Zielinski, Raymond v. Pabst Brewing ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-4742
RAYMOND ZIELINSKI, et al., individually
and on behalf of all persons similarly situated,
Plaintiffs-Appellants,
v.
PABST BREWING COMPANY, INC.
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 04-C-385—Rudolph T. Randa, Chief Judge.
____________
ARGUED JUNE 6, 2006—DECIDED SEPTEMBER 7, 2006
____________
Before FLAUM, Chief Judge, and POSNER and KANNE, Circuit
Judges.
POSNER, Circuit Judge. This case raises in a novel setting
the vexing question of the interpretation of ERISA wel-
fare plans that specify no date of termination.
Back in 1971, Blue Cross-Blue Shield offered a
prescription-drug plan that reimbursed enrolled members’
entire drug costs subject only to a $2 deductible for a 34-day
supply of the drug. Beginning in 1973 several Milwaukee
breweries, including Pabst and Schlitz, agreed in successive
2 No. 05-4742
collective bargaining agreements with a local union
to provide the coverage described in the Blue Cross-Blue
Shield plan to their retired employees plus (for six months
after the retiree’s death) spouses and dependents.
In 1981 Schlitz closed its Milwaukee brewery and signed a
shutdown agreement with the union that supplanted the
then-current collective bargaining agreement but provided
that “the Company shall continue to provide the health and
welfare benefits for retirees [and their spouses and depend-
ents] described in” the prescription-drug provision of the
collective bargaining agreements if they retired on or before
January 1, 1982. The shutdown agreement contained no
termination date.
Pabst succeeded Schlitz as the obligor of the shutdown
agreement in 1999 and five years later precipitated—by
reducing the benefits specified in the 1971 Blue Cross-Blue
Shield plan—this lawsuit on behalf of more than 500 Schlitz
employees who had retired on or before January 1, 1982,
plus spouses and dependents. The reductions were as
follows: the $2 deductible was limited to generic drugs, and
only for a 30-day supply; for brand-name drugs the deduct-
ible was raised to $35 or (for “non-preferred” brands) $50;
and an annual cap of $3,000 was placed on reimbursement
of drug costs and those costs would for the first time be
counted against the $20,000 lifetime ceiling on major-
medical coverage. Administrators of the prescription-drug
plan had made changes in the plan before but most of the
changes had expanded rather than contracted benefits. Not
all, though. For example, one had required enrollees to
substitute generic for brand-name drugs except when their
doctor authorized the purchase of a particular brand-name
drug.
The plaintiffs seek injunctive relief under ERISA and also
damages under the Labor Management Relations Act, 29
No. 05-4742 3
U.S.C. § 185(a), which provides a damages remedy for the
breach of a labor agreement, including shutdown agree-
ments, see 29 U.S.C. § 185(a); Baker v. Kingsley, 387 F.3d 649,
659-60 (7th Cir. 2004); Diehl v. Twin Disc, Inc., 102 F.3d 301,
305 (7th Cir. 1996), and is not preempted by ERISA. 29
U.S.C. § 1144(d); Bidlack v. Wheelabrator Corp., 993 F.2d 603,
604-05 (7th Cir. 1993) (en banc) (lead opinion); Bugher v.
Feightner, 722 F.2d 1356, 1358-60 (7th Cir. 1983); Morse v.
Adams, 857 F.2d 339, 343 (6th Cir. 1988).
The district judge granted summary judgment for Pabst.
He reasoned that because there was no statement in
either the collective bargaining agreements that preceded
the shutdown agreement or in that agreement that the
benefits conferred by the prescription-drug program
were vested, the plaintiff class had no legally enforceable
right to them. We do not find this reasoning persuasive. The
shutdown agreement contains as we said no termination
date, and we cannot find any basis for interpolating one. It
is hard to read “shall continue” otherwise than as creating
a contractual obligation that indeed continues until six
months after the last retiree dies (if he has a surviving
spouse, or dependents). The presumption against vesting on
which the judge relied to overcome “shall continue” has
reference mainly to suits to enforce collective bargaining
agreements. Litton Financial Printing Division v. NLRB, 501
U.S. 190, 207-08 (1991); Bidlack v. Wheelabrator Corp., supra,993 F.2d at 606-07; Des Moines Mailers Union, Teamsters Local
No. 358 v. NLRB, 381 F.3d 767, 769-70 (8th Cir. 2004);
International Union, United Automobile, Aerospace & Agricul-
tural Implement Workers of America, U.A.W. v. Skinner, 188
F.3d 130, 141 (3d Cir. 1999). Those, being short-term agree-
ments, are presumed not to create rights or duties that
continue after the agreement’s termination date. The rights
that the plaintiffs assert in this case originated in collective
4 No. 05-4742
bargaining agreements but were carried forward into the
shutdown agreement, which, unlike a collective bargaining
agreement, has no end date.
It is true that in Diehl v. Twin Disc, Inc., supra, 102 F.3d
at 306-09, we analyzed a shutdown agreement in the
same manner and with the same presumption against
vesting that courts use in interpreting collective bargaining
agreements. Although it was not a collective bargaining
agreement, it was short term—only 13 months, shorter
indeed than the term of the standard collective bargaining
agreement, which is three years. So we applied the
presumption derived from cases involving benefits lan-
guage in collective bargaining agreements. But the
presumption could not overcome the shutdown agreement’s
explicit provision of benefits “for the lifetime of the pen-
sioner” and the equally unambiguous provision of lifetime
benefits to retirees. Id. at 306-07. So we went on to consider,
as we shall here, precisely what benefits the plaintiffs were
entitled to.
The shutdown agreement in this case is not short term—in
fact has no end date (though it would expire eventually, as
we’ll see)—and, in any event, no more than the language in
Diehl would its language of “shall continue” allow an
inference that Pabst’s contractual obligations terminated any
earlier than six months after the death of the last retiree.
And so Pabst remains obligated to provide prescription-
drug benefits. But also as in Diehl it does not follow, as the
plaintiffs argue, that the scope of the obligation was forever
fixed by the terms of the 1971 Blue Cross-Blue Shield
program—that the chain of incorporations from the shut-
down agreement through the collective bargaining agree-
ments back to that plan binds Pabst to every detail of a plan
that no longer even exists.
No. 05-4742 5
Because workers could retire from Schlitz after 25 years of
service—and a worker who retired at 50 in 1982 might well
live another 30 years—the shutdown agreement was a
very long-term contract, though the provider’s total obliga-
tions would diminish as retirees died off, and eventually
would cease altogether. The longer the term of a con-
tract, the more likely it is to contain provisions that ad-
just for future contingencies, such as an escalator
clause to adjust for inflation. See PSI Energy, Inc. v. Exxon
Coal USA, Inc., 991 F.2d 1265, 1266-67 (7th Cir. 1993); Karen
Eggleston, Eric A. Posner & Richard Zeckhauser, “The
Design and Interpretation of Contracts: Why Complexity
Matters,” 95 Nw. U.L. Rev. 91, 126 n. 101 (2000). The shut-
down agreement contains no such provisions. But the
likeliest reason it does not is that it does not actually specify
any long-term benefits. It merely incorporates by reference
the benefits provision of a collective bargaining agreement,
and since a collective bargaining agreement is short term,
the parties rarely bother to negotiate provisions designed to
cope with the profound uncertainties about what the distant
future may hold. “A short-term contract . . . is more likely to
have ‘unforeseen’ events disrupt party expectations,
precisely because the parties are unlikely to focus attention
on the possibility of change in the interval between the
signing of the contract and its expiration.” Subha
Narasimhan, “Of Expectations, Incomplete Contracting, and
the Bargain Principle,” 74 Calif. L. Rev. 1123, 1192 n. 211
(1986). This is true of collective bargaining agreements as
well as other short-term contracts. See Harry Shulman,
“Reason, Contract, and Law in Labor Relations,” 68 Harv. L.
Rev. 999, 1004-05 (1955).
How the parties to a contract actually perform their
contractual undertakings is often and here persuasive
evidence of what the parties understood the contract to
6 No. 05-4742
require. That the words “shall continue” in the shut-
down agreement were not meant to create an inflexible
obligation is thus suggested by the frequent changes that the
plan administrators made in the drug program—some of
which, at least, were disadvantageous to the partic-
ipants (we gave an example earlier)—without evoking
a peep of protest from anyone. The administrators would
hardly have been likely to increase benefits had they
thought the increase would set a new floor for the indefinite
future. But that is not to imply a tacit agreement that the
administrators could cut the benefits to zero. At once
defending this extreme position and flinching from it,
Pabst’s lawyer told us at argument that as long as the
cut did not reduce the benefits to a de minimis level, it would
not violate the shutdown agreement. But de minimis covers
a range that ends just above zero, and “shall continue at a
level arbitrarily close to zero” is not a plausible interpreta-
tion of “shall continue.”
Pabst’s lawyer acknowledged however the possibility
of an intermediate position—that any reduction in bene-
fits below the level specified in the shutdown agreement
had to be reasonable. And his brief had referred us to
affidavits from an expert on health insurance that the
changes that Pabst made in the plan it inherited were
reasonable in light of changes in health care since 1971 that
had affected health insurance; the expert stressed the greatly
increased availability of generic substitutes for brand-name
drugs. Adamant that the level of benefits could not be
reduced by even a penny, the plaintiffs presented no
counterevidence; and in this court, continuing in that vein,
they dismiss the expert’s affidavits as irrelevant.
Pabst is on to something. The most sensible interpretation
of the shutdown agreement, the interpretation that steers
No. 05-4742 7
between implausible extremes, is that it obligates the
company to provide prescription-drug benefits at a level
“reasonably commensurate” (to quote earlier cases, broadly
similar to this one) with the 1971 Blue Cross-Blue Shield
plan. Diehl v. Twin Disc, Inc., supra, 102 F.3d at 311; Barker v.
Ceridian Corp., 122 F.3d 628, 638 (8th Cir. 1997); Poole v. City
of Waterbury, 831 A.2d 211, 233-34 (Conn. 2003). Holding
Pabst to the literal terms of that ancient plan in today’s
marketplace would give the retirees an insanely generous
plan relative to today’s norms, rather than a plan that would
provide them with the same coverage, mutatis mutandis, that
they would have had in 1974. (The Blue Cross-Blue Shield
plan was created in 1971, but the breweries did not start
enrolling their retirees in it until 1974.)
That is one reason to doubt the plaintiff’s interpretation.
The indefinite duration of the shutdown agreement, coupled
with its structure—the chain of incorporations going back to
1971—is another. But the most compelling reason is the
sheer impossibility of determining Pabst’s obligations if the
only guide is the old Blue Cross-Blue Shield brochure—yet
it is the only evidence of the plan’s terms. According to the
brochure, the plan provides reimbursement for “covered
drugs.” This implies that not all drugs in existence in 1971
were eligible for reimbursement, which in turn implies that
not all newly developed drugs would be eligible either; an
affirmative decision by the plan to “cover” them would be
required. Most prescription-drug plans limit the circum-
stances in which they will reimburse the cost of a given
drug (for example, minoxidil for hypertension but not for
hair loss), and exclude some drugs from coverage alto-
gether. The brochure’s language suggests that the Blue
Cross-Blue Shield plan was like other plans in this respect.
But being just a brochure, it does not spell out which drugs
are covered or the criteria for determining coverage of
8 No. 05-4742
future drugs and future (different, or better understood, or
more treatable) medical conditions. Maybe “the contract” to
which the brochure alludes, whose “coverage, exclusions,
amendments and other provisions” qualify the brochure’s
statements, would answer these questions. But neither party
has produced or invoked the contract, suggesting that it’s
been lost; in any event, no arguments based upon it have
been made.
So the drug provision in the shutdown agreement con-
tains gaps. Filling gaps is a standard activity of courts in
contract cases. William B. Tanner Co. v. Sparta-Tomah Broad-
casting Co., 716 F.2d 1155, 1158-60 (7th Cir. 1983); Dobson v.
Hartford Financial Services Group, Inc., 389 F.3d 386, 399 (2d
Cir. 2004); Black Horse Lane Associates, L.P. v. Dow Chemical
Corp., 228 F.3d 275, 285-86 (3d Cir. 2000); Restatement
(Second) of Contracts § 204 and comment b (1981). As we
explained in Haslund v. Simon Property Group, Inc., 378 F.3d
653, 655 (7th Cir. 2004), “If contracting parties had to
provide for every contingency that might arise, contract
negotiations would be interminable. Contracts can be
shorter and simpler and cheaper when courts stand ready
to fill gaps and resolve ambiguities in the minority of
contracts that get drawn into litigation.” Particularly apt are
our words in the William B. Tanner case: “While we find no
ambiguity of expression to be present in the contract, we do
find a deficiency or omission of scope.” 716 F.2d at 1159.
But the gap in this case can be filled only if “reasonable
commensurability” is ascertainable here by the methods
of litigation, an issue the district judge did not address. (Nor
did he mention the expert’s affidavits.) The qualification is
implicit in Diehl, where the shutdown agreement also
incorporated the health-benefits provision of an old collec-
tive bargaining agreement. For we didn’t try to apply the
No. 05-4742 9
standard of reasonable commensurability to the facts of that
case, and we won’t try here; but we will try to provide a
little guidance to the district judge.
The Blue Cross-Blue Shield brochure notes that “in a
recent year, Americans spent $3.7 billion for 1.1 billion out-
of-hospital prescriptions.” This is an average of $3.36 per 34-
day supply (apparently the quantity to which the quotation
refers, though like much of the original plan this is obscure).
That is 1.68 times the $2 deductible. Were the deductible
increased to the point at which the current average price (of
a brand-name drug—for remember that Pabst has not raised
the deductible for generics, though it has reduced its
obligation to reimburse by limiting reimbursement to the
cost of a 30-day supply) were 1.68 times the deductible, the
members of the plaintiff class would be receiving a benefit
reasonably commensurate with the benefits provided by the
shutdown agreement. (So if the average price today is $20,
the deductible would be $11.90 ($20/1.68).) With this
adjustment, there would be no reason to cut down the
quantity of drugs covered by the deductible from 34 to 30
days.
Calculating a benefits ceiling reasonably commensurate
with the ceilings in the shutdown agreement is more
difficult—for there were no ceilings in the agreement. But
average drug prices were much lower in 1981 (not to
mention 1971) and drug usage less extensive. “Prescription
drug expenditures have grown at double-digit rates every
year since 1980.” Craig Copeland, “Prescription Drugs:
Issues of Costs, Coverage, and Quality,” Employee Bene-
fits Research Institute Issue Brief, Apr. 1999, p. 3,
http://www.ebri.org/pdf/briefspdf/0499ib.pdf. That is
why there is now a Medicare prescription-drug plan.
Supposing without deciding that all or virtually all
10 No. 05-4742
prescription-drug programs created in 2004 (the year of
the challenged reduction in benefits) contained yearly
and lifetime ceilings, the highest of those ceilings would
provide reasonable commensurability with the benefits
provision of the shutdown agreement. A further adjustment
would be appropriate to reflect the new Medicare program.
The shutdown agreement actually requires deduction of
benefits received under a prescription-drug program
created under future “hospital-surgical legislation,” which
does not describe the new Medicare program but perhaps
gestures, if blindly, toward it.
In sum, the benefits to which the plaintiff class is en-
titled are those specified in the shutdown agreement but
adjusted—to the extent possible without wild conjec-
ture—for changes to which the parties to the agreement
would have agreed had they focused at the outset on the
duration of the commitment made by the employers. The
district judge will want to pay particular attention to the
pharmaceutical-benefits packages that employees in the
brewing industry negotiate through their unions today, as
the brewers’ union did lo these many years ago. Those
packages should approximate, at least roughly, the
value of the 1971 Blue Cross-Blue Shield plan updated to
2004.
The judgment is vacated and the case remanded for
further proceedings consistent with this opinion.
No. 05-4742 11
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-7-06