Firms Claim Right to Change Coverage, Attempt to Pick Sympathetic Courts.

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End Run

Companies Sue Union Retirees To Cut Promised Health Benefits

Firms Claim Right to Change Coverage, Attempt to Pick

Sympathetic Jurisdictions

The Process Server Pays a Call

 

By ELLEN E. SCHULTZ

Staff Reporter of THE WALL STREET JOURNAL

November 10, 2004; Page A1

 

When a deputy sheriff came to his door with a court summons, George

Kneifel, a retiree in Union Mills, Ind., was mystified. His former

employer was suing him.

 

The employer, beverage-can maker Rexam Inc., had agreed in labor

contracts to provide retirees with health-care coverage. But now the

company was asking a federal judge to rule that it could reduce or

eliminate the benefit.

 

Many companies have already cut back company-paid health-care coverage

for retirees from their salaried staffs. But until recently, employers

generally were barred from touching unionized retirees' benefits

because they are spelled out in labor contracts. Now, some are taking

aggressive steps to pare those benefits as well, including going to court.

 

In the past two years, employers have sued union retirees across the

country. In the suits, they ask judges to rule that no matter what

labor contracts say, they have a right to change the benefits. Some

companies also argue that contract references to " lifetime " coverage

don't mean the lifetime of the retirees, but the life of the labor

contract. Since the contracts expired many years ago, the promises,

they say, have expired too.

[Kneifel]

 

The companies taking such steps remain a minority. Most big employers

continue to provide the retiree health coverage spelled out in labor

contracts. But the number of employers using the courts to attempt to

reduce benefits for union retirees is rising, and some have been

successful. " There's absolutely no doubt that there's been an

increasing number of cases over the past three years, " says Richard

Brean, associate general counsel of the United Steelworkers of America.

 

They have little to lose by trying. Typically, as such legal cases

drag on, the employers save money as some of the retirees, who have to

pay growing portions of their health-care costs, forgo costly care,

drop out of the plans or die. If companies lose in court, the worst

that happens is they have to resume paying benefits. They don't face

punitive damages or penalties. And they may not have to resume

benefits for those retirees who dropped out of the health plans.

 

What's more, their earnings get a pop. That's because at the same time

as they sue, employers typically announce reductions in the retirees'

benefits. Doing so entitles them to lessen the liabilities carried on

their books. Lower liabilities translate to higher earnings.

 

The retirees, by contrast, often find themselves in a bind -- unsure

of their recourse and facing, as they age, the court system's typical

long waits for legal resolution. The U.S. Labor Department is of

little help. Retired workers " aren't our constituents anymore, " says a

spokeswoman for the department.

 

Unions often do go to bat for retirees. The United Auto Workers and

the Steelworkers have been the most active in filing suits to protect

retirees whose benefits a company has unilaterally changed. But unions

aren't allowed to strike or file unfair-labor-practice complaints on

behalf of retirees.

 

Employers that want to cut union retirees' health coverage or make

retirees pay a larger portion could just impose changes and wait to be

sued. But by suing first, they stand a chance of choosing the

jurisdiction. This is important, because federal circuits' appellate

courts tend to take differing positions in these disputes. Indeed, the

unsettled nature of the law on these issues -- with employers'

arguments sometimes succeeding and sometimes not -- may be a factor

prompting some companies to have a go at gaining the legal right to

change benefits.

[nowides] RELATED ARTICLE

• Page One: Plaintiff Cry: When Retirees Sue an Ex-Employer

 

 

 

 

One afternoon last December, Basil Chapman was sitting on his porch in

Barboursville, W.Va., with his dog, Bo, when a union representative

phoned the retiree to say an executive of his former employer wanted

to speak to him. Mr. Chapman called the executive, at ACF Industries

Inc., a railroad-car maker where Mr. Chapman worked for 38 years. He

was told ACF was going to change health coverage, making retirees pay

for a portion that previously was free.

 

" We have a contract. You can't do that, " Mr. Chapman said, according

to court papers later filed by ACF. " We will file in federal court

against you b-----ds. " Asked about this, Mr. Chapman, who is 60, says

he didn't swear on the phone.

 

The next Monday, ACF, which financier Carl Icahn controls through an

investment vehicle, sued Mr. Chapman in federal district court in St.

Louis. The company asked the court to rule that it had the right to

change or terminate health coverage for 678 retirees and their

dependents. ACF said it was suing to protect itself, noting that

" defendant Chapman has already informed ACF that he plans to file a

lawsuit concerning the amendments of the plan. "

 

" I can't understand why they're picking on me, " Mr. Chapman says. " I'm

just a retired guy who was sitting on my porch. "

[nowides] CO-PAY BLUES

[Co-Pay Blues]

This week, the Online Journal looks at the financial burdens facing

health-care consumers who have insurance and offers advice on handling

medical expenses.

 

Do you have questions or ideas about selecting health-care coverage

and managing your family's costs? We invite you to participate in a

discussion with health-insurance and benefits experts.

 

Monday: The lines between HMOs and PPOs are blurring. Here's how to

choose the right plan option for you.

 

Tuesday: Dr. Benjamin Brewer, in his Doctor's Office column, talks

about how insurance coverage affects the patients that doctors agree

to service.

 

Thursday: Fiscally Fit columnist Terri Cullen focuses on the quandary

patients face when health-care providers charge more than what

insurers will pay.

 

 

 

 

Employers that sue retirees name one person or a handful. They may

choose people at random, retirees who have complained, or people who

were active in the union that negotiated the contract at issue. Mr.

Chapman, who repaired equipment and stenciled names on railroad cars

at ACF, also headed a Steelworkers bargaining committee. The named

defendants represent the " class " of retirees.

 

Key Contract Element

 

Mr. Chapman says health coverage for retirees was a key element of

labor contracts he helped negotiate in 1995. Up to then, although the

company paid 100% of hospitalization and surgical coverage, retirees

paid for major medical. But their premiums for that coverage had risen

so high that many had dropped it.

 

To make health coverage affordable for future retirees, the union

accepted lower starting pay for new workers in exchange for lower-cost

major medical coverage for retirees. According to the contract, any

employee retiring during the term of the agreement " will contribute a

flat $100 per month for life towards the cost of such coverage. The

Company will pay any additional required costs. "

 

The company doesn't dispute that the contract says that, but it says

that " $100 per month for life " referred only to the major medical

coverage, not explicitly to the hospital/surgical portion.

 

In addition, it believes the agreements to provide health coverage to

retirees expired with the contracts, said Marc Weitzen, general

counsel for ACF at Icahn & Co. in New York, in an interview.

 

The retirees, represented by the union, countersued to dismiss the

complaint. They contended ACF had gone through " the charade of

telephoning retiree Mr. Chapman about the cuts, just so it could

provoke a predictable negative reaction and then use the reaction to

immediately sue. "

 

The retirees said ACF had sued in St. Louis, which is part of the 8th

federal circuit, because it " apparently believes that the 8th Circuit

is more favorable to employers in retiree medical benefits cases, and

apparently feels that its chances are improved if it makes the

retirees litigate hundreds of miles from their homes. "

CREATIVE STRATEGIES

Companies that cut retiree health benefits promised in writing may use

one or more arguments or tactics:

 

• Escape Clause: Insert sentence in benefit plan saying company

" reserves the right " to change benefits.

 

• 'Life' Line: Argue that " lifetime coverage " refers to life of the

contract, not lives of retirees.

 

• Fine Print: Say that retirees signing health-plan enrollment forms

waived prior agreements.

 

• Trip to Court: Sue retirees, ask court to declare company has right

to cut benefits.

 

Source: WSJ research

 

 

 

 

Most of ACF's retirees live in West Virginia, in the 4th Circuit,

where a court favored union retirees in an earlier decision. The

retirees asked the judge to dismiss the case or transfer it to the

southern district of West Virginia.

 

Mr. Weitzen at Icahn & Co. said ACF sued in Missouri because it

administers the benefits plans from there. He added, " As with many

other U.S. businesses, ACF believes it has the right to pass along

certain of its health-insurance costs to retirees. "

 

It is legal and common for litigants to try to pick a favorable

jurisdiction. If two parties sue each other, the courts generally hear

the case that's filed first. But a court can dismiss or transfer a

case if it believes a company is " forum shopping " or suing retirees as

a pre-emptive strike to deprive them of their rights, as " natural

plaintiffs, " to sue in the court they would choose.

 

That happened in this case. In August, the court in St. Louis --

saying it appeared ACF's move " resulted in a proverbial race to the

courthouse in order to deprive defendants of their choice of forum " --

moved the suit to federal court in Huntington, W.Va. The case is ongoing.

 

But a different court came to the opposite conclusion regarding Rexam,

illustrating why employers make these legal thrusts at retirees.

 

In early 2002, Rexam raised retirees' share of the cost of

prescription drugs. " For people getting a pension of $300 to $400 a

month, it ate their whole pension, " says Mr. Kneifel, the retiree in

Union Mills, Ind., who is 65.

 

For more than a year, retirees complained to the company that it had

no right to change negotiated agreements, which stated that

" Company-paid major medical coverage will be provided for all

retirees, " and specified what the retirees' costs would be.

 

'Reserves the Right'

 

Rexam responded that a booklet describing the coverage contained a

clause that said the company " reserves the right to amend, modify or

discontinue the plan in the future in conformity with applicable

legislation. "

 

The retirees said the clause meant that if government legislation or

regulations changed, then the plan might have to be modified

accordingly. It didn't give the company a right to unilaterally change

the agreement, retirees said, pointing to another clause specifically

stating that the right to modify the benefits " was subject to any

applicable collective bargaining agreement. "

 

In May 2003, Rexam sued the retirees, asking a federal court to

declare that it had the right to change their benefits.

 

It filed in Minneapolis. The appearance of a deputy sheriff bearing a

summons to court 475 miles away was a shock to Mr. Kneifel. " I'm glad

I was home when they came, because my wife had a stroke about six

years ago, " he says. " Suing retirees is a cowardly way to go about the

whole thing. "

 

The retirees, represented by the Steelworkers, countersued in Toledo,

Ohio, asking that the case be dismissed or transferred there. They

said Minnesota was home to only 100 of the 3,600 retirees and that

Rexam had made a pre-emptive legal strike to choose the jurisdiction.

The business, which was called American National Can Co. before its

2000 purchase by Rexam Inc., is based in Chicago and has offices in

Charlotte, N.C. It is a subsidiary of Britain's Rexam PLC.

 

The judge in Minneapolis rejected the retirees' arguments. Because

they had not been planning to sue Rexam, they couldn't claim Rexam was

suing in a pre-emptive strike, said Judge Ann Montgomery. She let the

case stay in Minneapolis because Rexam employs 115 people in St. Paul

and has retirees in Minnesota.

 

Judge Montgomery also said she was allowing the suit to move forward

" in the interests of justice. " She cited a liability for the benefits

on Rexam's balance sheet and said the company was harmed " because it

cannot lower the liability unless it reduces the retirees' benefits. "

The case is pending.

 

A Rexam spokesman said with health-care costs rising, the company

" must do what we can to address these costs " to remain competitive,

but will continue to provide retirees with fair coverage.

 

Gradual Erosion

 

The erosion of legal protection for retiree health benefits has been

gradual. When medical costs began to rise steeply in the 1980s,

employers first started to cut benefits for salaried retirees. If

sued, employers pointed to clauses they had added to the health plans'

technical documents. The clauses said the employer reserved the right

to change the benefits.

 

Retirees complained that the clauses were buried in long technical

documents they often didn't know existed. (Companies must provide

employees a summary of these documents when they first become

health-plan participants; the summaries may or may not include the

clauses at issue.) The retirees also pointed to employer literature

referring to lifetime coverage. Nonetheless, courts began accepting

company arguments.

 

A key case involved cuts by General Motors Corp. in coverage it had

offered to 50,000 salaried employees over the years to induce them to

retire early. A 6th Circuit appellate court ruled in 1998 that what

mattered weren't brochures that advised prospective retirees that

health coverage would be provided " at GM's expense for your lifetime, "

but a clause in which GM reserved the right to alter benefits.

Although dissenting judges assailed this reasoning, and the federal

circuits remain divided about it, salaried retirees have steadily lost

in benefits cases ever since.

 

Union retirees were more secure because their benefits were part of

negotiated contracts. But after the GM ruling, more employers began to

argue that that decision's logic applied to union retirees, as well,

and some courts agreed.

 

Meanwhile, over the years some employers also have argued that

promises of lifetime coverage expired when the contracts expired, or

were canceled out by clauses noting how long the contracts would run.

Initially, courts rejected those arguments, saying general " duration

clauses " in contracts refer simply to the period of the contract, and

pertain to salary and benefits for active employees, not to benefits

for retirees.

 

But some courts in the past decade have accepted these employer

arguments. The federal circuits are split.

 

Retirees who go to court on their own to contest cuts in their

benefits face a hard road.

 

Employers generally use a combination of arguments when they

unilaterally change union retirees' health coverage and file suit

against the retirees.

 

Serving Papers

 

Asarco Inc. told retirees in mid-2003 that it was raising their

health-care premiums. As it did so, the copper company sent summonses

to some retirees in Arizona, where many live, telling them they were

defendants in a suit it was filing in Phoenix.

 

The suit pointed to a clause in health-plan documents saying, " The

Company reserves the right to amend or terminate the Plans at any time

for any reason....even after you retire. "

 

In addition, Asarco pointed to general " duration clauses " in the

contracts, which said the agreements expired when the labor contracts

did. The agreements that expired, the company said, included the one

to provide retirees with health coverage until they qualify for Medicare.

[Yarter]

 

Retired Asarco miner Chuck Yarter learned he was being sued when he

got a call from a process server trying to find his remote home in the

Sonora Desert near Marana, Ariz. Mr. Yarter, 61, says he told the man

how to find his modest 625-square-foot house, which sits at the end of

a dirt road, with a distant view of the open-pit Silver Bell copper

mine where Mr. Yarter was a mechanic on heavy equipment.

 

He smiles recalling the visit: His black dog, Lady, wouldn't let the

visitor out of his car. The process server handed the papers through

the car window before trundling away through the saguaro and mesquite.

" I've never been served papers in my life, " Mr. Yarter says.

 

In its July 8, 2003, letter to him and other retirees, Asarco, a unit

of Grupo Mexico SA, said: " As you know, the past several years have

been very difficult for the copper industry. The continuing low copper

prices and escalating medical costs force us to make these changes. "

 

Mr. Yarter, who monitors copper prices on the Internet, says Asarco is

just making excuses. Copper prices have nearly doubled since the July

2003 letter, to about $1.36 a pound from 76 cents.

 

Asarco, in a statement, said it acted in response to " the constantly

escalating " cost of providing medical and drug coverage, saying it

must control costs because it can't control what it gets for its

copper. It said it continues to make coverage available " at a

reasonable cost, " declining further comment because the case is in

litigation.

 

Three unions filed a counterclaim on retirees' behalf against Asarco:

the Steelworkers, the International Brotherhood of Electrical Workers

and the International Chemical Workers. The retirees' suit says that

the duration clauses weren't meant to limit the retirement benefits of

people who had already retired, " as such retirement benefits were

meant to last during retirement independent of the expiration of

agreements applicable to active employees. "

 

It added that the " alleged 'severe financial distress' has not

prevented the Company from paying its top management quite

handsomely. " And it said that " 'unforeseen circumstances' do not

justify a breach of contractual obligations ... to persons living on

fixed income who can ill-afford to pay the costs the company has

shifted upon them. "

 

Since Asarco imposed the changes, Mr. Yarter's share of premiums,

deductibles and co-payments has grown to consume half of his $1,005

monthly pension. He says he is staying in the plan anyway, because his

wife, Frances, has diabetes.

 

But Larry Bracamonte, 64, with a pension of $448 a month, is among

Asarco retirees who have dropped the plan as a result of the increase.

He works at a furniture store, and twice a month, he drives a van full

of Arizona retirees five hours to Algodones, Mexico, to buy

prescription drugs more cheaply than in the U.S. He says a neighbor

can't afford even the lower-cost Mexican drugs on her Asarco widow's

pension of $54 a month, so she gets drugs from a state program for

low-income people.

 

Mr. Yarter says he's in better shape than many Asarco retirees. " I did

all the retirement planning you're supposed to do, " he says. " I

decided I could afford to retire. " After retiring, he studied computer

programming and obtained an associate's degree in systems administration.

 

Now he's looking for work, so far without success. " If the company

kept its promise, I'd be all right, " he says. " Nobody ever thought the

company would try to renege on a contract like that. "

 

Write to Ellen E. Schultz at ellen.schultz