United States: Sixth Circuit Finds CBA Provision Requiring Union To Indemnify Employer For Withdrawal Liability Does Not Violate Public Policy Under ERISA

The Sixth Circuit Court of Appeals recently held that a collective bargaining agreement (CBA) provision, which obligated a union to indemnify an employer for withdrawal liability did not violate public policy under the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA). This issue was undecided in the Sixth Circuit, and the decision provides some much-needed guidance for employers. Shelter Distribution, Inc. v. Gen'l Drivers, Warehousemen & Helpers Local Union No. 89, No. 11-5450, Sixth Circuit Court of Appeals (March 16, 2012).

Factual Background

After failed collective bargaining agreement negotiations, the union disclaimed representation of employees of Shelter Distribution, Inc. and terminated the collective bargaining process. As a result of the union's disclaimer, the company withdrew from the Central States, Southeast and Southwest Areas Pension Fund. As a result, the fund imposed withdrawal liability against Shelter Distribution.

Shelter Distribution demanded indemnification from the union pursuant to a CBA provision, which stated that "[t]he Union shall indemnify the [c]ompany for any contingent liability which may be imposed under the [MPPAA]." Shelter Distribution filed suit after the union refused to comply with the indemnification provision. However, the district court stayed the case and ordered the parties to arbitrate pursuant to the CBA. During the arbitration, the union argued that, under MPAAA, it was a violation of public policy for a union to indemnify an employer for any withdrawal liability. The arbitrator rejected the public policy argument, citing the Third Circuit Court of Appeals' decision in Pittsburgh Mack Sales & Service, Inc. v. Int'l Union of Operating Engineers, Local Union No. 66, 580 F.3d 185 (3d Cir. 2009) where the Third Circuit found that ERISA and MPPAA did not establish such public policy preventing enforcement of a CBA indemnification provision. As such, the arbitrator required the union to indemnify Shelter Distribution for the amount of withdrawal liability. The union tried to vacate the arbitrator's ruling in district court, but the district court upheld the arbitrator's decision. Thereafter, the union appealed to the Sixth Circuit.

Legal Analysis

Noting that the case involved an issue of first impression, the Sixth Circuit considered its prior holding in Pfahler v. National Latex Products Co., 517 F.3d 816 (6th Cir. 2007) was instructive. In that case, the Sixth Circuit observed that ERISA Section 410(a) only prohibits agreements that diminish the statutory obligations of a fiduciary and that ERISA Section 410(b) allows a fiduciary to purchase insurance to cover any potential liability. The court stated that "it would be illogical to interpret the statute as prohibiting indemnification agreements which accomplish the same thing [as insurance]" because "there is no logical difference between contracting with an insurance company under [ERISA Section 410(b]) and negotiating an indemnification provision like the provision" in the CBA at issue. The court explained that the CBA provision at issue did not violate ERISA Section 410(a) because it did not shift financial liability from the company, as the company was still liable for the withdrawal liability. Instead, similar to insurance, the company simply found an alternate source of funds to pay that liability through indemnification by the union. As such, the Sixth Circuit held the indemnification provision in the CBA was not a violation of public policy.

Practical Impact

This decision is important because it provides needed clarification on the issue of whether a third party may contractually agree to be held liable for an employer's withdrawal liability responsibilities. Going forward, employees should consider negotiating for "Shelter-like" indemnification provisions in CBAs to recover potential withdrawal liability amounts from unions.

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