3872192286_afb40f2b92_zLate in its May term, the Illinois Supreme Court heard oral arguments in Matthews v. Chicago Transit Authority, which poses the question of whether the health care benefits of Chicago Transit Authority employees and retirees are vested, and therefore immune from reduction. Our detailed summary of the underlying facts and lower court holdings in Matthews is here.

The complaint in Matthews set forth two classes of plaintiffs: CTA employees hired before September 2001 who retired before January 1, 2007, and employees hired prior to September 2001 who either retired in 2007 or later, or remain active employees. The complaint purports to allege claims for breach of contract, violation of the state Constitution’s pension clause and breach of fiduciary duty.

The pension plan defendants moved to dismiss the complaint on various grounds, including that the plaintiffs’ health care benefits were not vested, and the pension clause of the state constitution doesn’t apply to health care benefits. The CTA filed a separate motion to dismiss, arguing that it was not a proper party to the lawsuit. The trial court held that the current employees lacked standing, and dismissed the remainder of the action for failure to state a claim. The Appellate Court affirmed in part and reversed in part, holding that current employees lacked standing, but that retirees had a viable claim against the CTA for promissory estoppel and declaratory judgment. Following the decision of the Third District in Marconi v. City of Joliet, the Court held that health care benefits were presumptively vested, and that nothing in the agreements overcame that presumption.

Counsel for the CTA began the argument. Counsel argued that the parties’ agreements clearly provide that pension benefits are vested, but other contract benefits are subject to modification. The presumption applied by the Appellate Court turned well-settled principles of contract law on their head, counsel argued. The Court has made clear in Heaton and Kanerva, according to counsel, that the pension protection clause protects the contract the parties entered into, not benefits per se. Counsel concluded by briefly addressing the Appellate Court’s holding that plaintiffs had a viable claim against the CTA for promissory estoppel, noting that promissory estoppel against a municipality requires extraordinary and compelling circumstances not present in Matthews.

Counsel for the Retirement Plans and Trusts followed. Counsel argued that the contract is unambiguous with respect to whether retiree health benefits are vested. The Marconi decision on which the Appellate Court based its presumption ultimately derives from a Sixth Circuit decision called Yard-Man, counsel argued – but Yard-Man was unanimously rejected by the U.S. Supreme Court while briefing was underway in Matthews. When the parties to the contracts wanted to provide that rights were vested, they knew how to do it – the word “vest” is used ten times in Section 11 of the agreement, counsel argued, while Section 20 relating to health care benefits doesn’t use the word even once. Counsel noted that although the Appellate Court didn’t reach the constitutional issue, nothing in the pension protection clause prevented adjustments made through usual contract principles. Justice Kilbride asked counsel whether he was going to address the plaintiffs’ request for a remand. Counsel answered that there was no need for a remand if the Court agreed that the contract was unambiguous and health benefits weren’t vested.

Counsel for the retirees and employees was next. He asked for a ruling that current employees have standing to sue and that all pre-2001 retirees have vested rights to a paid health care benefit. Given that paid health care benefits have been part of the retirement system for thirty years, counsel argued, they cannot be diminished through collective bargaining without the agreement of all individual plan participants. Justice Kilbride asked counsel if he as saying that the union needed individual participation from each member of the plan in order to waive any rights, and counsel said yes – vested rights can be created through bargaining, but they cannot be waived that way. Justice Karmeier asked if that meant that a subsequent agreement could have no effect on the previous one. Counsel said that for current participants who had a vested right in health care benefits, the answer was no – a subsequent agreement could not waive their rights without their separate consent. According to counsel, the terms of the pension protection clause mean that all the benefits of the retirement system automatically vest whether or not the contracts specifically say so. In addition, any ambiguity must be resolved in favor of the retirement plan participant. Counsel argued that annuities and health care benefits are fundamentally different from other non-pecuniary terms of the collective bargaining agreement. Justice Thomas asked what role consideration has in all this. Counsel answered that the union could bargain over certain benefits, but couldn’t bargain away vested benefits. Therefore, counsel argued, it was not essential that the contracts specify that health care benefits vested, although he believed that the contract did indeed so provide. Counsel argued that if his current employees didn’t have standing, then logically they couldn’t have standing to protect their rights under the pension protection clause either. The unions’ obligation to defend the rights of its membership were not an adequate substitute for individual rights to redress. Justice Kilbride asked whether the relevant contracts were subject to a union ratification vote, and counsel agreed they were. Justice Kibride asked if counsel was suggesting that it would take 10,000 separate ratifications to approve what the union had negotiated. Counsel agreed that was correct, and suggested that a simple vote on the contract wouldn’t be enough – it would require an individual contractual waiver, agreeing to change an employee’s benefit in return for sufficient consideration.

Counsel for the Retirement Plans and Trusts led off the rebuttal. Counsel argued that vested rights arose from the pension protection clause, but that was the whole issue in the case – whether the rights were vested at all. The pension clause doesn’t vest anything, counsel argued – it protects a contractual relationship.   The question was whether health care benefits were vested under the parties’ agreement, and the answer was no. Counsel concluded by pointing out that in return for the changes in health care benefits, the retirees had received a cap on their premium, plus a $2.5 million infusion into the pension fund.

Counsel for the CTA began his rebuttal by arguing that health care benefits had always been subject to modification at any time. Counsel agreed with counsel for the Plans and Trusts that the pension protection clause merely protects the contract the parties entered into. Counsel noted that plaintiffs’ counsel had called for individualized consent from all 10,000 employees, but argued that that was an invitation to chaos. The retirees and employees had received fair consideration for the changes to health care premiums, counsel argued in conclusion.

We expect Matthews to be decided in three to four months.

Image courtesy of Flickr by EmilyDickinsonRidesaBMX (no changes).