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Since 1991, the number of retirees offered health benefits by the nation’s largest companies plummeted from 80% in 1991 to 56% by 2003, and some union retirees promised lifetime medical benefits have learned that lifetime only means “until revoked.” Across the country in contract disputes and bankruptcy filings, federal courts have been pulled into the wrangling over how promises of lifetime benefits can be broken, or whether they existed at all. And the courts have not been uniform in their answers. Some predict that the U.S. Supreme Court will eventually have to step in to smooth out the wrinkles. For the steel industry, 2000 to 2003 “was about the lowest period in the industry when 250,000 retirees and their spouses lost benefits during Chapter 11″ bankruptcies, said David Jury, assistant general counsel for the United Steelworkers of America. In Michigan, 2,900 retired union autoworkers for ArvinMeritor Inc., a parts supplier, have challenged the company’s unilateral cancellation of lifetime retiree health benefits first negotiated in 1962. Cole v. ArvinMeritor Inc., No. 03-73872 (E.D. Mich.). A federal judge temporarily restored the benefits but further proceedings are set for August. A recent report by Standard & Poor’s found that post-retirement benefits, mostly medical costs, were underfunded by nearly $300 billion among the firms in the S&P 500 stock index. “The trend in industry after industry is to eliminate retiree benefits,” Jury said. Currently, it is the fate of the auto industry and its workers that has garnered the most concern. In June, the annual judicial conferences of both the 6th and 7th U.S. circuit courts of appeals met in Detroit and Chicago and focused on the growing number of bankruptcies in the auto industry. Late last year, the United Auto Workers union agreed to cut $1 billion annually from General Motors Corp. retiree health care expenses, but have the former workers pick up more of the tab, saving the company potentially $15 billion on a projected obligation of more than $70 billion, according to a GM estimate. Earlier this year, much healthier companies have cut or frozen contributions to pension and medical benefit programs for current and retired workers, among them IBM, Verizon Communications Inc., Hewlett-Packard Co. and Motorola Inc. A ‘complete restructuring’ For the auto industry the retiree medical issue is looming, said G. Christopher Meyer, a bankruptcy specialist in the Cleveland office of Squire, Sanders & Dempsey who lectured at the 6th Circuit’s conference. An estimated $1,500 per car goes for retiree medical care. That is not sustainable, he said. “We have a complete restructuring of an industry going on,” said Charles Dyke, who specializes in benefits litigation in the bankruptcy context in Thelen, Reid & Priest’s San Francisco office. Three legal battlegrounds have opened up over post-retirement health benefits. They are: How and when companies can unilaterally withdraw from negotiated or promised benefits. In bankruptcy, seeking court-ordered elimination of medical benefits under Section 1114 of the Bankruptcy Code. Whether the government’s rule allowing over-65 retirees to receive health benefits inferior to those younger than 65 violates age discrimination law. Nationally, more and more companies say they did not make lifetime promises to pay retiree health benefits in union contracts, arguing instead that the benefits were only intended for the duration of the contract and renewable with each new contract. ArvinMeritor represents an archetype of the many companies engaged in the tug-of-war between retirees and firms desperate to cut rising health costs in an increasingly competitive auto industry. The litigation often shapes up as contract disputes with the battle being over whether a lifetime promise-or something less-was made. Stuart Israel of Martens, Ice, Klass, Legghio, Israel in Royal Oak, Mich., who represents the ArvinMeritor retirees, declined to talk about the ongoing litigation. But in court papers, he wrote that the company as engaged in “a dense brew of already-rejected arguments, still ineffectively seeking to evade the lifetime retiree health benefits unambiguously promised by contract and . . . words and deeds spanning five decades.” ArvinMeritor lawyers did not return calls seeking comment, but in a court brief they argued that it was an “unwarranted leap” to infer that because retirees were eligible for health benefits that the company “intended health benefits to vest merely because the recipient happens to be a pensioner.” “What companies do is make economic assessments about the likelihood of success of terminating retiree benefits,” said Dyke. “The costs can be enormous.” Dyke pointed to a 1983 6th Circuit case that held that if a collective bargaining agreement is silent on vesting, and the company did not reserve the right to cancel benefits, an inference can be drawn that the benefit was intended to vest at retirement, UAW v. Yard-Man, Inc., 716 F.2d 1476 (1983). But the 5th, 7th and 8th circuits have rejected that concept, he said, while the 3rd, 4th, 9th and 11th circuits hew more closely to the 6th. Current industry conditions are a far cry from the attitude prevalent in 1971, when then-President Richard Nixon said, “even one worker whose retirement security is destroyed by the termination of a plan is one too many.” In 1974 Congress created the Employee Retirement Income Security Act (ERISA) to establish fiduciary standards to protect retiree pensions and other benefits. Although pensions were vested under the law and difficult to alter, health benefits were not and could be changed more readily. The 7th Circuit has one of the toughest standards for retirees attempting to block loss of benefits. The court has said that a company had to have misled plan participants about the terms in order to have breached its fiduciary obligation. In the case of 347 CNA Financial Corp. retirees whose early retirement health care allowance was cut off, the court found the promise of “lifetime” coverage meant “good for life unless revoked or modified,” Vallone v. CNA Financial Corp., 375 F.3d 623 (2004). By contrast, the 2d Circuit has provided a more expansive interpretation of ERISA’s fiduciary standard by focusing on the plain meaning of the word “lifetime.” The court found that a company might violate its fiduciary duty if it provides a lifetime benefit, but the right does not vest. Abbruscato v. Empire Blue Cross & Blue Shield 274 F.3d 90 (2001). And the 3d Circuit, in In re Unisys Corp. Retiree Medical Benefit “ERISA” Litigation, 58 F.3d 896 (1995), said that a plan administrator who knows but fails to provide information, to the detriment of beneficiaries, breaches its fiduciary duty. Lastly, the 6th Circuit has said that if a company misleads the retirees, regardless of whether it was negligent or intentional, a breach of fiduciary duty exists. James v. Pirelli Armstrong Tire Co. 305 F.3d 439 (2003). The bankruptcy route More financially troubled companies that have turned to the bankruptcy courts may have an easier time shedding retiree benefit obligations. Under Section 1114 of the Bankruptcy Code, a debtor can ask a bankruptcy judge to modify a benefit if the company can show that it negotiated in good faith with the union and it needs the change to succeed in reorganizing, according to Gary M. Kaplan, a bankruptcy and restructuring specialist with Howard Rice Nemerovski Canady Falk & Rabkin in San Francisco. “What has driven a lot of these [airline and auto-parts companies] bankruptcies has been issues of retiree pension and medical costs,” he said. Congress took notice of the hits taken by retirees and, in the bankruptcy reform law of 2005, has said that any company that modified or terminated retiree benefits within six months of filing for bankruptcy could be ordered to rescind the changes, Kaplan said. “It was no coincidence that Northwest Airlines and Delta Air Lines filed for bankruptcy on the eve of the new law taking effect,” he said. “They applied early to avoid application of that statute.” Patricia Dilley of the University of Florida Levin College of Law said that in Section 1114 of the code, “all bets can be off” for pensioners. “Health benefits can be canceled at any time. ERISA provides no protection. There is no vesting,” said Dilley, who specializes in benefits law. “Employers are terminating pension benefits right and left,” she said. “I imagine how these agreements are interpreted will have to go to the Supreme Court at some point,” she said. Meanwhile, a new front in the battle has opened in a suit by the AARP. Last year, the members challenged an Equal Employment Opportunity Commission rule that allows employers to give retirees older than 65 health benefits that are inferior to those who are younger than 65. The suit, filed in federal court in Philadelphia, contends that the practice amounts to age discrimination and is illegal under the Age Discrimination in Employment Act. AARP v. EEOC, No. 05-CV-509. It challenges a practice of separate benefits for Erie County, Pa., public employees Although the judge initially sided with AARP, formerly the American Association of Retired Persons, an intervening Supreme Court decision in an unrelated action prompted reconsideration, and the issue is now on appeal to the 3rd Circuit. The outcome could be extremely important because of the potential costs to companies if they are required to provide equal benefits, said Janell Grenier, benefits counsel with of Potter Anderson & Corroon in Wilmington, Del. “A lot of companies will just terminate benefits altogether if they have to provide equal benefits,” she said. Steelworkers attorney Jury said future prospects for protecting retiree benefits will be tough. “If you’re relying on the court to save the day, that will be a strategy that leads to distinct disappointment,” he said.

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