Court Sends Back Retiree Health Care Case

The appellate court vacated a district court’s dismissal of a complaint brought by the Sonoma County Association of Retired Employees alleging that the County of Sonoma had breached its obligation to provide certain vested health care benefits in perpetuity. The Association alleged that although the County had not expressly promised to provide these benefits, it had implicitly done so.    

The 9^th Circuit held that in light of the California Supreme Court’s decision in Retired Employees Ass’n of Orange County, Inc. v. County of Orange (REAOC II), which recognized that a county may form a contract with implied terms under specified circumstances, the district court erred in dismissing the Association’s complaint with prejudice. The appellate court said in its opinion that although the Association’s amended complaint failed to plausibly allege the County created an implied contract by ordinance or resolution, the district court erred by denying the Association leave to amend on the ground that such amendment would be futile.The case was remanded to the district court for further proceedings.  

The Association alleged that, in connection with providing health care benefits for retirees over the course of many decades, the County made two different promises to the retirees. First, beginning in at least 1964, the County promised to pay “all or substantially all” of the costs of post-retirement health care benefits for its retirees and their dependents. Second, in 1985, the County entered into a “tie agreement,” which promised that the County would treat retirees and their dependents the same as it treated the active management employees with respect to health care benefits and the County’s payment of costs. 

The Association alleged that these promises, and the employees’ performance of services in exchange for these promises, created a legally binding contract. It further alleged that the County intended these promises to create health care benefits that would continue during the lives of the retirees and their dependents.  

According to the REAOC II decision by the state high court, in order to survive a motion to dismiss, the Association’s complaint must plausibly allege that the County: (1) entered into a contract that included implied terms providing health care benefits to retirees that vested for perpetuity; and (2) created that contract by ordinance or resolution. The Association’s allegations met the first requirement. The 9^th Circuit disagreed with the district court that allowing the Association to amend its compliant to satisfy the second requirement would be futile.