Mack Trucks and its corporate parent, Volvo, have agreed to pay $525 million to settle a class action suit brought by more than 9,300 Mack retirees to challenge threatened reductions to their lifetime health benefits.

Senior U.S. District Judge R. Barclay Surrick has granted preliminary approval of the settlement in Mack Trucks Inc. v. United Auto Workers and has scheduled a hearing for Sept. 7 to consider whether it is fair and reasonable.

The litigation began when Mack filed a declaratory judgment action against the United Auto Workers Union seeking a ruling that the lifetime benefits of its retirees were not vested and therefore could be modified or even eliminated.

Retirees later filed a class action in federal court in Michigan seeking an order preventing Mack from unilaterally altering the benefits, and the two cases were later consolidated in the Eastern District of Pennsylvania.

Since then, lawyers for Mack, the union and the class have spent a year exploring, analyzing and negotiating a potential settlement.

Under the terms of the settlement, Mack and Volvo have agreed to pay $525 million in cash, in five annual installments, to create a voluntary employees beneficiary association, or VEBA, that will take over administration of a new post-retirement health care plan for the class.

Details of the proposed settlement were disclosed in a joint brief filed by lawyers for the class, Andrew Nickelhoff and Marshall J. Widick of Sachs Waldman in Detroit; the UAW’s lawyer, William T. Josem of Cleary & Josem in Philadelphia; and Mack’s lawyers, Thomas J. Bender and Robert C. Drake of Littler Mendelson in Philadelphia.

The brief says the settlement makes sense because both sides faced serious risks in going forward.

“The settlement will drastically reduce the uncertainties facing the class regarding their future medical coverage, not only because it removes the risk of an adverse litigation outcome, but also because it replaces dependence on Mack’s future financial fortunes with the security of up-front cash funding,” the brief says.

Lawyers for the class and UAW said it was “extremely important” that Mack’s funding obligation will be backed up by Volvo, and that the funding “will be in cash rather than with long-term notes or equity instruments of uncertain value.”

The brief says Mack has been a market leader in specific segments of the heavy duty truck market, but that its sales and market share have been declining in those segments in the last several years.

“It is, at best, highly uncertain whether Mack’s business outlook and finances will improve in the short term or in the long term,” the joint brief says.

In 2007, the brief says, Mack told the UAW that “runaway health care cost inflation had crippled its ability to continue to pay for the retiree medical benefits program,” and that it intended to unilaterally implement changes to the benefits of current retirees effective April 2008.

The brief says both sides strongly believed in their litigation positions.

“UAW and class counsel adamantly believe that the language of the collective bargaining agreements, along with other evidence of intent, manifests the bargainers’ intention to provide such vested, lifetime retiree coverage, which Mack may not terminate or modify,” the brief says.

And Mack “believes just as strongly that the contract language and plan documents manifest no such understanding and that it has the legal right to reduce or even eliminate medical benefits for the class,” the brief says.

But both sides also recognized that losing the case would have dire consequences.

Under the settlement, retirees face an immediate reduction of benefits and the probability of further reductions in the future.

The brief says the VEBA plan “requires some cost sharing by participants, including annual deductibles and co-payments.”

An economist who performed an actuarial study estimated that the VEBA’s funding will be sufficient to pay for 85 percent of the projected cost, the brief says.

“This funding level means that the VEBA committee will have to institute additional benefit reductions and cost shifting in the future, to bring the benefit level in line with the funding,” the brief says.

Surrick, in an eight-page opinion that granted preliminary approval of the settlement, said, “The outcome of this case is far from certain and the risks of litigation are high for all interested parties.”

Finding that the deal provides the retirees with “significant lifetime medical benefits,” Surrick said he was “satisfied that the proposed settlement is fair and falls well within the range of reasonableness.”

(Copies of the eight-page opinion in Mack Trucks Inc. v. United Auto Workers, PICS No. 11-0915, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.) •