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Orth v. Wisconsin State Employees Union, Council 24, No. 07-2778 (7th Cir. Oct. 22, 2008)

| Oct 21, 2008 | Daily Developments in EEO Law |

To steal from the elderly, you don’t have to lurk around the local check-cashing store with a lead pipe. In this Seventh Circuit ERISA case, a union and employer pulled a fast one on retirees by stealthily raising their contributions to their own medical benefits. The retirees fight back and win!

Orth v. Wisconsin State Employees Union, Council 24, No. 07-2778 (7th Cir. Oct. 22, 2008):  The district court entered judgment for two participants who discovered that a $42,000 “bank” of accumulated sick leave,  used to pay the participants’ contribution to their retiree health benefits, was nearly depleted.  Though the collective bargaining agreement provided that the retirees’ share was 10% of the premium, the plan charged the “bank” 100% and nearly vacuumed away the entire account.  The district court awarded the retirees restoration of the money taken ($36,000 plus $7,200 premium reimbursement) and attorney’s fees ($41,000).

The defendants advanced two theories to defend their thievery, both rejected below and on appeal to the Seventh Circuit.

First, the defendants argued that the “10%” figure was a latent ambiguity that could be exposed by extrinsic evidence. After describing the famous opinion in Raffles v. Wichelhaus (a/k/a the two ships named Peerless case), 2 H.& C. 906, 159 Eng. Rep. 375 (Ex. 1864), the panel holds that there is no ambiguity at all. 

“In a case of latent ambiguity, the contract is seen, once its real-world setting is understood, to have never been clear; in a case of modification, the contract was clear when it was made but was later changed. After the extrinsic evidence was presented in the Raffles case, it was apparent that the ambiguity in the word ‘Peerless’ could not be cured because the contracting parties had not agreed on which ‘Peerless’ the cotton was to be shipped on. After all the extrinsic evidence is weighed and parsed in this case, the contract remains unambiguous.”

Second, the defendants argued that the contract was modified by subsequent dealings — that they had reached an unwritten deal to change the contribution formula.  Indeed, they held — as evidence of the modification — that other retirees had not complained about the increase. The panel writes:

“An ordinary contract can be modified by subsequent dealings that give rise to an inference that the parties agreed, even if just tacitly, to the modification (‘acquiesced,’ as the cases say, though ‘agreed’ is clearer). [Citations omitted.] But because ERISA plans must be ‘maintained pursuant to a written instrument,’ 29 U.S.C. § 1102(a)(1), only modifications of such plans in writing are enforceable, and so it would seem that the principle that contracts can be modified by the subsequent conduct of the parties is inapplicable to ERISA plans unless the conduct is proved by a writing.”

The panel notes, though, that the principle of promissory estoppel — which only seldom applies in ERISA cases — is confined to written promises, not presented here. 

The panel also considers whether the plan’s origins from a collective bargaining agreement made any difference.  “[S]uch contracts can be and often are modified by a subsequent non written agreement – whether express (and therefore oral) or tacit (and therefore evidenced by subsequent dealings) – between the union and the employer.”  But the panel holds that it would violate the union’s duty of fair representation, as well as its fiduciary duties to the participants, to modify the plan in secrecy (citations omitted below).

“[J]ust as in the collective bargaining setting, it is a breach of fiduciary duty to change the plan without notice to those affected by the change. It is also a statutory violation; a plan’s participants and beneficiaries must be notified in writing of all modifications to the plan. 29 U.S.C. § 1024(b)(1). Without knowledge of their rights under the plan, participants cannot make intelligent decisions with regard to the purchase of private health insurance to replace or supplement their plan benefits. The secret side deal between the union and the employer in this case was a breach of the plan managers’ fiduciary duty to the plan participants and beneficiaries. So it is doubly unlawful-as unwritten and as secret.”

The panel also affirms the award of damages, and the fees, taking a parting shot at the defendants: 

“The judge made no mistake. No careful lawyer could have thought this a case of latent ambiguity or valid modification. And for the defendants to use their deceptive conduct toward the retired employees as a basis for trying to duck liability was shabby. The only questionable aspect of the district judge’s opinion is his statement that the defendants were acting throughout in good faith.”

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