Evergreen Clauses May Trump Bargaining Parties' Subsequent Agreement to Terminate CBA, Court Rules

The U.S. Court of Appeals for the Seventh Circuit recently ruled that Central States, Southeast and Southwest Areas Pension Fund may continue its lawsuit against Transervice Logistics, Inc. and Zenith Logistics, Inc. seeking allegedly outstanding pension fund contributions. The case examined two consolidated appeals, each involving a nearly identical collective bargaining agreement (CBA) between each employer and a union, and trust agreements between each employer and the plaintiff fund. The court was asked to determine whether the employers were required to maintain contributions to a multiemployer pension plan pursuant to so-called “evergreen clauses” that renewed the CBAs each year unless timely terminated.

Factual Background

The CBAs obligated the employers to make pension fund contributions to plaintiff, making the fund a third-party beneficiary of the agreements. The trust agreements obligated the employers to contribute to the fund for the “entire term of any collective bargaining agreement… (including any extension of a collective bargaining agreement through an evergreen clause…).” The CBAs were set to expire on January 31, 2019, but contained evergreen clauses that renewed the CBAs each year unless terminated with 60 days’ notice.

In November 2018, after the window for notice of timely termination had closed, the union president sent a letter to each employer with the subject line “CONTRACT EXPIRATION” followed by the expiration date stated in the evergreen clause. The text of the letters did not explicitly express an intention to terminate the CBAs. After the letters were sent, the employers and union negotiated new CBAs to take effect on February 1, 2019, which required employers to continue making pension fund contributions but to a different pension fund.

In letters dated January 30, 2019, the employers informed the plaintiff fund that they would no longer contribute after February 2, 2019. After the fund asked for proof that the CBAs were timely terminated, the employers provided copies of the union’s negotiation letters from November, together with F-7 forms that were attached to the letters. The F-7 form is used to notify the Federal Mediation and Conciliation Service when a party wishes to terminate or modify a CBA, as required by the National Labor Relations Act. The fund continued to bill employers for contributions, which the employers did not make.

Lawsuit and Decision

The fund filed suit against the employers under ERISA § 502, alleging that the employers breached the trust agreements in violation of ERISA § 515 by ceasing contributions without having properly terminated the CBAs. Defendants moved to dismiss the complaint for failure to state a claim, arguing that the November letters properly terminated the CBAs such that the evergreen clauses did not renew the contracts requiring contributions to the pension fund. The district court granted the motion, and the Seventh Circuit reviewed the decision de novo.

The court found that an intention to terminate must be “unequivocal and unmistakable” in large part because Section 515 “makes clear that a court deciding a contribution obligation should hold the parties to the terms of their contracts as written.” A standard of strict enforcement is consistent with Section 515’s purpose of ensuring that multiemployer benefit funds can rely on the terms of agreements alone to determine funding obligations.

The court concluded that the November letters expressed a desire to negotiate new contracts, which is not equivalent to expressing a desire to terminate the CBAs. In other words, the November letters lacked an express intent to terminate the CBAs. Furthermore, the court found that although the F-7 forms were attached to the letters, the union selected an option categorizing the notice type as a “renegotiation” and therefore the forms did not express an intention to terminate the contracts. The court declined to consider extrinsic evidence of negotiations because the contracts provided clear instructions regarding method and timing of termination.

Finally, the court rejected defendants’ argument that it would be unfair to make employers “pay into two pension funds for the same hours worked for the same group of employees.” The court acknowledged that while such a result is unfortunate, Section 515 does not admit equitable defenses. Therefore, the court held that the employers were obligated to contribute to the plaintiff fund for another year pursuant to the evergreen clauses and remanded the case for further proceedings.

Effect and Questions

While evergreen clauses can be useful tools to provide parties with additional time to negotiate contracts without the threat of strikes and lockouts, parties should also be aware of the potential pitfalls, including strict enforcement. Failure to expressly terminate the CBAs may result in an additional year or more of participation in the old pension fund, which not only increases contributions but also may increase any potential withdrawal liability once an employer is able to exit that pension fund. In the case of a 9(a) CBA, labor law requires the employer to maintain the status quo after termination of an agreement, making the impact of CBA termination on employees minimal, but it preserves the employer’s ability to exit a multiemployer pension plan upon agreement or impasse rather than waiting for the duration of the

Editor’s Note:  This article was written by guest authors Gregory J. Ossi  and Caitlin M. Britos of the law firm Faegre Drinker Biddle & Reath LLP and reprinted with permission. The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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