Court Finds Bargaining Agreement Vests Lifetime Medical Benefits for Retirees

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In Kelly v. Honeywell International, Inc., the U.S. Court of Appeals for the Second Circuit held that an effects bargaining agreement (“EBA”) unambiguously vested medical coverage for retirees who retired prior to the expiration of the EBA and their surviving spouses.

In 1993, Textron Corp. began negotiating a sale of its plant in Stratford, Connecticut to AlliedSignal, Inc. Textron and the local unions negotiated, and AlliedSignal approved, several agreements including an EBA, which specifically concerned “the financial and economic impacts and effects of a potential sale of assets” to AlliedSignal.

The EBA outlined medical benefits for union retirees as follows:

All past and future retired employees and surviving spouses shall continue to receive … full medical coverage as provided in the … Group Insurance Agreement, as now in effect or as hereafter modified by the parties for the life of the retiree or surviving spouse.

Following the termination of the agreements in 1997, AlliedSignal, which later assumed the Honeywell name, continued to provide retirees with medical benefits without interruption until December 2015, when it undertook a review of its agreements in light of the Supreme Court’s decision in M&G Polymers USA, LLC v. Tackett. In Tackett, the Supreme Court held ordinary principles of contract law govern the interpretation of collective bargaining agreements, including provisions about retiree health benefits, as long as such principles are not inconsistent with federal labor policy. Following the review, Honeywell announced its intent to terminate retiree medical coverage. The retirees brought suit over Honeywell’s decision to terminate their medical coverage, claiming they were entitled to medical coverage for their lifetimes.

The Second Circuit explained that for welfare benefits to be vested, there must be written language that ties the benefits that a recipient will receive to that recipient’s lifetime or to an indefinite duration. The court had “little trouble” concluding that the language in the EBA constituted affirmative lifetime language.

In addition, the Second Circuit found that the EBA expressly prohibited Honeywell from unilaterally cancelling retiree medical benefits because of language requiring both parties to agree to modify retiree benefits. The Second Circuit also rejected Honeywell’s argument that the general duration clauses in the EBA and CBA prevented retiree medical benefits from vesting. According to the Second Circuit, reading the durational clauses to prevent vesting would violate the ordinary contract principles by rendering the lifetime language in the EBA superfluous.

Takeaways: The Second Circuit noted examples of contractual language that can reasonably be interpreted to create a promise to vest lifetime benefits because such language measures the duration of a retiree’s benefits by the retiree’s lifetime:

  • Retirees’ benefits will remain at a stated level “for the remainder of their lives.”
  • Retirees would receive benefits “for the lifetime of the pensioner.”

The court also noted examples of contracts that did not contain any affirmative lifetime language:

  • A contract stating that the retiree health benefits “shall remain in effect for the term of this … Labor Agreement.”
  • A summary plan description stating, “The company expects and intends to continue the Plans in your Benefits Program indefinitely, but reserves its right to end each of the Plans, if necessary. The company also reserves its right to amend each of the Plans at any time.”