Uaw v. General Motors

• Decision Date: 07 August 2007
• Docket Number: No. 06-1475.,No. 06-2064.,06-1475.,06-2064.
• Citation: 497 F.3d 615
• Parties: INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE, AND AGRICULTURAL IMPLEMENT WORKERS OF AMERICA; Earl L. Henry, et al., Plaintiffs-Appellees, Leroy Henry McKnight, et al., Movants-Appellants, v. GENERAL MOTORS CORPORATION, Defendant-Appellee. International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America; Bobby Hardwick, et al., Plaintiffs-Appellees, Lawrence Bronson, et al., Consolidated Plaintiffs-Appellants, v. Ford Motor Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

497 F.3d 615

INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE, AND AGRICULTURAL IMPLEMENT WORKERS OF AMERICA; Earl L. Henry, et al., Plaintiffs-Appellees, Leroy Henry McKnight, et al., Movants-Appellants, v. GENERAL MOTORS CORPORATION, Defendant-Appellee.

International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America; Bobby Hardwick, et al., Plaintiffs-Appellees, Lawrence Bronson, et al., Consolidated Plaintiffs-Appellants, v. Ford Motor Company, Defendant-Appellee.

No. 06-1475.

No. 06-2064.

United States Court of Appeals, Sixth Circuit.

Argued: June 7, 2007.

Decided and Filed: August 7, 2007.

ARGUED: Mark S. Baumkel, Provizer & Phillips, Bingham Farms, Michigan, James R. Malone, Jr., Chimicles & Tikellis, Haverford, Pennsylvania, for Appellants. Julia Penny Clark, Bredhoff & Kaiser, Washington, D.C., William T. Payne, Pittsburgh, Pennsylvania, Richard C. Godfrey, Kirkland & Ellis, Chicago, Illinois, Jonathan L. Abram, Hogan & Hartson, Washington, D.C., for Appellees. ON BRIEF: Mark S. Baumkel, Provizer & Phillips, Bingham Farms, Michigan, James R. Malone, Jr., Daniel B. Scott, Chimicles & Tikellis, Haverford, Pennsylvania, for Appellants. Julia Penny Clark, John M. West, Bredhoff & Kaiser, Washington, D.C., John E. Stember, Edward J. Feinstein, Stember, Feinstein, Doyle & Payne, Pittsburgh, Pennsylvania, William T. Payne, Pittsburgh, Pennsylvania, Richard C. Godfrey, John F. Hagan, Jr., Andrew B. Bloomer, Catherine L. Fitzpatrick, Kirkland & Ellis, Chicago, Illinois, Jonathan L. Abram, Hogan & Hartson, Washington, D.C., for Appellees.

Before: MARTIN and SUTTON, Circuit Judges; GRAHAM, District Judge.^*

OPINION

SUTTON, Circuit Judge.

The fortunes of the General Motors Corporation and the Ford Motor Company, two of the world's largest auto makers and two of this country's largest employers, have risen and fallen many times over the last 50 years. Their most recent economic challenges stem from a variety of factors, including the emergence of vigorous international competition, the ever-changing preferences of the American consumer and the fiscal strain of maintaining healthcare benefits for retirees well in excess of those provided by their foreign competitors.

In 2005, GM and Ford tried to address one of these issues by reducing retiree healthcare benefits, only to be challenged by the International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (the UAW), which represents hourly workers at both companies and which negotiated these healthcare benefits in the first place. Insisting that the retirees' healthcare benefits had vested and could not be modified without the retirees' consent, the UAW filed this declaratory-judgment action and eventually proposed a class of retirees from GM and Ford to defend its position. Through two similar agreements, the companies, the UAW and the classes proposed to settle their differences. A small percentage of retirees from each company (less than one half of one percent) objected to the proposed settlements and, when the district courts rejected their objections after a fairness hearing, appealed to our court. We have consolidated the appeals and now affirm.

I.

Retiree Healthcare Benefits Provided by the Two Companies. For more than 50 years, the UAW has been negotiating with GM and Ford over retiree healthcare benefits for hourly retirees. Starting in 1955, GM gave retirees what now sounds like a quaint option: They could purchase hospital and medical coverage, but GM would not subsidize the cost of this coverage. Ford followed suit three years later. In 1961, GM and Ford agreed to pay half the healthcare premiums for retirees and to extend these benefits to hourly workers who had retired under previous collective bargaining agreements. At the same time, GM offered coverage to retiree dependents (at full cost), while Ford assumed half the cost of dependent coverage.

By 1967, GM and Ford had assumed the entire cost of retirees' healthcare benefits, including the benefits for dependents. The car companies added other healthcare benefits for retirees over the next 20 years: prescription-drug coverage in 1970; dental and hearing-aid coverage in 1976; and comprehensive vision coverage in 1979. GM extended coverage to substance abuse in 1984 and mental health in 1990. Because each agreement encompassed all hourly retirees, not just those who had retired after each new collective bargaining agreement was made, GM and Ford now provide healthcare coverage for all eligible retirees, their spouses and dependents—which is to say 472,000 people in GM's case and 174,000 people in Ford's case.

These benefits are not inexpensive. Accounting for active and retired workers and their families, GM provides healthcare to 1,100,000 people, making it the "single largest private purchaser of health care in the United States," with yearly expenditures of $5.4 billion in 2005 and with the lion's share (nearly $3.7 billion in 2005) going to retiree benefits. GM JA 614. Ford tells a similar story. It spent $3.5 billion to cover 590,000 people in 2005, with $2.4 billion going to retiree benefits. In 2005, these aggregate healthcare expenditures added $1,525 on average to the cost of every GM vehicle and $1,100 to the cost of every Ford vehicle. But for the legacy expenses—the retiree benefits—the healthcare costs per vehicle at GM and Ford would be $480 and $346, respectively. Their Japanese rivals spend an average of $450 per vehicle for all healthcare costs, in other words for the healthcare benefits of active workers and retirees.

No participant in this case—whether that party agrees with the settlement or not—offers any reason to believe these healthcare benefits will become cheaper over time, the car companies' capacity to pay them will become less burdensome in the future or the differential between what these American car companies pay in healthcare costs per vehicle and what their rivals from Japan (which has universal healthcare) pay will change any time soon. GM's accumulated post-retirement healthcare obligations increased from $42 billion in 2000 to $67.6 billion at the end of 2004; Ford faced $35 billion in accumulated obligations in 2005, an increase of $14 billion since 2000. By the end of 2004, GM's accumulated obligations amounted to almost seven times its market value; by the end of 2005, Ford's obligations amounted to almost three times its market value. Making these obligations increasingly more difficult to meet are a growing ratio of retirees to active employees (four to one at GM in 2006 and two to one at Ford in 2005) and rapidly increasing healthcare costs. See, e.g., GM JA 615 (absent the settlement, GM's accumulated obligations were expected to increase 22% between 2005 and 2009); Ford JA 851 (retirees accounted for 80% of the increase in Ford's healthcare costs between 2000 and 2005).

Declining Market Share. Once the world's largest automotive manufacturer (and still Michigan's largest employer with 71,000 residents on its payroll), GM has seen its share of the North American market decline from 40% to 25.5% over the past 20 years. Ford's share has declined from 25% in 1995 to 17% ten years later. Over the last decade, profits at the two companies have declined and in some years disappeared. In 2005, GM's automotive division posted a pre-tax loss of $11.4 billion; Ford's automotive division lost $3.9 billion.

These problems have not been lost on the financial markets. In early 2005, both companies' credit ratings declined to non-investment grade status ("junk" status), in part due to GM's "burdensome postretirement benefit obligations," GM JA 606, and Ford's "massive unfunded retiree medical liability," Ford JA 863 (internal quotation marks omitted). GM's stock, priced at $53.40 at the end of 2003, fell to $19.42 over the next two years; its market capitalization slid from $30 billion to $11 billion. Ford's stock price decreased from $30 a share in 2001 to $7.72 by the end of 2005; its market capitalization fell from $54 billion to approximately $14 billion during that time.

GM's Recovery Strategy and the Proceedings Below. To address these fiscal challenges, GM has sought to scale back production and cut costs across the board. In 2005, GM "closed or idled" assembly plants in Maryland, Michigan and New Jersey to reduce excess capacity. GM JA 600. In addition, GM announced plans to close twelve assembly plants or facilities, to lay off 7,000 salaried employees and 30,000 hourly workers, to cut the salaries of senior leadership, to place caps on healthcare expenditures for salaried employees and retirees and to reduce its annual dividend to shareholders.

A central feature of GM's recovery strategy included reducing the burden of its accumulated healthcare obligations to hourly retirees. When the UAW refused to discuss the possibility of modifying hourly retirees' healthcare benefits in 2005, GM responded that it would unilaterally reduce the benefits. Although no retiree filed a lawsuit to block GM's action, the UAW stepped in and agreed to negotiate changes to retiree benefits on the condition that the company postpone any cuts until negotiations had concluded and that it "fully open its books and share its complete financial data" with the UAW. GM JA 351. An independent financial consultant, Lazard Freres & Co., LLC, reviewed this data for the UAW and concluded that GM had not embellished its fiscal woes.

On October 17, 2005, GM and the UAW announced an agreement that would permit the company to modify its retiree healthcare benefits. Because the two entities had no authority to act on behalf of the retirees, the UAW approached two hourly retirees (each of whom had been elected to a local retired workers chapter) about filing a class action against GM. At the UAW's suggestion, the retirees retained William T. Payne as lead class counsel. Among other qualifications, Payne had...