Former Employer Could Not Unilaterally Change Agreement And Charge Retirees Monthly Premiums For Health Insurance

The United States Court of Appeals for the Ninth Circuit held that a former employer could not start charging retirees monthly premiums for their health insurance where the collective bargaining agreements (“CBA”) in effect when the employees retired provided that they would receive premium-free health insurance until they reach age 65.  (Alday v. Raytheon Company (— F.3d —-, C.A.9 (Ariz.), May 21, 2012).


From 1972 to 1999, the CBAs between employees and the owner of a defense plant stipulated that the employer would provide eligible retired employees with health insurance.  Hughes Missile Systems Group owned the plant until 1997, when it was taken over by the Raytheon Company.  In order for employees to be eligible for health insurance after retirement, they were required to participate in the “contributory option,” under which they agreed to contribute three percent of their eligible compensation. 

Before the CBA for 2003-2006 became effective in November 2003, Raytheon provided fully-funded healthcare coverage for those eligible retirees who participated in their retirement plan’s contributory option.  The CBA that went into effect in 2003, however, expressly limited the contribution by Raytheon toward healthcare coverage for future eligible retirees.  In 2004, Raytheon began applying this policy to all employees who had retired while the previous CBAs were in effect and charged those retirees monthly premiums for their health insurance.

Several retirees brought a lawsuit against Raytheon alleging violations of the Labor Management Relations Act (“LMRA”) and the Employee Retirement Income Security Act of 1974 (“ERISA”).  The trial court found in favor of the retirees and held that terms of the CBAs unambiguously established that the retirees had the contractual right to premium-free health insurance until they reach the age of 65.


The court of appeals affirmed the decision of the trial court.  As a general rule, the labor rights of a retired worker are governed by the CBA under which he or she retired and the terms of any ERISA plan that was incorporated in the CBA.  Therefore, the court looked at the four CBAs that retirees in this lawsuit retired under, which were the 1990, 1993, 1994 and 1999 CBAs. 

Each relevant CBA had either a three or four year effective term.  Each applicable CBA obligated the employer to pay comprehensive medical plan premiums for active employees.  The CBAs further provided that the employer would continue to provide the medical plan coverage for which a retiree was covered while he or she was an active employee until the retired employee reaches the age of 65.  To qualify for continued health coverage, the retiree was required to be between 55 and 65 years of age, have five years of continuous employment, and at least three years of continuous participation in the plan’s contributory option before retirement.  For employees who participated in the non-contributory option, the CBAs were clear that continued enrollment in a health plan after retirement would be contingent on the retiree’s payment of premiums. 

The CBAs reference Raytheon’s ERISA welfare benefits plans (“Plans”).  The Plans for 1994 and 1997 provide that the employer reserved “the right to alter, amend, modify, revoke or terminate in whole or in part the Plan, except as provided in any agreement with a Collective Bargaining Agent.”  The 1999 and 2003 Plans also allow Raytheon to amend the Plan but do not explicitly reference the CBAs.  Raytheon asserted that the Plan provisions authorize it to unilaterally discontinue or limit the retirees’ contractual right to premium-free health insurance.  The court concluded that Raytheon lacked the authority to abrogate unilaterally the collectively bargained for premium-payment obligations for the retirees. 

The LMRA creates a cause of action for breach of a CBA.  ERISA provides a cause of action to participants or beneficiaries of a benefits plan.  Post-retirement medical benefits are classified as welfare benefits under ERISA, which do not vest until an employer says they vest.  Under ERISA, an employer may modify or terminate welfare benefits unless it contractually concedes the freedom to do so.

The question here is whether the terms of the CBAs regarding medical coverage constitute a contractual commitment by the employer to provide benefits.  The court found that the various CBAs applicable here obligate Raytheon to fully pay the health insurance premiums of the eligible retirees until they reach the age 65.  The court further concluded that Raytheon's obligation survived after each CBA’s expiration.  “Because the CBAs here required Raytheon to ‘continue to provide’ Retirees with premium-free healthcare coverage until they reach age 65, Raytheon’s obligation to pay . . . continued after the CBAs themselves expired.” 

The reservation of rights provisions in the Plans were not incorporated into the CBAs in regard to the medical coverage requirement “and the CBAs expressly prevented Raytheon from unilaterally abrogating its contractually premium-payment obligations.”  None of the provisions in the Plans allow Raytheon to unilaterally override the terms of the CBAs under which Raytheon promised to provide premium-free healthcare coverage to the eligible retirees. 

Raytheon expressly agreed to pay for healthcare premiums for the eligible retirees.  That obligation survived the expiration of the applicable CBAs.  Raytheon could not unilaterally abrogate the agreed-upon obligation to provide healthcare benefits.  Accordingly, the court found in favor of the retirees on the issue of Raytheon’s breach of its promise when it started charging the retirees for their insurance.

The court, however, rejected the retirees’ claim for punitive and extra-contractual damages.  Retirees alleged no facts that show Raytheon's conduct was egregious or outrageous enough to warrant an award of punitive damages.       


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