In Retired Employees Association of Orange County, Inc. v. County of Orange, (— F.3d —-, C.A.9 (Cal.), June 29, 2010), the United States Court of Appeals for the Ninth Circuit asked the Supreme Court of California to answer the following question: “Whether, 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.” Orange County (“County”) asserts that decisions from California’s appellate courts support the “conclusion that an implied contract to which a county is one party cannot confer” vested rights to health benefits. The Retired Employees Association of Orange County, Inc. (“REAOC”) contends that an implied contract can confer such vested rights.
Facts
In 1966, County started offering healthcare plans to its retirees. Premiums for retired employees were determined separately from those of active employees. This changed in 1984 when County began to pool retired and active employees when determining healthcare premiums. This had the effect of subsidizing healthcare benefits for the retired employees because it lowered the insurance premiums paid by retirees to below the actual expense of the premiums. However, the premiums of the active employees were raised above their actual expense. Retired employees would normally pay higher premiums because, as a group, they are more expensive to insure than active employees. Retired employees are required to pay the majority of their premiums. Because County pays a large portion of active employees’ premiums, County actually paid the majority of the subsidy for the retirees. However, active employees were required to pay for the rest of the subsidy through higher premiums.
In 2007, budgetary concerns prompted County’s Board to pass a resolution to split the pool of retired and active employees. However, before County passed the resolution, it negotiated changes to active employees’ benefits with labor unions. County did not conduct negotiations with the retirees or REAOC.
REAOC brought a lawsuit against County on behalf of approximately 4,600 County retirees. REAOC challenged County’s decision to change the retirees’ health benefits. REAOC asked a federal district court for an injunction to prohibit County from splitting the pool of retired and active employees. REAOC asserted County’s decision to split the pool “constituted an impairment of contract in violation of the United States Constitution and the California Constitution.” REAOC claimed that County’s “longstanding and consistent practice of pooling active and retired employees, along with its representations to employees regarding this pooling, created an implied contract to continue the pooling practice for employees who retired before January 1, 2008.” The federal district court held “County cannot be liable for any obligation that it did not enter through explicit Board resolution.” The court found “California courts have refused to find public entities contractually obligated to provide specified retirement benefits like those [REAOC] seeks in the absence of explicit legislative or statutory authority.” The court concluded that, because the rights advanced by REAOC arise from an implied contract between the retirees and County, “the County is not contractually obligated to provide retirees the pooling benefit throughout their lifetimes.”
Decision
On appeal, REAOC argued that County violated the rights of retirees by revoking the pooling arrangement that was in place from 1985 through 2007. REAOC claimed County’s action violated “the prohibition on the impairment of the obligation of contracts contained in both the United States Constitution and the California Constitution.” In order to prevail on its claim, REAOC must show “County entered into an enforceable contract giving retirees a right to the pooling subsidy and that the County substantially impaired that right.”
In order to determine if a violation of the contract clause exists, “federal courts look to state law to determine the existence of a contract.” The court of appeal concluded, “In light of the conflicting contentions of the parties, and in light of the great practical importance of the question, we do not think that it is appropriate to substitute our judgment on this issue of state law for the judgment of the California Supreme Court. Accordingly, we feel that the California’s highest court is the most appropriate forum to address the issue.” The federal appellate court asked the California Supreme Court to answer the question of whether pursuant to California law, “a county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.” The United States Court of Appeals stayed the proceedings in the lawsuit until the California Supreme Court takes action on the certified question.
Questions
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Mona G. Ebrahimi | 916.321.4500