap in ERISA. More importantly, Mr. Sprague's estoppel theory would undermine ERISA's requirement that "every employee benefit plan shall be established and maintained pursuant to a written plan document." 29 U.S.C. ' 1102. The Sixth Circuit wrote a short death certificate for estoppel, stating:
Principles of estoppel, however, cannot be applied to vary the terms of an unambiguous plan document; estoppel can only be invoked in the context of ambiguous plan provisions . . . There are at least two reasons for this. First, as we have seen, estoppel requires reasonable or justifiable reliance by the party asserting the estoppel. That party's reliance can seldom, if ever, be reasonable or justifiable if it is inconsistent with the clear and unambiguous terms of plan documents available to or furnished to the party. Second, to allow estoppel to override the clear terms of plan documents would be to enforce something other than the plan documents themselves. That would not be consistent with ERISA.
The Plaintiffs last theory of recovery springs from the recent U.S. Supreme Court decision in Varity Corp. v. Howe, 116 S.Ct. 1065 (1996). In Varity, the Supreme Court held that an employer acted in a fiduciary capacity when making misrepresentations to its employees about their employee benefit plans. Applying the law of trusts, the Varity Corp. stated that "conveying information about the likely future plan benefits" was a discretionary act of plan administration. Id., at 1073. The Supreme Court concluded the employer breached its fiduciary duty when it lied to its employees.
The Sprague plaintiffs had asserted that General Motors' failure to affirmatively disclose that GM could reduce retiree plan benefits constituted a breach of fiduciary duty to the early retirement plan participants. The Sixth Circuit ruled, however, that, Mr. Sprague could not prove this negative.
A breach of fiduciary duty claim could not survive because no court of appeals has imposed fiduciary liability for failing to disclose information that is not required to be disclosed. At least three circuits have held that there is no fiduciary duty to disclose plan changes in benefits or even the termination of a plan before those actions become official. Pocchia v. Nynex Corp., 81 F.3d 275, 278 (2d Cir.), cert. denied, 117 S.Ct. 302 (1996); Payonk v. HMW Industries, Inc., 883 F.2d 221, 229 (3d Cir. 1989); Stanton v. Gulf Oil Corp., 792 F.2d 432, 435 (4th Cir. 1986). A fortiori, there can be no fiduciary duty to disclose the [possibility] of a future change in benefits. See Restatement (2nd) of Trusts, ' 173, Comment d (1959) ('ordinarily the trustee is not under a duty to the beneficiary to furnish information to him in the absence of a request for such information.')
While the Sprague decision is of some comfort to employers, the retiree medical wars are far from over. Four judges vigorously dissented in Sprague. Moreover, several federal courts of appeals continue to use extrinsic evidence to analyze these disputes. See, e.g., Barker v. Ceridian Corp., 122 F3d 628, 638 (8th Cir. 1997); International Ass'n of Machinist, et al., v. Masonite Corp., 122 F3d 228, 233 (5th Cir. 1997) Once a court finds ambiguity in plan documents about the provison of retiree medical benefits, the extrinsic evidence race begins. It is a race where employers too often find their fate shackled to the memories of self-interested retirees.
Employers wishing to avoid litigation over retiree medical benefits should be vigilant in monitoring the written and verbal promises made to employees and retirees. All written and oral statements made about these benefits must be constantly reviewed for clarity and consistency. Employers should ensure that amendment and termination language is present in all governing plan documents and summary plan descriptions. Plan fiduciaries and plan administrators should be trained about the importance of these amendment and termination and perhaps should be provided with prepared scripts to use in answering recurring questions about these benefits. If plan administrators and fiduciaries follow these simple guidelines, they may continue to find themselves in the business of plan administration rather than in the hell of damage control.