Non-ERISA Employee Benefits Litigation

By: Mark Casciari and Jules Levenson 

Seyfarth Synopsis: The Supreme Court has held unanimously that a 1980 amendment to ERISA means that a pension benefit plan need not be established by a church in order to be exempt from ERISA rules, including most importantly, its funding rules.  The decision shows that most courts misread ERISA, which is not that surprising, given the statute’s complexity.

On June 5, 2017, the Supreme Court unanimously held that a pension benefits plan need not be established by a church in order to qualify as a church plan exempt from ERISA funding and other rules, reversing three Courts of Appeal decisions to the contrary. Advocate Health Network v. Stapleton, No. 16-74 — S. Ct. — (June 5, 2017).

Stapleton involved pension plans established by nonprofit hospitals allegedly affiliated with churches.  The original ERISA definition of church plan required that the plan be “established and maintained . . . by a church,” but a 1980 amendment defined the phrase “established and maintained . . . by a church” to include plans maintained by certain affiliate organizations.  The question before the Court was whether a plan qualified as a church plan simply by virtue of its being maintained by a qualifying affiliate organization (referred to by the Court as a “principal purpose organization”) — the position taken by the hospitals — or whether a church must first have established the plan — the position taken by the plaintiffs.

In an opinion sure to delight enthusiasts of textualism, Justice Kagan, writing for a unanimous court (absent Justice Gorsuch), sided with the hospitals. The Court concluded that Congress’s amendment to ERISA brought plans maintained by principal purpose organizations into the exempt category of plans “established and maintained . . . by a church,” even if those plans were not in fact initially established by church. The Court also noted that that the IRS, DOL, and PBGC had long interpreted ERISA to exempt these plans.

This decision is a significant victory for church-affiliated healthcare organizations that have not already settled for tens and even hundreds of millions of dollars with the plaintiff attorneys and the classes they represent. The settlements attempted to bridge the funding shortfalls if those plans were subject to stringent ERISA funding rules. The decision thus rewards those employers who took a hard line against Courts of Appeals decisions.  It also is yet another lesson that one can never be too careful interpreting ERISA, and sometimes the correct interpretation runs counter to many lower court decisions and the admonitions of strident plaintiff counsel.

We have written previously about how this case might affect ERISA litigation.  We thought the Court might comment on the U.S. Constitution’s “concrete injury” precondition to suit in federal court under ERISA, in the context of an ERISA violation that is limited to technical statutory compliance.  The Court did not, however.  Instead, the Court offered a lesson on how to interpret a highly complex statute.

 By: Ronald Kramer, Justin T. Curley, and Barbara Borowski,

 Employers may unwittingly create implied vested contractual rights to retirement and healthcare benefits for their employees in perpetuity.

 In Sonoma County Ass’n of Retired Employees v. Sonoma County, No. 10-17873 (February 26, 2013), the Ninth Circuit vacated a district court’s dismissal of a lawsuit brought by a group of retired non-union county workers seeking to enforce an alleged agreement by the county’s board of supervisors to provide them lifetime healthcare benefits.  The retirees contended that the board broke its word to pay for “all or substantially all” of the retirees’ healthcare benefits in perpetuity when it cut the county’s healthcare benefit contributions to $500 a month for retirees in 2008, a change that was aimed at reining in the county’s ever-rising health care costs.  The retirees asserted state law breach of contract and promissory estoppel claims, as well as claims under the Contract Clauses and Due Process Clauses of the California and U.S. Constitutions.

 In 2010, the district court dismissed the suit with leave to amend, ruling that the county never expressly promised to continue retiree healthcare benefits in perpetuity, and that extrinsic evidence of such a promise could not bind the county.  The retirees filed an amended complaint, this time adding more facts and attaching evidence of an alleged express agreement with implied terms providing for healthcare benefits in perpetuity, including board resolutions, memoranda of understanding, and ordinances.  The district court remained unpersuaded on the retirees’ second try, and dismissed the complaint without leave to amend.

 The retirees appealed.  While the appeal was pending, the California Supreme Court held in 2011 in Retired Employees Ass’n of Orange County, Inc. v. County of Orange that a vested right to healthcare benefits for retired county employees can be implied under certain circumstances from an express contract created by county ordinance or resolution.  We previously reported on this decision here.

 On appeal, the Ninth Circuit, relying on Retired Employees Ass’n of Orange County, found that plaintiffs had plausibly alleged in their amended complaint that the county had entered into an express contract, which included implied terms providing healthcare benefits to retirees that vested for perpetuity.  But the Ninth Circuit determined that the retirees had not plausibly pointed to a county ordinance or resolution that created that alleged express contract with the implied terms.  It nonetheless held that the plaintiffs should be permitted another shot at amending their complaint to state a claim for an implied right to lifetime healthcare benefits based on an express contract created by county ordinance or resolution.

 Notably, the Ninth Circuit did observe that the retirees faced a “heavy burden” of establishing that the county intended to create a compensation contract with them by ordinance or resolution, and demonstrating that implied terms in that contract provided for vested healthcare benefits in perpetuity.  It cautioned that any court considering such a claim must “identify ‘a clear basis in the contract or convincing extrinsic evidence’ establishing that a contract exists and clearly delineating the contractual obligation at issue.”

 This case is significant to public employers because it lends additional heft to retirees seeking to rely on extrinsic evidence to assert implied vested contractual rights to lifetime retirement and healthcare benefits.  While private employers are generally governed by ERISA, courts may look to the relevant state law in determining whether a contractual claim could be stated under ERISA common law.  Meeting the financial obligations created by such implied rights would add substantial cost burdens to employers who never intended to assume such obligations in perpetuity.  Employers may be able to avoid creating implied vested contractual rights by carefully describing the limits of a retiree benefit, and by expressly stating that neither a benefit nor a method of calculating that benefit is vested, but instead can change from year to year. 

 

 

 

 

 By: Mark Casciari and Barbara Borowski

In Cloutier v. State, No. 2010-714, 2012 N.H. LEXIS 42 (N.H.Mar. 30, 2012), a retired probate judge contested the validity of certain changes that the State of New Hampshire made to the Judicial Retirement Plan. 

 Under the prior retirement statutes, “as additional compensation for services rendered and to be rendered,” a judge who retired upon attaining the age of seventy years having served as a judge for at least seven years, or upon attaining the age of sixty-five years having served for at least ten years, was entitled to receive for the rest of his or her life an annual amount equal to seventy-five percent of the currently effective annual salary of the office from which the judge was retired.  Under the new statute, effective in 2005, benefits were limited to seventy-five percent of the judge’s final year’s salary with the board’s discretion to award cost-of-living adjustments to retired judges up to an aggregate amount of $50,000 per year, and to award more than that amount with the approval of the legislature.  Under the new statute, the plan became self-funding, relying upon contributions from the State and the judges.

 The judges alleged that the State’s action constituted an impairment of contract in violation of the New Hampshire Constitution.  The trial court found that the application of the changes to the Plan to judges who accepted their positions before its enactment in 2005 violated the Constitution’s contract clause.  The State appealed the court’s decision that the changes to the Plan violated the Constitution and argued that, at most, it is unconstitutional only as to those judges who met the service and age requirements for retirement as ofJanuary 1, 2005. 

 The Supreme Court of New Hampshire stated that whether a public retirement plan creates a contract between a public employee and the State is a question of first impression inNew Hampshire.  Contract clause analysis inNew Hampshirerequires a threshold inquiry as to whether the legislation operates as a substantial impairment of a contractual relationship.  This inquiry has three components: (1) whether there is a contractual relationship; (2) whether a change in law impairs that contractual relationship; and (3) whether the impairment is substantial.  If the legislation substantially impairs the contract, a balancing of the police power and the rights protected by the contract clause must be performed, and the law may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose.

 The Court found the prior statute created an implied-in-fact contract between the State and the judges who entered into employment when the statutes were in effect, which vested when they were appointed to be judges, subject to attaining the age and service requirements.  The Court reasoned: “One of the primary purposes of providing benefits to public employees is to induce competent persons to enter and remain in public employment.  Benefits would serve as little inducement if they could be whisked away at the whim of the public employer.”

 The Court went on to find an impairment of vested rights because the prior retirement statute based benefits on the most recent adjustments in judicial salaries, whereas the new statute based benefits on the amount the judge was being paid at the time of retirement.  As for whether the impairment was substantial, the Court remanded the case to allow the trial court to determine whether the impairment was offset by any compensating benefits.  The Court explained that prior to retirement, a plan may be changed only if there is a corresponding change of a beneficial nature to the employee. 

 This case is noteworthy because as the Court indicated the prior retirement statutes stated unequivocally that judicial retirement pay was “additional compensation for services rendered.”  State and local governmental entities may be able to avoid creating implied vested contractual rights by de-linking, to the extent possible, retirement benefits from compensation.  We note as well that when a public employee’s retirement benefit becomes vested varies from state to state.  Some states have found that vesting occurs when an employee is hired.  Others have found that vesting begins when an employee actually retirees.  Still others have found that vesting begins when an employee is eligible to retire.

By: Sheryl Skibbe and Kathleen Cahill-Slaught

On February 1, 2012, an Arizona Superior Court handed a defeat to state employers in their effort to transfer a greater share of the cost of retirement benefits to current employees.  In Barnes v. Arizona State Retirement System, et al., (Ariz. Super.Ct., No. CV- 2011-011638), the court granted the plaintiffs’ motion for summary judgment, holding a 2011 Arizona law, which attempted to alter the employees’ percentage of their contribution to the Arizona State Retirement System (“ASRS”), was unconstitutional.  

In an effort to save the State an estimated $60 million annually, theArizonalegislature passed S.B. 1614 ( signed by Gov. Jan Brewer (R) in April 2011).  The bill took effect onJuly 1, 2011.  The law changed the proportionate share of the annual contributions that state employers and its employees paid into the plan.  Previously, the split had been set at 50 percent for the employer and 50 percent for the employee, but after passage of S.B. 1614, the contributions paid by state employees increased to 53 percent, while contributions by their employers were decreased to 47 percent.

Judge Eileen Willett sided with the seven teachers who filed suit challenging the new law’s constitutionality.  Judge Willett found that forcing employees to pay additional contributions interfered with the employees’ contractual relationship with the state under the contract clauses of theArizonaand U.S. Constitutions (prohibiting the passage of a bill of attainder, ex post facto law or law impairing of the obligation of a contract).  “Art. 29 § 1 of our Constitution expressly prohibits the type of diminution or impairment of Plaintiffs’ existing public retirement system benefits that S.B. 1614 exacts,” Willett said.  The court observed that in 1998, Arizonans approved a constitutional amendment that states:  “Membership in a public retirement system is a contractual relationship that is subject to Article II, §25, and public retirement system benefits shall not be diminished or impaired.”  When the plaintiffs were hired, she wrote, they entered a contractual relationship with the state regarding the public retirement system of which they became members.  Thus, the law improperly attempted to unilaterally change terms of a contract previously agreed to by the parties.

Anticipating the court’s opinion, members of the Arizona Legislature have proposed a recent measure (H.B. 2264)to rescind the increase either through the budget process or through legislation.  If passed, the bill would require not only the return to the previous contribution level, but also require the state to refund contributions made exceeding 50 percent this year.

Although this ruling relies in part on the unique provisions of Arizona’s constitution, the case may serve as a warning that states cannot attempt to ameliorate budgetary problems by shifting more of the costs of pensions to current employees.

 By: Mark Casciari and Barbara Borowski

 In Retired Employees Assn. of Orange County, Inc. v. County of Orange, 52 Cal. 4th 1171 (Cal. 2011), an employee association filed a lawsuit in the federal court contesting the validity of certain changes that Orange County California made to health benefits for retired employees.  From 1985 through 2007, the County combined active and retired employees into a single unified pool for purposes of calculating health insurance premiums so that retires would pay lesser premiums then they otherwise would in a separate pool.  But in 2007, the County passed a resolution splitting the pool of active and retired employees, effective January 1, 2008, which had the effect of increasing retired employee premiums.  The association sought an injunction prohibiting the County from splitting the pool of active and retired employees. 

 The association alleged, among other things, that the County’s action constituted an impairment of contract in violation of the federal and state Constitutions.  In support of its position, the Association claimed that the County’s long-standing and consistent practice of pooling active and retired employees, along with the County’s representations to employees regarding a unified pool, created an implied contractual right to continuation of the single unified pool for employees who retired before January 1, 2008.  The district court granted summary judgment for the County on all claims, finding that the County cannot, as a matter of law, be liable for any obligation it did not undertake explicitly through a resolution. The association appealed and the Court of Appeals for the Ninth Circuit asked the California Supreme Court to determine “[w]hether as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.” 

 The California Supreme Court concluded that “under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”  The Court addressed three arguments raised by the County: (1) that a county government and its employees cannot form an implied contract; (2) that even if implied contracts are cognizable in the public employment context, such contracts cannot create vested rights; and (3) that even if vested contractual rights for county employees may be implied, such rights cannot include health benefits.

 The Court rejected all three arguments.  As to the first argument, the Court found: “Where the relationship is governed by contract, a county may be bound by an implied contract (or by implied terms of a written contract), as long as there is no statutory prohibition against such an agreement.”  As to the second argument, the Court found that implied contracts can create vested rights, but noted:  “[A]s with any contractual obligation that would bind one party for a period extending far beyond the term of the contract of employment, implied rights to vested benefits should not be inferred without a clear basis in the contract or convincing extrinsic evidence.”  As to the third argument, the County relied on the California Employees Retirement Law of 1937 (Gov. Code, § 31450 et seq.), and focused specifically on Government Code section 31692, which provides in relevant part that the adoption of an ordinance or resolution pursuant to Section 31691 shall give no vested right to any member or retired member.  Section 31691 authorizes a county board of supervisors by ordinance to provide for the contribution by the county from its funds toward the payment of all or a portion of the premiums on a policy or certificate of life insurance or disability insurance, or toward the payment of all or part of the consideration for any hospital service or medical service corporation.  The Court found that Government Code Section 31692 does not apply because the plaintiff association merely seeks health insurance premiums that are equal to active employees premiums, and does not argue that the County must continue to make any contributions toward the payment of active employee premiums.  

 This case is noteworthy because it holds that it is legally possible for a governmental retiree to have an implied vested contractual right to benefits which could add significant costs to already cash-strapped governmental agencies and underfunded retirement plans.  Governmental agencies may be able to avoid creating implied vested contractual rights by carefully describing the limits of a retiree benefit, and by expressly stating that neither a benefit, nor a method of calculating that benefit, is vested, but instead can change from year to year.