But wait—there wasn’t any reservation-of-rights clause in the SPD that GM gave this group of retirees. Score one for the retirees? You’d think so. But with the elastic logic so common in ERISA decisions, the court of appeals concluded that this was a summary plan description; “as such, it was a summary, so wouldn’t include everything, including such things as reservation of rights clauses.”
Further, the court concluded that an employer didn’t even need to write down a reservation-of-rights clause. So, even if the documents didn’t include such a clause, the court must infer that the company intended to reserve the right to cut benefits.
As for the retirees, just because the company promised orally and in writing that their benefits were to be paid by GM, the court could not infer that GM intended to pay the benefits. “GM never told the early retirees that their health care benefits would be fully paid up or vested upon retirement. What GM told many of them, rather, was that their coverage was to be paid by GM for their lifetimes.” In other words, because GM didn’t use the word “vested,” the benefits weren’t.
“Interpretive gymnastics,” scoffed one of the dissenting judges. The three dissenting judges said the majority’s ruling gave employers a green light to lie to employees by luring them into early retirement with promises of health coverage, then canceling the benefits once the people had made an irrevocable decision to retire. “When General Motors was flush with cash and health care costs were low, it was easy to promise employees and retirees lifetime health care…. Rather than pay off those perhaps ill-considered promises, it is easier for the current regime to say those promises were never made. There is the tricky little matter of the paper trail of written assurances of lifetime health care, but General Motors, with the en banc majority’s assistance, has managed to escape the ramifications of its now-regretted largesse.”
For years, union retirees generally had greater security because their benefits were protected by negotiated contracts, which fall under the federal Labor–Management Relations Act, as well as ERISA. When employers tried to cut health benefits for union retirees—pointing to reservation-of-rights clauses—the courts generally concluded that the contracts, not the companies’ unilaterally created plan descriptions were what mattered.
But after the GM ruling, employers began to argue that the benefits for union retirees should be governed by the same pro-employer inference that was applied in that ruling. To enhance their chances of success, some companies started to use a strategy outlined by the Varity managers: creeping take-aways. This involves taking small steps—increase premiums a small amount, or perhaps start charging premiums in the future. The retirees and unions ignore them. Then, a few years later, the company cuts benefits in a big way, saying that the retirees’ prior lack of legal action signaled tacit agreement that the company could change the plan.
Another ploy companies have used in an effort to increase the chances of appearing before a sympathetic judge is to sue retirees preemptively as they cut the benefits.
Chuck Yarter, a retired miner living in the Sonoran Desert outside Marana, Arizona, learned that he was being sued in 2003 when he got a phone call from a process server who was lost. Yarter gave the guy directions to his stucco home, which sits at the end of an unnamed dirt road, with a distant view of the open-pit Silver Bell copper mine, where Yarter had been a mechanic on ore crushers.
Yarter waited in his yard, curious. He’d never been sued in his life. The approaching trail of dust told him the car was arriving. When the process server pulled up, Yarter’s dog wouldn’t let him out of the car, so after exchanging a few pleasantries, he handed the papers through the car window before trundling away through the saguaro and mesquite.
The papers told Yarter that his former employer, Asarco, was suing him and other retirees in federal court in Phoenix. Asarco, an integrated copper producer that was once known as American Smelting and Refining Co., said it was asking the court to agree that it had the right to cut the union retirees’ benefits.
Asarco, a unit of Grupo Mexico SA, didn’t dispute that it had a contract with the retirees to provide health care until they were eligible for Medicare. But it said the agreements had expired when the labor contracts had, sometime back in the 1990s. The company then sent a letter to its 901 union retirees and dependents, explaining that falling copper prices and rising health care costs left it no choice but to reduce their health coverage. “The continuing low copper price has caused Asarco severe financial distress…. As a result, Asarco is no longer in a position to continue to provide health plan benefits at the current levels.”
The retirees were in a slightly better position than the GenCorp retirees: Some could pile into a van and drive to Mexico for their prescription drugs; others, however, dropped out of the plan as prices spiraled and went on public programs. Yarter appreciated the irony: Not only did his health care costs rise but, as a taxpayer, he would ultimately be picking up the tab for others.
Gonzalo Frias, a retiree-defendant who was a shovel operator at the Ray Mine in Kearny, Arizona, had been president of the local United Steelworkers union when the contracts were negotiated, and said it was ludicrous to think the workers would have agreed to lower wages in exchange for health coverage until sixty-five if the agreement meant the company could pull the plug at any time. The Steelworkers supported the retirees in the lawsuit. “ ‘Unforeseen circumstances’ do not justify a breach of contractual obligations… to persons living on fixed income who can ill afford to pay the costs the company has shifted upon them,” they told the court. It added that the “alleged ‘severe financial distress’ has not prevented the company from paying its top management quite handsomely.”
Like the GenCorp retirees, the Asarco retirees ultimately settled, in 2007, agreeing to pay some of the benefits, with the amounts remaining unchanged for six years. It was a reprieve of sorts. They felt lucky to get that: The company, facing a number of environmental lawsuits, filed for bankruptcy in 2005 and emerged in 2010.
CIRCUIT BREAKER
In early 2002, Rexam, a maker of cans for beverages, including Diet Coke, made a tiny increase in retirees’ share of the cost of prescription drugs. For more than a year, retirees complained to the company that it had no right to change the negotiated agreements, which stated that “Company-paid major medical coverage will be provided for all retirees.” Successive contracts noted that the parties had agreed that “the Company will continue to pay the entire cost.” But the changes weren’t a big enough deal for the retirees to take legal action.
The company was also planning to make more major cuts in benefits. But rather than wait for the retirees to sue, it sued the retirees. Under legal rules, the first party to file generally gets to have its case heard in the location where it files the suit. So, suing the retirees first enhances a company’s chances to get the case heard in a circuit with pro-business judges.
In “declaratory judgment” suits, such as Rexam’s, the company asks a judge to rule that the company has the right to change the retiree health plans. Rexam pointed to a line in a booklet it gave retirees. It stated that the company “reserves the right to amend, modify or discontinue the plan in the future in conformity with applicable legislation.”
The retirees said the clause meant that if government legislation or regulations changed, then the plan might have to be modified accordingly. It didn’t give the company a right to unilaterally change the agreement. They pointed to another sentence stating that the right to modify the benefits “was subject to any applicable collective bargaining agreement.” In any case, the union wouldn’t go to the trouble of negotiating benefits for retirees if they assumed the employer could subsequently cancel the benefits at will. This was an inference in favor of union retirees.
Rexam filed in Minneapolis, within a conservative circuit. There was little logic to this from a geographic standpoint. Minnesota was home to only 100 of the 3,600 retirees, and the company—known as American National Can before R
exam bought it in 2000—is based in Chicago and has offices in Charlotte, North Carolina. It’s a subsidiary of Britain’s Rexam PLC.
The retirees, supported by the United Steelworkers of America, countersued in Toledo, Ohio, asking that the case be dismissed or transferred there. They said that Rexam had made a preemptive legal strike in order to choose the jurisdiction.
The judge in Minneapolis rejected all the retirees’ arguments. She ruled that the case would remain there, because the company had 110 employees there. She said the retirees threatened to sue and hadn’t sued quickly enough, so couldn’t claim that Rexam was suing as a preemptive strike—there was nothing to preempt. She also made a nonlegal observation: She cited a $79 million liability for the benefits on Rexam’s balance sheet and said the company was harmed “because it cannot lower the liability unless it reduces the retirees’ benefits.”
Still, she found in a later decision that the language was ambiguous, rejecting the company’s motion for judgment on the papers alone, and she allowed the suit to move forward to a trial by jury, a move that may have led to a favorable settlement for the retirees. But the case was then assigned to Judge Patrick Schiltz, a former law clerk for Supreme Court Justice Antonin Scalia. Schiltz didn’t think the language in the contract was ambiguous and, rather than go to trial, where a jury would hear the facts, he invited Rexam to move for reconsideration, meaning it could file another motion asking the judge to decide the case on the papers alone. Rexam was happy to oblige. Schiltz concluded that the language in the documents was unambiguous for approximately 80 percent of the retirees, and clearly gave the company the right to unilaterally change the benefits that it had a contractual agreement to provide.
Occasionally, a judge will refuse to hear a case in the jurisdiction where it is originally filed and send it to another circuit. But this doesn’t occur often. Crown Cork & Seal, a Philadelphia-based packaging company that makes wrappers for such things as Mars bars and bottles of beer, sued its union retirees in U.S. district court in Chicago, but the judge wasn’t convinced that was where the case belonged.
“From day one, it seemed to me that Illinois was an unlikely home for this litigation,” Judge Milton Shadur told Crown’s lawyers, according to a transcript of a meeting he held in his chambers in August 2003 to determine whether the case should remain in Chicago or move to Cincinnati, where the retirees had countersued.
“I am not faulting you for this, but it’s pretty obvious why you chose the Seventh Circuit as your forum,” he said. “Because it’s very unfriendly to the idea of retiree benefits being vested at all.” He added that he was inclined to send the case to Pittsburgh. “You know, they [the retirees’ attorneys] want Ohio, because I think they view the Sixth Circuit on this subject of retirees as more favorable, but I am not going to give them that.”
“They shopped more than we did, Judge,” said James Rydzel, a lawyer with Jones Day, in Cleveland, representing Crown.
“Well, I am not sure about that,” the judge responded. He subsequently sent the case to Pittsburgh, where a number of the company’s retirees lived. The Crown retirees were initially hopeful because the case was assigned to a judge with a proworker reputation. However, the judge recused himself because his mother had worked in a factory at Continental Can, a predecessor company, and was potentially a member of the class. The next judge sent the case to Cincinnati, where it ultimately went to arbitration.
It may be routine for litigants to try to pick a favorable jurisdiction. If two parties sue each other, the courts generally hear the case that’s filed first. But a court can dismiss or transfer a case if it believes a company is “forum shopping” or suing retirees as a preemptive strike to deprive them of their rights, as “natural plaintiffs,” to sue in the court they would choose.
ACF Industries, a railroad-car maker headquartered in St. Charles, Missouri, took the additional step of provoking a retiree and then filing suit, claiming that the company was suing to protect itself. The company didn’t dispute that the contract promised health coverage at “$100 per month for life,” but said this referred only to the major medical coverage, not explicitly to the hospital/surgical portion.
And it maintained that St. Louis was the proper venue for the suit because “a substantial part of the activities and events giving rise to these claims occurred in this district.” Most of its 678 retirees and dependents lived four hundred miles away, in West Virginia, in the Fourth Circuit, which had ruled in favor of retirees in a similar case.
ACF, controlled by CEO Carl Icahn through an investment vehicle in New York, prepared its suit and had its legal guns lined up when its human resources vice president called up a retiree in Barboursville, West Virginia. Basil Chapman, a retired union representative, was sitting on his porch with his dog, Bo, enjoying a mild Friday in December, when he got the call. The executive told him that ACF was going to start charging the union retirees for their benefits. Chapman had been the chair of the union’s bargaining committee and had helped negotiate contracts in which the trade-off for lower salary increases was lifetime health coverage that would cost retirees a flat $100 a month.
“We have a contract. You can’t do that,” Chapman replied. “We will file in federal court against you bastards, I’ll guarantee you that.” That, in any case, was what ACF claimed, in court papers, Chapman had said, when it sued him the following Monday in federal district court in St. Louis. In its complaint, the company said Chapman had threatened them, and it was taking the step to protect itself from a lawsuit it anticipated from the retirees. “Defendant Chapman has already informed ACF that he plans to file a lawsuit concerning the amendments of the plan,” the complaint said.
The day after ACF sued the retirees, it sent them a letter, blaming a slump in the railcar-building-and-leasing industry, “particularly the covered hopper car producers. Because of this we are forced to make changes in our group insurance coverage.” And, by the way, it said, the plan documents gave the company the right to modify or revoke the benefits at any time.
Retirees were told to complete a form so that payments could be deducted from their pension checks; if they failed to return the form within two weeks, the company would terminate their benefits. Chapman worried that some of the less literate retirees “in the hollows” might not understand the letter or respond to it, and spent hours on the phone making sure they turned it in.
The Steelworkers union countersued in federal court in Huntington, West Virginia, to dismiss ACF’s complaint, contending that ACF had gone through “the charade of telephoning retiree Chapman about the cuts, just so it could provoke a predictable negative reaction and then use the reaction to immediately sue.”
The retirees’ suit also complained that ACF was suing not because it had been harassed but as a preemptive strike “to beat its own retirees to the courthouse,” and chose St. Louis because “ACF apparently believes that the Eighth Circuit is more favorable to employers in retiree medical benefits cases, and apparently feels that its chances are improved if it makes the retirees litigate hundreds of miles from their homes.”
In 2004, the court in St. Louis said that ACF’s move had “resulted in a proverbial race to the courthouse in order to deprive defendants of their choice of forum” and moved the case to federal court in Huntington, West Virginia. ACF may have lost its chosen venue, but it won the case anyway. The retirees appealed, and the case settled, with retirees paying more for their coverage than before.
Chapter 11
IN DENIAL
Incentives to Withhold Benefits
AFTER FORTY-TWO YEARS working in a coal mine, Elmer Daugherty could barely breathe. Doctors told him he had pneumoconiosis, commonly called black lung disease, a disabling, incurable ailment that has killed ten thousand miners over the past decade. His employer, Constellation Energy, provides disability and workers’ compensation for those injured or sickened on the job. It also provides black lung disease coverage, a benefit mandated by Congress.
/> Daugherty applied for black lung benefits in 2001, but the company denied his claim. Over the next three years, Daugherty was examined by nine different pulmonologists, underwent a battery of painful tests, and had more than thirty X-rays. Even though most of the doctors agreed he had black lung caused by his years in a coal mine, the company continued to deny his claim. He died in 2005.
Daugherty’s struggle to be awarded black lung benefits wasn’t unusual. Industry-wide, only fifteen claims in one hundred are paid. Providing benefits wouldn’t have put a dent in Constellation’s finances: Black lung is such a common outcome of working in coal mines that the federal government requires coal companies to pay into a central fund, run by the Labor Department, to finance the benefits.
But black lung coverage has something else is common with pensions: it’s a “postretirement obligation,” and under accounting rules is treated like other retiree liabilities, including retiree health care, long term disability, executive supplemental pensions, and deferred compensation. Coal producers must estimate the amounts they will likely pay over their afflicted miner’s lives, as short as they may be, and record that obligation on their financial statements.
These accounting rules, which reward employers for cutting retiree benefits, also provide them with an incentive to prevent workers and retirees from collecting benefits in the first place. Denying claims doesn’t just save coal companies money, it also helps the bottom line.
Consider the black lung obligations at Console Energy, one of the largest coal producers in the country. The $185 million “coal workers’ pneumoconiosis” obligation is calculated using assumptions including the incidence of disability, medical costs, mortality, death benefits, and interest rates.
Retirement Heist Page 18