he 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).

Orth v. Wisconsin State Employees Union, Council 24, Group Health Plan Wisconsin State Employees Union, Council 24, No. 07-2778 (7th Cir.) (October 22, 2008)

As this excerpt suggests, the Seventh Circuit in Orth explored two defenses offered by plan fiduciaries as justification where the plan language failed to comport with the plan administrator’s administrative practices. The opinion, authored by Judge Posner, reaches the conclusion that neither theory advanced by the defendants had merit.

The Facts

Retirees were promised health coverage. The retirees’ financial obligation was set by cross reference.

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.”

(emphasis added)

When Orth retired in 1998, he had more than $42,000 in accrued sick leave. The employer applied his sick leave to pay 100% of the premium, despite the premium share set forth above, and virtually exhausted the sick leave account in eight years.

The Defense

The defendants had evidently charged other retirees the full amount or premium and argued that #1 the plan provisions were ambiguous when viewed in the context of administrative practices, or alternatively, #2 the parties had subsequently modified the arrangement through course of dealing.

Neither of these arguments really cohere with the ERISA world view.

Judge Posner took the latent ambiguity argument as an occasion for a review of the classic instance of confusion in contract terms, the venerable Peerless ship case.

The defendants admit that the language of the agreementis 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).

But Peerless involved a case in which there were two ships with the same name arriving a different times. In the case at bar, the plan language was not ambiguous.

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.

The alternative argument fared no better.

The court held that the subsequent dealings argument ran afoul of the written plan requirement – and the secretive aspect violated the plan managers’ fiduciary duty.

Without knowledge of their rights under the plan, participants cannot make intelligent decisions with regard to the purchase of private health insurance to replace or supplement their plan benefits. The secret side deal between the union and the employer in this case was a breach of the plan managers’ fiduciary duty to the plan participants and beneficiaries. So it is doubly unlawful—as unwritten and as secret.

Note: The court had harsh words for the defendants:

The judge made no mistake. No careful lawyer could have thought this a case of latent ambiguity or valid modification. And for the defendants to use their deceptive conduct toward the retired employees as a basis for trying to duck liability was shabby. The only questionable aspect of the district judge’s opinion is his statement that the defendants were acting throughout in good faith.

Attorneys’ Fees – In justifying the award of attorneys’ fees, the court observed that:

There are fixed costs of litigation, and they prevent a plaintiff from scaling down his expenses proportionately to the stakes. Tuf Racing Products, Inc. v. American Suzuki Motor Corp., supra, 223 F.3d at 592. One purpose of allowing an award of attorneys’ fees to a prevailing plaintiff is to disable defendants from inflicting with impunity small losses on the people whom they wrong. Cf. Hyde v. Small, 123 F.3d 583, 585 (7th Cir. 1997). Accomplishing that purpose will often require a fee award equal to or larger than the damages awarded