Orth v. Wisconsin State Employees Union Counsel 24

• Decision Date: 22 October 2008
• Docket Number: No. 07-2778.,07-2778.
• Citation: 546 F.3d 868
• Parties: Ronald P. ORTH and Eufemia B. Orth, Plaintiffs-Appellees, v. WISCONSIN STATE EMPLOYEES UNION, COUNCIL 24, and Group Insurance Plan Wisconsin State Employees Union, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

546 F.3d 868

Ronald P. ORTH and Eufemia B. Orth, Plaintiffs-Appellees, v. WISCONSIN STATE EMPLOYEES UNION, COUNCIL 24, and Group Insurance Plan Wisconsin State Employees Union, Defendants-Appellants.

No. 07-2778.

United States Court of Appeals, Seventh Circuit.

Argued May 7, 2008.

Decided October 22, 2008.

Ross Townsend (argued), Liebmann, Conway, Olejniczak & Jerry, Green Bay, WI, for Plaintiffs-Appellees.

Kurt C. Kobelt (argued), Lawton & Cates, S.C., Madison, WI, for Defendants-Appellants.

Before BAUER, POSNER, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

The plaintiffs in this suit under both ERISA and the Taft-Hartley Act charge the defendants, an employer and a welfare benefits plan, with having violated provisions of an ERISA plan contained in a collective bargaining agreement between the employer (Council 24 of the Wisconsin State Employees Union) and the union that represented Mr. Orth. The district judge granted summary judgment for the plaintiffs and also awarded them their attorneys' fees. The appeal requires us to consider, among other things, the circumstances in which extrinsic evidence can be used to demonstrate the existence of a "latent" ambiguity in a contract that is clear on its face and the requirements for a valid modification of a contract in general, and an ERISA plan in particular, by subsequent dealings between the parties. These issues are to be resolved in accordance with federal common law. E.g., Ruttenberg v. U.S. Life Ins. Co., 413 F.3d 652, 659 (7th Cir.2005); Mathews v. Sears Pension Plan, 144 F.3d 461, 465-66 (7th Cir.1998).

The collective bargaining agreement in force when Orth retired required the employer to provide health insurance to current and retired employees. If upon retirement an employee had unused sick leave, the monetary value of that leave would be used to pay the insurance premiums "on the same basis as the benefit is currently paid for employees." The reference is to a provision in the collective bargaining agreement that the employer "will pay 90% of the total premium while the employee pays 10% of the total premium."

When he retired in 1998, Orth had more than $42,000 in accrued sick leave. Eight years later his former employer told him that the entire amount had been or was about to be completely used up in payment of his share of his health insurance premiums. The reason, it turns out, is that contrary to the language of the collective bargaining agreement that we quoted, the welfare benefits plan was deducting not 10 percent but 100 percent of the retired employees' health insurance premiums from their sick-leave accounts.

The defendants admit that the language of the agreement is clear "on its face"; that is, no one who just read the agreement would think there was any uncertainty about the share of health insurance premiums that a retired employee would be responsible for: 10 percent. But sometimes a contract is clear on its face yet if you knew certain background facts you would realize that it was unclear in its application to the parties' dispute. The best exemplar of the principle remains Raffles v. Wichelhaus, 2 H. & C. 906, 159 Eng. Rep. 375 (Ex. 1864). The plaintiff agreed to sell the defendants a quantity of cotton, at a specified price, to be shipped from Bombay to Liverpool by a ship called Peerless. Nothing unclear there. But it happened that there were two ships named Peerless sailing from Bombay to Liverpool a few months apart. The cotton was shipped on the second Peerless, and the defendant — the price of cotton having fallen in the interim — argued that it should have been shipped on the first one. A.W. Brian Simpson, "Contracts for Cotton to Arrive: The Case of the Two Ships Peerless," 11 Cardozo L.Rev. 287, 319-21 (1989). Nothing in the contract indicated which ship Peerless the parties had agreed that the cotton would be shipped on, and the court ruled therefore that the contract was hopelessly ambiguous — though perfectly clear on its face.

At some point in the administration of the collective bargaining agreement in the present case, the plan started deducting 100 percent of retired employees' insurance premiums from their sick-leave accounts. Two retired employees besides Orth were subjected to such deductions. They did not complain, but on the other hand they had never been told that 100 percent rather than 10 percent of the premiums were being deducted and so far as appears they never discovered the fact on their own. There is also evidence that the employees' union knew what the plan was doing but did not object. And a subsequent collective bargaining agreement, though inapplicable to the Orths' claim, changed the employee's share from 10 percent of premiums to a combination of zero percent of premiums for single coverage and 100 percent of the difference between the premiums for single coverage and family coverage. This change was proposed by the union and for all we know made most employees better off, but probably not the Orths. Both Orths were reimbursed under their retirement plan for 90 percent of their health insurance premiums; the new provision would reimburse all of Mr. Orth's premiums but none of his wife's.

All this evidence, however it might bear on the defendants' alternative argument that the contract on which the Orths are suing was modified by subsequent dealings between the union and the employer, has no force in establishing a latent ambiguity. Indeed, we cannot see how the same evidence could support both arguments. 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. The defendants' argument is not that the contract does not mean what it says but that it is not the contract. That argument has nothing to do with ambiguity, so we turn to the question of modification by subsequent dealings.

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). E.g., Cromeens, Holloman, Sibert, Inc v. AB Volvo, 349 F.3d 376, 395 (7th Cir.2003); Operating Engineers Local 139 Health Benefit Fund v. Gustafson Construction Corp., 258 F.3d 645, 649 (7th Cir.2001); International Business Lists, Inc. v. American Tel. & Tel. Co., 147 F.3d 636, 641 (7th Cir.1998); Edell & Associates, P.C. v. Law Offices of Peter G. Angelos, 264 F.3d 424, 440 (4th Cir.2001); see Restatement (Second) of Contracts § 202(4) (1981). 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 common paraphrase of section 1102(a)(1) is that "ERISA plans must be in writing and cannot be modified orally." Livick v. Gillette Co., 524 F.3d 24, 31 (1st Cir.2008); see, e.g., Nachwalter v. Christie, 805 F.2d 956, 960 (11th Cir.1986). But the two clauses don't fit together; the accurate paraphrase is that because a plan must be maintained pursuant to a writing, it can be modified only in writing. Modification by conduct is tacit, and therefore (unless evidenced by a writing) unwritten, like oral modification; why should it matter that it is nonverbal? The statutory requirement "that the plan be in writing is thought to carry over to this `procedure for amending such plan,' hence to mean that plan amendments must be in writing." John H. Langbein, Susan J. Stabile & Bruce A. Wolk, Pension and Employee Benefit Law 690 (4th ed.2006). That would exclude modification by subsequent dealings not confirmed in writing.

The refusal of this and other courts to hold that promissory estoppel can never be used to vary an ERISA plan may seem inconsistent with requiring that all modifications be in writing. But as we explained in Miller v. Taylor Insulation Co., 39 F.3d 755, 758-59 (7th Cir.1994), the main objection "to oral modifications [of ERISA plans] is that they would enable the plan's integrity, and possibly its actuarial soundness, to be eroded by relatively low-level employees who in response to inquiries about the scope of coverage advise participants that a particular medical procedure is covered, even though the plan is explicit that it is not covered. This concern is diminished when the doctrine [of promissory estoppel] is used to prevent an employer from denying that an employee (or as in this case a former employee) is a participant in the plan. Assurances that one is a participant, as distinct from assurances concerning the plan's coverage of a particular medical procedure, are unlikely to come from low-level employees, and did not in this case" (citations omitted). In the present case, even more clearly, there is no danger that departing from the literal terms of the plan would undermine its actuarial soundness, for the departure is sought in order to reduce the plan's liability.

But the statutory requirement that a modification of an ERISA plan be in writing is not limited to cases in which departures might deplete the plan's assets, important as those cases are. See, e.g., Shields v. Local 705, Int'l Brotherhood of Teamsters Pension Plan, 188 F.3d 895, 903-05 (7th Cir.1999) (concurring opinion). In most of the relatively few cases in which estoppel, whether promissory or equitable, has been...