Opposition Brief — Musto v. American General Corp.

No. 88-1376

IN THE

Supreme Court of the United States

October Term, 1988

ROBERT L. Musto, et al.,

Petitioners,

us.

AMERICAN GENERAL CORPORATION, et al.,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Sixth Circuit -

BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

SIDNEY O. SMITH, JR.

(Counsel of Record)

PHILIP C. Cook

WILLIAM C. HUMPHREYS, IR.

GREGORY C. BRADEN

Alston & Bird

One Atlantie Center

Atlanta, Georgia, 30309-3424

LARRY D. KING

Associate General Counsel

American General Corporation

2929 Allen Parkway

Houston, Texas 77019

Attorneys for Respondents

i

QUESTIONS PRESENTED

1. Whether the United States Court of Appeals for the

Sixth Cireuit (“Court of Appeals”) erred in holding that the

terms of the written employee welfare benefit plan sponsored

by Respondents will be the primary determinant of Petitioners’

benefits under the plan.

2. Whether the Court of Appeals committed reversible

error by applying a uniform body of federal common law

developed under the Employee Retirement Income Security

Act of 1974 (“ERISA”), rather than state insurance law, to

interpret the terms of the employee welfare benefit plan spon-

sored by Respondents.

STATEMENT OF CORPORATE AFFILIATES PURSUANT

TO SUPREME COURT RULE 28.1

See Appendix.

ii

TABLE OF CONTENTS

nnr

STATEMENT OF CORPORATE AFFILIATES

PURSUANT TO SUPREME COURT RULE 28.1.

— ¼⁰- % Ä-.-Uſ—ů

po OE a ie gy i en ere

STATement OF THE CASE ..........ccsccceces

SUMMARY OF ARGUMENT .....................

REASONS FOR DENYING THE WRIT...........

I. PETITIONERS’ ADVOCATED COMMON

LAW VESTING RULE FOR RETIREE

MEDICAL PLANS DOES NOT RAISE AN

ISSUE REQUIRING THE COURT’S

V OA ——— ere re

A. There is No Confliet Among the Courts of

Appeals over the Application of a

Common Law Vesting Rule to Retiree

%«öÜͤ—Ü er rere

B. Petitioners’ Advocated Common Law

Vesting Rule for Retiree Medical Plans

Never Existed Before ERISA; Therefore,

the Petition Raises No Question of a

Conflict with ERISA...... Sra

1. No Pre-ERISA Case Gives Retired

Employees the Right to Veto

Modifications in Their Medical Plan

Where the Employer Has Reserved

the Right to Make Such

% ne er mere

2. Petitioners’ Reliance on the

Unilateral Contract Doctrine

3 Ae c b ikl,

iii

Applicable to Pension Plans Before

ERISA is Inappropriate .......... 9

C. Congress Consciously Chose to Reject

Vesting of Retiree Medical Benefits

Under ERISA and to Preempt State

Law; Therefore, the Courts Are Not Free

to Impose Vesting Requirements on

Retiree Medical Plans................ 10

II. THERE IS NO DISAGREEMENT AMONG

THE CIRCUITS OVER THE PROPER

CONSTRUCTION OF RETIREE MEDI-

/ a 15

, 18

iv

TABLE OF AUTHORITIES

Adickes v. S. H. Kress d Co., 398 U.S. 144 (1970)

Alessi v. Raybestos- Manhattan, Inc., 451 U.S. 504

hh/;õꝰ” 0 64

Anderson v. Alpha Portland Indus., Inc., 836 F. 2d

1512 (8th Cir. 1988), cert. denied, 57 U.S. L. W.

3565 (U.S. Feb. 27, 1989) (No. 87-2022)

Anderson v. John Morrell & Co., 830 F.2d 872

, ² ² 0òre !

Commissioner v. Asphalt Prod. Co., 482 U.S. 117

/// A ‚— 5 se

Commissioner v. Gordon, 391 U.S. 83 (1968)

Davis v. United States, 417 U.S. 333 (1974)

DeGeare v. Alpha Portland Indus., Inc., 837 F. 2d

812 (8th Cir. 1988), vacated on other grounds,

57 U.S.L.W. 3565 (U.S. Feb 27, 1989) (No. 87-

— ⁵ͥA—U . ³——Q

Delta Air Lines, Inc. v. August, 450 U.S. 346

hy, bedkeheneSet keene’ ss

In re Erie Lackawanna Ry., 548 F.2d 621 (6th

eee cent ea idk wih aes 440.0 ©

Hoefel v. Atlas Tack Corp., 581 F.2d 1 (1st Cir.

1978), cert. dented, 440 U.S. 913 (1979).......

International Union, LUA. W. v. Cadillac Malleable

Iron Co., 728 F.2d 807 (6th Cir. 1984)

International Union, LUA. W. v. Yard-Man, Inc., 716

F.2d 1476 (6th Cir. 1983), cert. denied, 456

ft: | Re er eee

Mackey v. Lanier Collection Agency & Service,

.

Massachusetts Mut. Life Ins. Co. v. Russell, 473

,, ⅛ - Ä

Melin v. Northwestern Bell Tel. Co., 266 N. W. 2d

,, ̃²˙ ²˙ *ͥkd ree re ree

12,16

e eee

Metropolitan Life Ins. Co. v. Massachusetts, 471

, ˙ r.

Molnar v. Wibbelt, 789 F.2d 244 (3d Cir. 1986)

Moore v. Metropolitan Life Ins. Co., 856 F.2d 488

7 A ĩ WHWW aes

Nachman Corp. v. P. B. G. C., 466 U.S. 359 (1980)

Pilot Life Ins. Co. v. Dedeauz, 481 U.S. 41 (1987)

Schlosser v. Allis-Chalmers Corp., 271 N.W.2d 879

J 6d SREY. SESH us Sida ds va wabed ve

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983)

Sheehy v. Seilon, Inc., 227 N.E.2d 229 (Ohio

—A (

Struble v. New Jersey Brewery Employees’ Welfare

Trust Fund, 732 F.2d 325 (3d Cir. 1984)..... .

Turner v. Local Union 302 Int’l Bhd. of Teamsters,

604 F.2d 1219 (9th Cir. 1979) ...............

United States v. Mendenhall, 466 U.S. 544 (1980)

Van Orman v. American Ins. Co., 680 F.2d 301

/// kB kg eee koi. ess.

In re White Farm Equip. Co., 42 Bankr. 1005

(N.D. Ohio 1984), rev’d., 788 F.2d 1186 (6th

% ··¹¹ ³5»ö³·³ -W .

In re White Farm Equip. Co., 788 F.2d 1186 (6th

EERE Sn ne ˙

FEDERAL STATUTES

ERISA § 3(1), 29 U.S.C. § 1002 (1) (1982) .....

ERISA § 201, 29 U.S.C. § 1051 (1982) .........

ERISA § 402(a), 29 U.S.C. § 1102(a) (1982) ...

ERISA § 402(b) (3), 29 U.S.C. § 1102(b) (3)

— ·⅛·¹¹wm sdeeddcccecess

ERISA § 404 (a) (1) (D), 29 U.S.C.

JJ ͤ ²˙ -

ERISA 5 514 (a), 29 U.S.C. § 1144 (a) (1982) ...

ERISA § 514 (b), 29 U.S.C. § 1144 (b) (1982)

Page

12,13,14

6

6,9

10

13

8

12,13

8

6

7

13,14

13,14

OTHER

„„ „„ „„ „ „ „ „ „ „ „ „ „

/b „ err

H.R. Rep. No. 807, 93d Cong., 2d Sess., reprinted

in 1974 U.S. Code Cong. & Admin. News 4670

H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess.,

reprinted in 1974 U.S. Code Cong. & Admin.

PO Ne aa bas wee cnc te eae es ees Bee cote

S. Rep. No. 127, 93d Cong., 2d Sess., reprinted in

1974 U.S. Code Cong. & Admin. News 4838 ...

ae

— ee se

STATEMENT OF THE CASE

In 1945, the National Life and Accident Insurance Com-

pany (“NLA”) established a medical benefits program for its

employees (Ptnr. Apx. A, A-1).’ The medical benefits program

provided employees with reimbursement for specific types of

medical expenses up to specified dollar amounts. Subject to a

maximum lifetime benefit of $500 for all medical expenses, the

program provided medical expense reimbursement to retirees.

During the next 40 years, the program was amended

several times (Ptnr. Apx. A, A-2). Sometimes employees and

retirees were required to make contributions in order to receive

coverage under the program and sometimes they were not.” Id.

The numerous changes in the coverage provided to both active

employees and retirees were made pursuant to an expressly

reserved right to modify or terminate the program in NLA’s

sole diseretion.“ (Ptnr. Apx. A, A-2). This express reservation

appeared in the master plan documents and in the numerous

booklets and certificates distributed to Petitioners over the

years. (Ptnr. Apx. A, A-2, A-7, A-8, A-10, A-11, A-13, A-14,

’ References herein to “Ptnr. Apx.” are to the Appendix filed with the

Petition for a Writ of Certiorari and are followed by the page number of the

cited text.

* Petitioners, in the first of several incorrect “factual” statements

appearing in their Statement of the Case, allege that the “company paid for it

[the medical coverage]. Petition for a Writ of Certiorari, (hereinafter

Petition“) p. 3. In fact, the record clearly shows that contributions were

required of both active employees and retirees from time to time. Because

Petitioners do not ask the Court to review the factual findings of the Court of

Appeals, they are not free to ignore them in their Statement of the Case.

* Petitioners allege as fact that “Respondents never claimed the right to

reduce the benefits of employees who had already retired.” (Petition p. 3).

Once again, Petitioners ignore the record. The Court of Appeals found just

the opposite (Ptnr. Apx. A, A-2, A-6, A-7, A-8). Even the District Court,

which held in Petitioners’ favor, found that, “[t}he termination/modification

clause contained in the NLT/NLA summary plan descriptions, clearly and

expressly reserve (sic) the right to amend or terminate the medical insur-

ance benefit plan.” (Ptnr. Apx. B, A-62).

2

A-16, A-17). The changes generally resulted in benefit im-

provements and, by 1984, a Petitioner who retired under the

1945 program had seen the ceiling on his post-retirement

coverage increased from $500 to 8100, 000.“

In 1982, Respondent American General Corporation ac-

quired NLA and in 1984, NLA’s employee benefit programs

were modified to conform to the programs provided by Ameri-

can General Corporation to its employees and employees of its

other subsidiaries. (Ptnr. Apx. A, A-2). The changes included

reductions (for example, required contributions) and improve-

ments (for example, a doubling of the ceiling on post-retire-

ment coverage to 800,000).

Claiming that Respondents could only change their post-

retirement medical coverage for the better, and that all the

prior improvements in coverage made after their retirement

were vested, Petitioners sued in the United States District

Court for the Middle District of Tennessee (“District Court“)

to enjoin the 1984 changes.“ The District Court, relying on the

At the commencement of this action, there was a small number of

Petitioners who retired under the 1945 plan. Many more retired when

maximum limits of $5,000, $10,000, and $25,000 were in effect.

s In an apparent attempt to obtain the. Court's sympathy, Petitioners

distort the record by arguing that “Respondents terminated the medical

insurance for retirees who were unable to pay the required premium contribu-

tions. For many retirees, the contributions were more than the pension they

received.” (Petition p. 3.) This allegation finds no support in the record.

The two witnesses Petitioners presented who did not elect coverage both

testified that they elected not to enroll because they had better coverage

elsewhere. The District Court found that “it could not determine how many

[Petitioners] chose not to enroll because the cost was prohibitive.” (Ptnr.

Apx. B, A-46).

* As the Court of Appeals noted, “[r]egardless of when they had retired,

the Plaintiffs sought to freeze their medical insurance coverage at the

configuration that applied to them on June 30, 1984.“ (Ptnr. Apx. A, A-3).

Approximately 70% of the Petitioners retired before the plan they seek to

reinstate became effective. These Petitioners want to benefit from the pre-

1984 modifications to their retiree medical coverage (which they liked) and

a eee

3

state law doctrine of unilateral contract espoused in In re

White Farm Equipment Co., 42 Bankr. 1005 (N.D. Ohio 1984),

rev'd, 788 F.2d 1186 (6th Cir. 1986), found that the modifica-

tion/termination clause in the plan documents was unenforce-

able unless plan modification was necessary to prevent

insolvency. (Ptnr. Apx. B, A-65). Based upon this holding,

the District Court issued a preliminary injunction restraining

Respondents from making any further changes in the post-

retirement medical program. (Ptnr. Apx., A, A-34).

Respondents appealed and, on November 15, 1989 “after a

careful search of the record,” the Court of Appeals reversed

the District Court, finding that Petitioners had failed to estab-

lish the requisite probability of success on the merits of their

claims.’ (Ptnr. Apx. A, p. A-33). Specifically, the Court of

Appeals found that Respondents had clearly and consistently

reserved the right to modify the post-retirement coverage in

claim the modification clause is not enforceable for the 1984 changes (which

they did not like).

In yet another mischaracterization of the Court of Appeals’ decision,

Petitioners allege, The Sixth Circuit determined that as a matter of law.

[bJecause ERISA does not require vesting of welfare plans, an employer may

change or terminate those plans at any time for any reason no matter what

the reasonable expectations of the Retirees” (Petition, p. 4). On the

contrary, the Court of Appeals devoted no less than 15 pages of its opinion

(Ptnr. Apx. A, A-9 through A-23) to an exhaustive analysis of the Petition-

ers’ reasonabie expectations based on information given to Petitioners

concerning their coverage. The Court of Appeals concluded:

Nowhere in that or any other employee publication — or in any memo-

randum, letter, brochure, report, or other written document, as far as we

have been able to ascertain after a careful search of the record — did the

company ever promise any employee that all premiums for post-retire-

ment medical coverage would be irrevocably “paid up“ upon the em-

ployee's retirement. (Ptnr. Apx. A, A-21).

Nowhere in the district court's opinion is there a specific finding that

any National Life employee received an oral promise that his post-

retirement medical insurance coverage would be permanently, irrevoca-

bly, and fully “paid up.” (Ptnr. Apx. A, A-23).

4

the master plan documents (insurance policies) and in the

many written communications issued to Petitioners describing

the program. (Ptnr. Apx. A, A-2, A-7, A-8, A-10, A-11, A-12,

A-13, A-16, A-17, A-19, A-21, A-23). Moreover, the Petitioners’

coverage had been modified several times in the past by

Respondents without objection in accordance with this re-

served right. (Ptnr. Apx. A, A-2).

SUMMARY OF ARGUMENT

Petitioners ask this Court to review the Court of Appeals’

decision for the purpose of considering adoption of a common

law vesting rule which would prever“ the sponsor of a retiree

medical benefit plan from ever changing the coverage provided

to any retiree regardless of whether the plan’s written terms

permit changes and regardless of whether the plan has been

changed in the past in accordance with its terms.“ Petitioners

also urge the Court to grant certiorari and find that the Court

of Appeals erred by failing to apply a ‘doctrine of reasonable

expectations” alleged to exist under state insurance law in

interpreting the documents governing the retiree medical bene-

fit plan. (Petition p. 11).

The Petition should be denied because it raises none of the

considerations governing review on certiorari. U.S. Sup. Ct.

R. 17.

With respect to Petitioners’ advocated common law vest-

ing rule, the decisions of the United States Courts of Appeals

are in complete accord. Every circuit that has been asked to

adopt the rule has rejected it.“ Similarly, there is no important

question of federal law to be settled by this Court because the

basic premise of Plaintiffs’ argument — that the Court of

Appeals’ construction of ERISA destroys preexisting em-

* Although Petitioners disguise their common law vesting rule as the

“doctrine of unilateral contract” (Petition, p. 6), it is nothing more than a

mandatory vesting rule for retiree medical plans.

No conflict with a state court of last resort or with the prior decisions

of this Court is alleged and none exists. U.S. Sup. Ct. R. 17.1.

5

ployee rights — is false. There was no pre-ERISA common law

or statutory rule applicable to Petitioners or the public gener-

ally which prohibited modification of a post-retirement medical

program. Even if there was, Congress answered the question

Petitioners now submit to this Court by explicitly excepting

medical benefit plans from the plans subject to ERISA’s

vesting requirements and by broadly preempting the state law

upon which Petitioners base their arguments.

With respect to Petitioners’ assertion that the Court of

Appeals’ decision conflicts with other circuits because it did

not apply insurance law in interpreting the plan, this argument

is made for the first time in the Petition and is simply a plea

for this Court to reconsider the factual findings of the Court of

Appeals.“ There is no conflict among the circuits over the

application of state insurance law to interpret medical benefits

plans under ERISA. Morecover, the Court of Appeals’ exten-

sive factual findings, which are not reviewable absent gross

error, conclusively establish that Petitioners could never have

reasonably expected what they now demand.

10 Petitioners argued below that the federal common law would control

their entitlement to benefits. They have never before argued that state

insurance law should apply in construing the terms of the plan documents.

The District Court held that all Petitioners’ state law claims (which did not

include insurance law claims) were preempted. (Ptnr. Apx., A, A-53). This

holding was not disputed by Petitioners on appeal. Having lost under the

federal common law they advocated, Petitioners now ask this Court to give

them an opportunity to prove their case under state insurance law.

“Ordinarily, this Court does not decide questions not raised or involved

in the lower court.” Youakim v. Miller, 45 U.S. 231, 234 (1976); See also

United States v. Mendenhall, 446 U.S. 544, 551-52 n. 5 (1980); Adickes v. S. H.

Kress & Co., 398 U.S. 144, 147 n. 2 (1970); Delta Air Lines, Inc. v. August, 450

U.S. 346, 362 (1981) (question presented in petition but not in court of

appeals is not properly before the Court).

6

REASONS FOR DENYING THE WRIT

I, PETITIONERS’ ADVOCATED COMMON LAW VEST-

ING RULE FOR RETIREE MEDICAL PLANS DOES

NOT RAISE AN ISSUE REQUIRING THE COURT’S

REVIEW.

A. There Is No Conflict Among the Courts of Appeals over

the Application of a Common Law Vesting Rule to

Retiree Medical Plans.

The Courts of Appeals are unanimous in their rejection of

the common law vesting rule advocated by Petitioners. Moore

v. Metropolitan Life Ins. Co., 856 F.2d. 488, 491 (2d Cir. 1988)

(“Automatic vesting does not occur in the case of welfare

plans”); Anderson v. Alpha Portland Indus., Inc., 836 F.2d

1512, 1516 (8th Cir. 1988), cert. denied, 57 U. S. L. W. 3565 (U.S.

Feb. 27, 1989) (No. 87-2022) (“welfare benefits do not auto-

matically vest as a matter of law”); DeGeare v. Alpha Portland

Indus., Inc., 837 F.2d 812, 815 (8th Cir. 1988), vacated on other

grounds, 57 U.S.L.W. 3565 (U.S. Feb. 27, 1989) (No. 87-2070)

(Accord with Anderson v. Alpha-Portland Indus., Inc.); Ander-

son v. John Morrell & Co., 830 F.2d 872, 876 (8th Cir. 1987),

(Accord with DeGeare); Molnar v. Wibbelt, 789 F.2d 244, 250

(3d Cir, 1986) (“Unlike rights to pension benefits, rights to

welfare benefits do not automatically vest as a matter of law“);

In re White Farm Equip. Co., 788 F.2d 1186, 1193 (6th Cir.

1986) (we discern no basis for finding mandatory vesting in

ERISA of retiree welfare benefits”); International Union,

UA. W. v. Cadillac Malleable Iron Co., 728 F.2d 807, 808 (6th

Cir. 1984) (“we agree. . that there is no legal presumption [of

vested benefits] based on the status of retired employees”);

International Union, UA. W. v. Yard-Man, Inc. 716 F.2d 1476,

1479 (6th Cir. 1983), cert. denied, 456 U.S. 1007 (1984)

(“[T]he court should first look to the explicit language of the

collective bargaining agreement for clear manifestations of

intent”); Struble v. New Jersey Brewery Employees’ Welfare

Trust Fund, 732 F.2d 325, 330-331 (3d Cir. 1984) (Collective

bargaining agreement contained no language suggesting re-

7

tiree welfare benefits would continue beyond the life of the

agreement; therefore, retirees are not entitled to vested life-

time benefits); Turner v. Local Union 302 Int’l Bhd. of Team-

sters, 604 F. 2d 1219, 1225, n. 5 (9th Cir. 1979) (“Pension plans

must meet... vesting requirements... while welfare plans do

not have to do so”).

In the face of this overwhelming authority, Petitioners

point to only two federal cases supporting their common law

vesting rule; In re Erie Lackawanna Ry, 548 F.2d 621 (6th Cir.

1977) (applying Ohio law) and In re White Farm Equipment

Co., 42 Bankr. 1005. However, both of these cases arose in the

Sixth Circuit and were overruled and reversed respectively by

the Sixth Circuit’s decisions in In re White Farm Equipment

Co., 788 F.2d 1186, 1192 (6th Cir. 1986) and in this case (Ptnr.

Apx. A, A-18).

If Petitioners disagreed with the Court of Appeals’ treat-

ment of In re Erie Lackawanna Ry., they should have petitioned

for rehearing. They did not. The Supreme Court does not sit

to resolve alleged inconsistencies between the decisions of a

Court of Appeals or decide whether the Court of Appeals

should have overruled one of its prior decisions. U.S. Sup. Ct.

R. 17.1; Davis v. United States, 417 U.S. 333, 340 (1974).

B. Petitioners’ Advocated Common Law Vesting Rule for

Retiree Medical Plans Never Existed Before ERISA;

Therefore, the Petition Raises No Question of a Conflict

with ERISA.

1. No Pre-ERISA Case Gives Retired Employees the Right to

Veto Modifications in Their Medical Plan Where the

Employer Has Reserved the Right to Make Such

Modifications.

Petitioners’ argument for certiorari is founded on a super-

ficially appealing syllogism. The first premise is that, under

pre-ERISA law, Petitioners had a legal right to veto the

changes in the medical plan sponsored by Respondents regard-

less of the plan’s written terms. The second premise is that

8

ERISA is a remedial statute designed to expand the rights of

employees. It follows, assert Petitioners, that the Court of

Appeals’ holding (the plan documents control) is in conflict

with ERISA and the courts should establish an automatic

vesting rule for medical benefits under ERISA.

However Petitioners’ syllogism suffers from a critical flaw:

there is not a single pre-ERISA case which has ever given a

retired employee a vested interest in an employer sponsored

medical plan in the face of an explicitly reserved amendment

right in the governing plan documents.”

Indeed, none of the three pre-ERISA state law cases cited

by Petitioners as evidence of their advocated medical benefits

vesting rule even involved medical] benefits. To argue that

retiree medical benefits could not be changed before ERISA

regardless of the governing plan’s terms based upon three

state law cases, none of which even involved a medical plan,

exceeds the bounds of reason and logic. The Supreme Court

n Respondents have located only one pre-ERISA case (not cited by

Petitioners) in which an employer was restrained from terminating or

modifying a retiree medical plan. There, the Ohio Supreme Court held in a

one-page per curiam affirmance that an employer could not terminate post-

retirement medical coverage. Sheehy v. Seilon, Inc., 227 N.E.2d 229 (Ohio

1967). However, there was no evidence that the employer had reserved the

right to terminate coverage in Sheehy.

In re Erie Lackawanna Ry., 548 F.2d 621 (6th Cir. 1977) involved

claims by former employees of a bankrupt employer for life insurance

benefits. The court held the employees’ claims were not entitled to adminis-

trative priority and the plan was terminated. Similarly, Melin v. Northwestern

Bell Tel. Co., 266 N.W.2d 183 (Minn. 1983) addressed whether an alcoholic

was entitled to a disability pension under his employer's plan. The court held

that aleoholism did not constitute a disability and denied recovery to the

former employee. Finally, Schlosser v. Allis-Chalmers Corp., 271 N.W.2d 879

(Wis. 1978) also involves the termination of a group life insurance plan. Life

insurance and disability annuity benefits are distinguishable from medical

benefits because the benefit liabilities are limited and readily ascertainable.

See footnote 13 infra.

W

9

does not sit to review questions that are not raised by either

the law or the facts.

2. Petitioners’ Reliance on the Unilateral Contract

Doctrine Applicable to Pension Plans Before ERISA is

Inappropriate.

To bolster their claim of a conflict between the Court of

Appeal’s decision and ERISA, Petitioners have attempted to

develop from pre-ERISA state law cases involving pension

plans a fictitious legal doctrine applicable to medical plans.

Petitioners cite Hoefel v. Atlas Tack Corp., 581 F.2d 1 (1st Cir.

1978), cert. denied, 440 U.S. 913 (1979) as the leading case

establishing that pre-ERISA law uniformly vested pension and

medical benefits at retirement under the unilateral contract

theory. Yet Hoefel is a case that deals exclusively with the

termination of pension plans and the Hoefel court relied on

ERISA in reaching its decision. Acknowledging that ERISA

was inapplicable, the court nonetheless called ERISA “an

expression of national policy” and held that its construction of

state law was confirmed by:

the concerns motivating Congress to enact ERISA in

1974... See H. Rep. No. 93-807, 93d Cong., 2d Sess., 3 U.S.

Code Cong. & Admin. News, pp. 4760, 4676 (1974); S.

Rep. No. 93-127, 93d Cong., 2d Sess., 3 U.S. Code Cong. &

Admin. News, pp. 4841-42 (1974).

Id. at 6.

Of course, as we see below, in enacting ERISA, Congress

consciously chose for sound policy reasons to prescribe vesting

rules, but to specifically exempt medical plans from the scope

of the rules.“ Thus, Petitioners assert the remarkable boot-

13 « Automatic vesting [of medical plans] was rejected because the costs

of such plans are subject to fluctuating and unpredictable variables. Actua-

rial decisions concerning fixed [pension] annuities are based on fairly stable

data, and vesting is appropriate. In contrast, medical insurance must take

account of inflation, changes in medical practice and technology, and in-

10

strap argument that a pre-ERISA case decided in reliance on

the policy choices made by Congress in enacting ERISA’s

pension vesting rules is evidence that pre-ERISA state law

vested medical benefits.

C. Congress Consciously Chose to Reject Vesting of Retiree

Medical Benefits Under ERISA and to Preempt State

Law; Therefore, the Courts Are Not Free to Impose

Vesting Requirements on Retiree Medical Plans.

Petitioners seem to think that this Court should grant

certiorari simply because ERISA is a remedial statute and the

Court of Appeals has denied their claims under ERISA. Peti-

tion pp. 12, 18. However, while ERISA generally expands the

rights of employee benefit plan participants, its provisions

reflect a careful balancing between the interests of participants

and employee benefit plan sponsors.’

Congress enacted ERISA only after years of careful

study. Nachman Corp. v. P.B.G.C., 446 U.S. 359, 361-362

(1980); Alessi v. Raybestos Manhattan, Inc., 451 U.S. 504, 510

(1981). Yet, there is no mention in ERISA’s legislative history

of the existence of Petitioner's alleged medical benefits vesting

rule. It is preposterous to suggest, as Petitioners have, that

Congress would overrule a “well-established” common law

vesting rule without note or comment in the voluminous history

of its deliberations and study in enacting ERISA.

However, even if Petitioners’ mistaken assertion — that

before ERISA medical benefits vested at retirement in some

creases in the costs of treatment independent of inflation. These unstable

variables prevent accurate predictions of future needs and costs.” Moore v.

Metropolitan Life Ins. Co., 856 F.2d 488, 492 (2d Cir. 1988).

“If employers respond to more comprehensive coverage, vesting and

funding rules by decreasing benefits under existing plans or slowing the rate

of formation of new plans, little if anything would be gained from the

standpoint of securing broader use of employee pensions and related plans.”

H. R. Rep. No. 807, 93d Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. &

Admin. News 4670, 4682.

1]

states regardless of the terms of any written plan — is correct,

this case raises no unanswered federal question concerning the

continued application of the rule after ERISA. Congress

answered the question of whether medical benefits would be

required by law to “vest” when it enacted ERISA § 201, 29

U.S.C. § 1051 (1982):

This part [requiring vesting of “accrued benefits“ under

employee benefit plans and forbidding amendments which

reduce vested “accrued benefits”) shall apply to any

employee benefit plan described in section 4(a) (and not

exempted under section 4(b)) other than —

(i) an employee welfare benefit plan.“ (Emphasis

supplied).

H.R. Rep. No. 807 defines the accrued benefits which are

required to vest under ERISA as follows:

Under the committee bill, the vested employee is protected

in his rights to all, or a certain percentage, of his “accrued

benefit.”

The term “accrued benefit” refers to pension or retirement

benefits and is not intended to apply to certain ancillary

benefits, such as medical insurance or life insurance,

which are sometimes provided for employees in conjunc-

tion with a pension plan, and are sometimes provided

separately.

H.R. Rep. No. 807, 93d Cong., 2d Sess., reprinted in 1974 U.S.

Code Cong. & Admin. News at 4726; see also H.R. Conf. Rep.

No. 1280, 98d Cong., 2d Sess., reprinted in 1974 U.S. Code

Cong. & Admin. News 5038, 5054.

5 Petitioners concede the post-retirement medical program at issue in

this case is an employee welfare benefit plan. Petition, p. 5 n.5. See, ERISA

§ 3(1), 29 U.S.C. 5 1002 (1) (1982).

12

Thus, Congress explicitly considered and rejected the

application of vesting requirements to employee welfare benefit

plans. These explicit statements of legislative intent are a far

ery from the Congressional “silence” alleged in the Petition

(p. 13).

[Unless this congressional intent can be inferred from

the language of the statute, the statutory structure, or

some other source, the essential predicate for implication

of a private remedy simply does not exist.’ Northwest

Airlines, Inc. v. Transport Workers, 451 U.S. 77, 94 (1981).

‘The federal judiciary will not engraft a remedy on a

statute, no matter how salutary, that Congress did not

intend to provide.’ California v. Sierra Club, 451 U.S. 287,

297 (1981).

Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 145

(1985).

Next, to eliminate any lingering doubts about the contin-

ued application of state common or statutory law to employee

welfare and pension benefit plans, Congress declared any and

all such state laws preempted by ERISA “... insofar as they

may now or hereafter relate to any employee benefit plan.

1 This Court has consistently rejected suggestions that it should disre-

gard explicit statutory language to achieve some purpose deemed consistent

with a perceived Congressional intent: “Judicial perception that a particular

result would be unreasonable may enter into the construction of ambiguous

provisions, but cannot justify disregard of what Congress has plainly and

intentionally provided.” Commissioner v. Asphalt Prod. Co., 482 U.S. 117, 107

S.Ct. 2275, 2278 (1987); Commissioner v. Gordon, 391 U.S. 83, 93 (1968).

* There is no doubt that a state common law vesting rule would “relate

to” a retiree medical plan within the meaning of 5 514 (a). Metropolitan Life

Ins. Co., v. Massachusetts, 471 U.S. 724, 739 (1985) (state law requiring

additional benefits not provided by a medical plan relates to the plan and is

preempted unless saved by insurance law exception); See also, Shaw v. Delta

Air Lines, Inc., 463 U.S. 85, 97 (1983).

— . — —

13

ERISA §514(a), 29 U.S.C. §1144(a) (1982). Congress

explained its preemptive intentions as follows:

Finally, it is evident that the operations of employee

benefit plans are increasingly interstate. The uniformity

of decision which the Act is designed to foster will help

administrators, fiduciaries and participants to predict the

legality of proposed actions without the necessity of refer-

ence to varying state laws.

S. Rep. No. 127, 93d Cong., 2d Sess., reprinted in 1974 U.S.

Code Cong. & Admin. News 4838, 4865.“ See also, Alessi v.

Raybestos-Manhattan, Inc., 451 U.S. at 523 (state law indirectly

requiring an ERISA plan to provide greater benefits than

provided under the plan terms is preempted); Shaw v. Delta

Air Lines, Inc., 463 U.S. at 96 (1983) (state human rights law

is preempted; [the breadth of § 514 (a)'s pre-emptive reach is

apparent from that section’s language.”); Metropolitan Life Ins.

Co. v. Massachusetts, 471 U.S. at 739 (1985) (“The pre-emption

provision was intended to displace all state laws that fall

within its sphere, even including state laws that are consistent

with ERISA’s substantive requirements.”); Pilot Life Ins. Co.

v. Dedeauz, 481 U.S. 41 (1987) (state common law which would

expand the relief obtainable by plan participants in ERISA

suits is preempted); Mackey v. Lanier Collection Agency d

Service, Inc., 108 S.Ct. 2182, 2185 (1988) („[Wie have virtu-

ally taken it for granted that state laws which are ‘specifically

Exceptions to the broad preemptive scope of ERISA §514(a) are

provided for state insurance, banking, and securities laws. ERISA § 514 (b),

29 U.S.C. § 1144 (b) (1982). However, petitioners do not argue that their

common law vesting rule arises under state insurance, banking, or securities

laws and it is clear that none of the exceptions applies. See, Pilot Life Ins. Co.

v. Dedeauz, 481 U.S. 41. (State common law providing extra-contractual

relief to ERISA plan participants is not saved by the insurance law

exception).

The legislative history of ERISA § 514 (a) is succinctly recounted by

the Court in footnotes 18, 19, and 20 of the Court's opinion in Shaw v. Delta

Air Lines, Inc., 463 U.S. at 98-99.

14

designed to affect employee benefit plans’ are pre-empted

under § 514(a)”).

Indeed, this Court has recognized that, while “ERISA

imposes upon pension plans a variety of substantive require-

ments... [i]t does not regulate the substantive content of

welfare-benefit plans.” Metropolitan Life Ins. Co. v. Massachu-

setts, 471 U.S. at 732. Instead, it reserves the determination of

the substantive content of a welfare benefit plan for the plan

sponsor. Id. at 739.”

Despite these explicit authorities, Petitioners ask this

Court to grant their petition and determine whether pre-

ERISA state common law from Minnesota, Wisconsin, and

Ohio should be applied to regulate the substantive content of

an ERISA medical program administered in Tennessee cover-

ing retirees in almost every other state. This is precisely the

question Congress answered when it enacted § 514(a) and this

Court has consistently rejected attempts to narrow the scope of

§ 514(a), especially when the state law at issue would impose

requirements not contemplated by Congress.

Congress’ answer to the question of whether medical

benefits vest under ERISA or by operation of state law is

crystal clear. They do not vest by operation of ERISA and any

state law requiring such vesting is preempted; therefore, they

vest, if at all, only by the express terms of the governing plan

documents.?“ This, of course, is exactly what the Courts of

In Metropolitan, the Court held that a state law regulating the

substantive content of a medical insurance program was “covered by ER-

ISA’s broad pre-emption provision set forth in §514(a).” Jd. at 739. The

Court found the state law saved from preemption by the exception for laws

regulating insurance. ERISA §514(b) 29 U.S.C. 5 1144 (b) (1982). How-

ever, the insurance exception does not apply to Petitioners’ common law

vesting rule. See n. 18, supra.

u Congress emphasized the primacy of plan documents in determining a

participant's entitlement to benefits under ERISA by requiring that em-

ployee benefit plans be maintained in writing (ERISA 5 402 (a) 29 U.S.C.

§ 1102(a) (1982)) and administered in accordance with their terms. ERISA

15

Appeals have held without exception and what the Court of

Appeals held in this case. See, pp. 6, 7 supra, Ptnr. Apx. A,

A-18, A-19. Therefore, the Court of Appeals’ decision raises no

important federal question requiring the Court’s review.

II. THERE IS NO DISAGREEMENT AMONG THE CIR-

CUITS OVER THE PROPER CONSTRUCTION OF

RETIREE MEDICAL PLANS.

Petitioners allege without any support that “[t]he Sixth

Cireuit's interpretation of the plan at issue in this case is

inconsistent with that of other Circuits which have applied

general insurance law to the interpretation of ERISA plans”

Petition p. 9.” In fact, the Court of Appeal's approach to the

plan documents in this case is in complete accord with the

approach adopted by every other circuit which has been called

upon to interpret a retiree medical program.”

§ 404(a)(1)(D), 29 U.S.C. 5 1104 (a) (1) (D) (1982). Ptnr. Apx. A, A-24-5.

It would certainly be odd for Congress to include in ERISA’s regulatory

scheme the requirement that a written employee benefit plan.. provide a

procedure for amending such plan . if Congress intended that the written

procedure could be voided by the courts under state common law. ERISA

§ 402 (b) (3).

* Petitioners also state “the Sixth Circuit expressly disapproved of the

Third Cireuit's actual application of the insurance law principles in [North-

east Department ILGWU Health & Welfare Fund, Teamsters Local Union

No. 229 Welfare Fund, 764 F. 2d 147, (3d Cir. 1985)].” What the Sixth

Cireuit actually said was: “To the extent that dicta in the ILGWU decision

suggest that escape clauses in single employer plans are automatically

invalid, we respectfully disagree.” (Ptnr. Apx. A, A-30). Even if this passing

comment could be deemed “disagreement” it provides no support for the

Petition because it is confined to an issue that has nothing to do with the plan

interpretation challenged by Petitioners. Moreover the “escape clause” issue

has long since become moot. “... Subsequent to entry of the order appealed

from in this case... the American General welfare plan was amended to

eliminate the escape clause of which plaintiffs had complained...” (Ptnr.

Apx. A, A-30).

* See the cases cited herein on pages 6 and 7. In fact, the Sixth Circuit

has been accused of being more favorable to retirees than other circuits in its

construction of retiree medical plans. See Anderson v. Alpha Portland Indus.,

16

Where then is the need to resort to state law? As the

authorities cited by Petitioners clearly state, reference to state

law is appropriate only when the state law is “compatible with

national policy” and when “there is little federal law to which

the court may turn for guidance.” Massachusetts Mut. Life Ins.

Co. v. Russell, 473 U.S. 134, 157, n. 18 (1985).

Here the opposite is true. In the face of an abundance of

federal statutory and common law rejecting both their common

law vesting rule and their artificial “reasonable expectations”

construction rule, Petitioners point to only one decision which

they claim applied the doctrine of reasonable expectations

. . to limit policy provisions which, if read literally, would

largely nullify an insurance policy...” Petition, p. 11 citing

Van Orman v. American Ins. Co., 680 F. 2d 301 (3d Cir. 1982).

This statement is utterly baseless.

In Van Orman, the court ruled that, in view of its denial of

the participants’ claims, it could “assume, without deciding,

that New Jersey [insurance] law controls.” 680 F.2d at 308,

see also, id. at 306.“ The court went on to find the language of

the governing (pension) plan documents controlling and re-

jected the participants’ claims that the plan should be re-

formed to reflect their reasonable expectations.”

Indeed, when the Van Orman Court was called-upon by the

participants to adopt as federal common law under ERISA a

Inc. 836 F.2d 1512, 1517 (8th Cir. 1988), cert. denied, 57 U.S. L. W. 3565 (U.S.

Feb. 27, 1989) (No. 87-2022).

* Respondents are aware of no decision adopting under federal ERISA

common law “the doctrine of reasonable expectations.” The Van Orman

court clearly declined to adopt the doctrine under ERISA.

*“As a matter of logic, we find it difficult to perceive how plaintiffs’

expectations would be frustrated by the defendants’ retention of the surplus

if nothing in the booklets and letters led them to expect that a surplus might

arise.” Van Orman, 680 F.2d at 310.

—

eee eee tes

17

rule that would override the written terms of the plan, it had

this to say:

We believe that Congress’ authorization of the creation of

a federal common law of pension plans must be considered

in light of the comprehensive nature of the statute. Where

Congress has established an extensive regulatory network

and has expressly announced its intention to occupy the

field, federal courts will not lightly create additional

rights under the rubric of federal common law.

We are particularly reluctant to fashion a federal common-

law doctrine of unjust enrichment when such a right would

override a contractual provision.

The Supreme Court has emphasized the primacy of plan

provisions absent a conflict with the statutory policies of

ERISA.

Id. at 311-12.

In this case, the Court of Appeals devoted no less than

thirteen pages (Ptnr. Apx. A, A-9 through A-21) of its thirty

three page Slip Opinion to an exhaustive analysis of the

numerous documents given to Petitioners describing the medi-

cal benefits program concluding:

Nowhere in that or any other employee publication — or in

any memorandum, letter, brochure, report, or other writ-

ten document, as far as we have been able to ascertain

after a careful search of the record — did the company

ever promise any employee that all premiums for post-

retirement medical coverage would be irrevocably “paid

up” upon the employee’s retirement. (Id., A-21).

18

Application of the “doctrine of reasonable expectations”

would yield exactly the same result as the Court of Appeals’

decision in this case. Petitioners’ request that this Court grant

certiorar and uphold their “reasonable expectations” is simply

za request to second-guess the Court of Appeals’ conclusion

based upon its unchallenged factual findings.

CONCLUSION

For the foregoing reasons, the Petition should be denied.

Respectfully submitted,

SIDNEY O. SMITH, JR.

(Counsel of Record)

PuHILip C. Cook

WILLIAM C. HUMPHREYS, JR.

GREOORY C. BRADEN

Alston & Bird

One Atlantic Center

Atlanta, Georgia, 30309-3424

LARRY D. KING

Associate General Counsel

American General Corporation

2929 Allen Parkway

Houston, Texas 77019

Attorneys for Respondents

A-l

APPENDIX

American General Corporation owns the followiug subsidiaries,

which are involved in the joint ventures listed below:

AGC Resources, Inc.

Highland Resources, Inc.

American General Investment Corporation

Appelt Prop. No. 1, Ltd.

American General Life & Accident Insurance Company

Charterhouse Mezzanine Fund, L.P.

Fulerum II, L.P.

Fulerum III, L.P.

Institutional Venture Partners, L.P.

Institutional Venture Partners, II, L.P.

Morgan Stanley Leveraged Mezzanine Fund, L.P.

American General Life Insurance Company

American General Health Club

American General Life Insurance Company of Delaware

America Tower

Cypress Crossing Venture

Mosbacher — A.G. Company

American General Life Insurance Company of New York

Highland Resources, Inc. 1984

One Park Place Associates

American General Realty Investment Corporation

American Avia Associates — KCI

American Avia Associates — SEA

American Avia Associates I

American Fieldstone Venture

American Newland Associates

Boone-Southern 4

Carlton Arms of Egypt Lake

Charter Associates

Cinco Ranch Venture

Cutten Associates

Cypress Associates

Deer Valley Industrial Center

Glencairn Village

Hickory Downs Venture

Hickory Holly Venture

Hope Valley Venture

Jackrabbit Venture

Koll/Intereal Phoenix

Langham Associates

The Meadows Venture

Newmarket Venture

One Arlington Center

Pebble Creek Associates

Pecan Grove Associates

Sammis Diamond Bar II

Sammis Diamond Bar III

Treaschwig Associates

West Georgia Commons Associates

California-Western States Life Insurance Company

America Tower

Cal-Mira Mesa, Ltd.

Cal-Sorrento, Ltd.

Sunrise Mall Associates

Vagabond Glendale Motor Hotel

Vagabond Sunnyvale Motor Hotel

Warburg-Pincus LTD.

Georgetown Realty, Inc.

Lake Wylie

Gulf Equities

Parklawn Center

Shirley Industrial

Gulf Village, Ine.

Wharfside II

GULFCO Capital Management, Inc.

Soujourn/Westgrove Off / Serv Bldg.

Hadco, Inc.

Columbia Square

Duo Mercatum

——

A-3

Joventex Corporation

Camino Real Apartments

Knickerbocker Corporation

American Health Club Venture

STEA Limited Partnership I

Life and Casualty Insurance Company of Tennessee

Alamo II

America Tower

American General Health Club

Blackstone Capital

No. 1 Beach Street

Rylis Realty Company

Cinco Ranch Venture

Columbia 205 Commerce Center

Fairbanks Associates

Glencairn Village

Jackrabbit Venture

Overlake Commercial Center

Riverbrook Associates

Tennessee Vintage Corporation

Vintage Faire Associates