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March 12, 2014

Court of Appeals Finds No Vested Right to Retiree Health Benefit

On February 13, 2014, the United States Court of Appeals (“the Court”) issued a critical decision in the developing legal battle being waged over a public employer’s ability to modify retiree health benefits.  In Retired Employees Association of Orange County (“REAOC”) v. County of Orange (9th Circuit Case No. 12-56706), REAOC asserted on behalf of its 4600 retiree members that the County should be precluded from placing retirees in a separate pool established to set health insurance premium rates.  While an implied right to vested retiree health benefits may exist in some circumstances, REAOC failed to demonstrate that the County intended to create a vested contractual right to the ongoing pooling of retirees and active employees in this case.

The County pooled health insurance premium rates for retired and active employees from 1985 to 2007 to equalize active and retiree rates and to resolve a budget shortfall for retiree healthcare costs. The Board approved the pooling arrangement on an annual basis.  In 2008, the County decided to address rising health insurance premiums during negotiations with various labor unions, by splitting the insurance rate pool between active employees and retirees.  Consequently, the cost of health care premiums for retirees increased. 

At the beginning of the long and winding path to resolution, REAOC filed suit in the Central District of California, contending the County’s previous longstanding practice of pooling and the County’s representations to employees regarding that practice created an implied contractual right to continued pooled premiums for employees who retired prior to January 1, 2008.  

After the district court found that the County did not have a contractual obligation to continue providing the pooling benefit to retirees, REAOC appealed.  In response, the district court certified the following question for the California Supreme Court: 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?  Of critical importance to public employers, the Supreme Court affirmed that vested health benefits could be implied under certain circumstances from a county ordinance or resolution.  

The case was remanded back to the district court to determine whether the County employees had such a vested right to the pooling arrangement.  On remand, the district court again granted summary judgment for the County, finding that REAOC failed to meet its burden of proving that the relevant statutes or ordinances reflected a clear legislative intent for the County to enter into such a contract with its retirees. 

On appeal, the Court concluded that REAOC failed to establish the County’s intent to create an implied contractual right to the pooling of retirees and active employees for setting health insurance premium rates.  Notably, the Court found that implied rights to vested benefits should not be inferred absent clear contract language or convincing extrinsic evidence.
It is instructive for public employers to consider the nature of REAOC’s evidence and why it did not substantiate an implied right to a vested benefit.  First, while REAOC contended that the implied pooled premium was closely connected to express contract provisions regarding retiree health benefits, the Court found that the express terms of the contracts only supported the right to enrollment at a specific rate for a given year, not a right to a particular lifetime pooled premium.  Accordingly, the language did not show any link to the claim of an implied right to an ongoing pooled premium.  

REAOC also asserted that the County’s act of adopting annual agreements by Board resolution created an implied contract right to the pooled premium.  By creating the pooled premium via resolution, REAOC claimed that the Board conferred a lifetime benefit to retirees.  However, the Court rejected this argument because the initial resolution that authorized the adoption of 1985 health rates was silent about future premiums.  The Court also refused to find that a practice or a policy extended over a period of time automatically translated into an implied contract without clear legislative intent to create that right. 

REAOC further argued that statements and documents by the County contemplated certain lifetime retiree health care benefits and therefore demonstrated the existence of an implied right to the pooled rate. For instance, it pointed to statements by the County’s chief negotiator that included the value of the pooled premium to suggest that it would continue for rate setting purposes for that year.  The Court ultimately found that the alleged statements and documents simply demonstrated that the parties addressed the pooled premium in the course of negotiations, but fell short in establishing an implied contractual right.

The decision is important as it provides clarification as to how vested retiree benefits may be created by implication even if not expressly included in a contract.  Public employers need to be cognizant that courts will look beyond mere contract language to assess if there is evidence of a clear legislative intent to create a vested contractual right.  Consequently, public employers must be careful of the language used in external documents related to retiree benefit plans to avoid creating an unexpected ongoing obligation.   

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