In the

United States Court of Appeals

For the Seventh Circuit

No. 07-2778

RONALD P. ORTH and EUFEMIA B. ORTH,

Plaintiffs-Appellees,

v.

WISCONSIN STATE EMPLOYEES UNION,

COUNCIL 24, and GROUP INSURANCE PLAN 

WISCONSIN STATE EMPLOYEES UNION,

Defendants-Appellants.

Appeal from the United States District Court

for the Eastern District of Wisconsin.

No. 07-C-149—William C. Griesbach, Judge.

ARGUED MAY 7, 2008—DECIDED OCTOBER 22, 2008

Before BAUER, POSNER, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge. The plaintiffs in this suit under

both ERISA and the Taft-Hartley Act charge the defendants, an employer and a welfare benefits plan, with

having violated provisions of an ERISA plan contained in
2 No. 07-2778

a collective bargaining agreement between the employer

(Council 24 of the Wisconsin State Employees Union) and

the union that represented Mr. Orth. The district judge

granted summary judgment for the plaintiffs and also

awarded them their attorneys’ fees. The 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).

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.”

When he retired in 1998, Orth had more than $42,000

in accrued sick leave. Eight years later his former

employer told him that the entire amount had been or

was about to be completely used up in payment of his

share of his health insurance premiums. The reason, it

turns out, is that contrary to the language of the collective
No. 07-2778 3

bargaining agreement that we quoted, the welfare

benefits plan was deducting not 10 percent but 100 percent

of the retired employees’ health insurance premiums

from their sick-leave accounts.

The defendants admit that the language of the agreement is 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). The

plaintiff agreed to sell the defendants a quantity of

cotton, at a specified price, to be shipped from Bombay to

Liverpool by a ship called Peerless. Nothing unclear there.

But it happened that there were two ships named

Peerless sailing from Bombay to Liverpool a few months

apart. The cotton was shipped on the second Peerless,

and the defendant—the price of cotton having fallen in

the interim—argued that it should have been shipped on

the first one. A.W. Brian Simpson, “Contracts for Cotton

to Arrive: The Case of the Two Ships Peerless,” 11 Cardozo

L. Rev. 287, 319-21 (1989). Nothing in the contract

indicated which ship Peerless the parties had agreed that

the cotton would be shipped on, and the court ruled

therefore that the contract was hopelessly ambiguous—though perfectly clear on its face.

At some point in the administration of the collective

bargaining agreement in the present case, the plan started
4 No. 07-2778

deducting 100 percent of retired employees’ insurance

premiums from their sick-leave accounts. Two retired

employees besides Orth were subjected to such deductions. They did not complain, but on the other hand they

had never been told that 100 percent rather than 10 percent

of the premiums were being deducted and so far as

appears they never discovered the fact on their own. There

is also evidence that the employees’ union knew what the

plan was doing but did not object. And a subsequent

collective bargaining agreement, though inapplicable to the

Orths’ claim, changed the employee’s share from 10

percent of premiums to a combination of zero percent of

premiums for single coverage and 100 percent of the

difference between the premiums for single coverage and

family coverage. This change was proposed by the union

and for all we know made most employees better off, but

probably not the Orths. Both Orths were reimbursed under

their retirement plan for 90 percent of their health insurance premiums; the new provision would reimburse all of

Mr. Orth’s premiums but none of his wife’s.

All this evidence, however it might bear on the defendants’ alternative argument that the contract on which

the Orths are suing was modified by subsequent dealings

between the union and the employer, has no force in

establishing a latent ambiguity. Indeed, we cannot see

how the same evidence could support both arguments.

In a case of latent ambiguity, the contract is seen, once

its real-world setting is understood, to have never been

clear; in a case of modification, the contract was clear

when it was made but was later changed. After the extrinsic evidence was presented in the Raffles case, it was
No. 07-2778 5

apparent that the ambiguity in the word “Peerless” could

not be cured because the contracting parties had not

agreed on which “Peerless” the cotton was to be shipped

on. 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.

An ordinary contract can be modified by subsequent

dealings that give rise to an inference that the parties

agreed, even if just tacitly, to the modification (“acquiesced,” as the cases say, though “agreed” is clearer). E.g.,

Cromeens, Holloman, Sibert, Inc v. AB Volvo, 349 F.3d 376,

395 (7th Cir. 2003); Operating Engineers Local 139 Health

Benefit Fund v. Gustafson Construction Corp., 258 F.3d 645,

649 (7th Cir. 2001); International Business Lists, Inc. v.

American Tel. & Tel. Co., 147 F.3d 636, 641 (7th Cir. 1998);

Edell & Associates, P.C. v. Law Offices of Peter G. Angelos, 264

F.3d 424, 440 (4th Cir. 2001); see Restatement (Second) of

Contracts § 202(4) (1981). But because ERISA plans must be

“maintained pursuant to a written instrument,” 29 U.S.C.

§ 1102(a)(1), only modifications of such plans in writing

are enforceable, and so it would seem that the principle

that contracts can be modified by the subsequent

conduct of the parties is inapplicable to ERISA plans

unless the conduct is proved by a writing.

The common paraphrase of section 1102(a)(1) is that

“ERISA plans must be in writing and cannot be modified

orally.” Livick v. Gillette Co., 524 F.3d 24, 31 (1st Cir. 2008);
6 No. 07-2778

see, e.g., Nachwalter v. Christie, 805 F.2d 956, 960 (11th

Cir. 1986). But the two clauses don’t fit together; the

accurate paraphrase is that because a plan must be maintained pursuant to a writing, it can be modified only in

writing. Modification by conduct is tacit, and therefore

(unless evidenced by a writing) unwritten, like oral

modification; why should it matter that it is nonverbal?

The statutory requirement “that the plan be in writing is

thought to carry over to this ‘procedure for amending

such plan,’ hence to mean that plan amendments must be

in writing.” John H. Langbein, Susan J. Stabile & Bruce A.

Wolk, Pension and Employee Benefit Law 690 (4th ed. 2006).

That would exclude modification by subsequent dealings

not confirmed in writing.

The refusal of this and other courts to hold that promissory estoppel can never be used to vary an ERISA plan

may seem inconsistent with requiring that all modifications be in writing. But as we explained in Miller v. Taylor

Insulation Co., 39 F.3d 755, 758-59 (7th Cir. 1994), the main

objection “to oral modifications [of ERISA plans] is that

they would enable the plan’s integrity, and possibly its

actuarial soundness, to be eroded by relatively low-level

employees who in response to inquiries about the scope

of coverage advise participants that a particular medical

procedure is covered, even though the plan is explicit that

it is not covered. This concern is diminished when the

doctrine [of promissory estoppel] is used to prevent an

employer from denying that an employee (or as in this

case a former employee) is a participant in the plan.

Assurances that one is a participant, as distinct from

assurances concerning the plan’s coverage of a particular
No. 07-2778 7

medical procedure, are unlikely to come from low-level

employees, and did not in this case” (citations omitted). In

the present case, even more clearly, there is no danger

that departing from the literal terms of the plan would

undermine its actuarial soundness, for the departure

is sought in order to reduce the plan’s liability.

But the statutory requirement that a modification of an

ERISA plan be in writing is not limited to cases in which

departures might deplete the plan’s assets, important as

those cases are. See, e.g., Shields v. Local 705, Int’l Brotherhood of Teamsters Pension Plan, 188 F.3d 895, 903-05 (7th

Cir. 1999) (concurring opinion). In most of the relatively

few cases in which estoppel, whether promissory or

equitable, has been allowed to vary the terms of the

written plan, the claim of estoppel was itself based on a

writing (for example, a written promise)—and we have

deemed that element essential. Kamler v. H/N Telecommunication Services, Inc., 305 F.3d 672, 679 (7th Cir. 2002); Downs

v. World Color Press, 214 F.3d 802, 805 (7th Cir. 2000);

Schmidt v. Sheet Metal Workers’ National Pension Fund, 128

F.3d 541, 546 (7th Cir. 1997). The application of the writing

requirement to modification by a subsequent course of

dealings is implicit in Schoonmaker v. Employee Savings Plan

of Amoco Corp. & Participating Companies, 987 F.2d 410, 413-

14 (7th Cir. 1993), and Dardaganis v. Grace Capital, Inc., 889

F.2d 1237, 1241 (2d Cir. 1989); cf. Central States, Southeast &

Southwest Areas Pension Fund v. Gerber Truck Service, Inc.,

870 F.2d 1148, 1149-50 (7th Cir. 1989) (en banc). We now

make it explicit.

But we must consider the bearing of the fact that the

ERISA plan was created by a collective bargaining
8 No. 07-2778

contract, see, e.g., Matuszak v. Torrington Co., 927 F.2d 320,

321, 323-24 (7th Cir. 1991), and such contracts can be and

often are modified by a subsequent nonwritten agreement—whether express (and therefore oral) or tacit (and

therefore evidenced by subsequent dealings)—between

the union and the employer. E.g., id. at 321, 323-

24 (7th Cir. 1991); Railway Labor Executives Ass’n v. Norfolk

& Western Ry., 833 F.2d 700, 705 (7th Cir. 1987); Mohr v.

Metro East Mfg. Co., 711 F.2d 69, 71-73 (7th Cir. 1983);

American Federation of Musicians, Local 2-197 v. St. Louis

Symphony Society, 203 F.3d 1079, 1080 (8th Cir. 2000);

Sanderson v. Ford Motor Co., 483 F.2d 102, 111-12 (5th Cir.

1973); but cf. Pleasantview Nursing Home, Inc. v. NLRB, 351

F.3d 747, 753-54 (6th Cir. 2003). Must the employees

consent for the modification to be effective? There is no

indication that the two employees who allowed an additional 90 percent of their health insurance premiums to

be deducted knew they were being short-changed (even

if the union did, and acquiesced, of which there is some

evidence, as we said). But employees are not signatory

parties to the collective bargaining agreement, Plumbers’

Pension Fund, Local 130 v. Domas Mechanical Contractors,

Inc., 778 F.2d 1266, 1269 (7th Cir. 1985); H. K. Porter Co. v.

Local 37, United Steelworkers of America, 400 F.2d 691,

694 (4th Cir. 1968), and although they are third-party

beneficiaries, International Brotherhood of Electric Workers

v. Hechler, 481 U.S. 851, 863-65 (1987); Mohr v. Metro East

Mfg. Co., supra, 711 F.2d at 72; Anderson v. AT&T Corp., 147

F.3d 467, 473 (6th Cir. 1998), the rights conferred by that

status are not identical to those of express parties. The

prevailing although not unanimous view is that the
No. 07-2778 9

signatory parties can alter the contract (unless it

provides otherwise) even to the detriment of a third-party

beneficiary unless the latter, learning that he is a thirdparty beneficiary, relies to his detriment on his rights

under it. Restatement, supra, §§ 311(2)-(3); see E. Allan

Farnsworth, Farnsworth on Contracts § 10.8 (4th ed. 2004).

This principle is modified somewhat in the collective

bargaining context. Although, as we said, the contract can

be modified by agreement between the union and the

employer without the employees’ consent, the union has

a duty of fair representation. The breach of that duty is

illustrated by Lewis v. Tuscan Dairy Farms, Inc., 25 F.3d 1138,

1140-43 (2d Cir. 1994), where, much as in this case, the

union’s agent concealed from the union’s members an

oral agreement that he had made with the employer. See

also Bennett v. Local Union No. 66, Glass, Molders, Pottery,

Plastics & Allied Workers Int’l Union, 958 F.2d 1429 (7th

Cir. 1992); Merk v. Jewel Food Stores Division, 945 F.2d 889,

894 (7th Cir. 1991); Aguinaga v. United Food & Commercial

Workers Int’l Union, 993 F.2d 1463, 1468-70 (10th Cir. 1993).

The plaintiffs in our case do not allege a breach of fair

representation by the union, as they are entitled to do in

a suit to enforce rights under a collective bargaining

agreement, which this suit in part is. But the omission

turns out not to matter. The plan fiduciaries are to the

plan participants and beneficiaries as the union is to the

workers it represents; the union too is a fiduciary, and its

duty of fair representation is simply another name for

“fiduciary duty.” Welfare plans normally and in this case

do not create vested rights; they can be changed without

the consent of the participants and beneficiaries. Hughes
10 No. 07-2778

Aircraft Co. v. Jacobson, 525 U.S. 432, 443 (1999); CurtissWright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995). But

just as in the collective bargaining setting, it is a breach

of fiduciary duty to change the plan without notice to

those affected by the change. Smith v. National Credit

Union Administrative Board, 36 F.3d 1077, 1081 (11th Cir.

1994). It is also a statutory violation; a plan’s participants

and beneficiaries must be notified in writing of all modifications to the plan. 29 U.S.C. § 1024(b)(1); Godwin v. Sun

Life Assurance Co. of Canada, 980 F.2d 323, 327 (5th Cir.

1992). 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.

That completes our discussion of liability. But the

defendants also quarrel with the award of damages. They

say the judge should not have awarded the plaintiffs

the cost of the premiums that the plaintiffs had to pay

in order to keep their health insurance in force after

the plan wrongfully emptied Orth’s sick-leave account. It

is true that consequential damages cannot be recovered

in a suit under ERISA. Massachusetts Mutual Life Ins. Co.

v. Russell, 473 U.S. 134, 148 (1985); McDonald v. Household

Int’l, Inc., 425 F.3d 424, 429-30 (7th Cir. 2005). Had the

Orths paid higher premiums to another health insurer,

they could not recover the difference between those

premiums and the premiums the collective bargaining
No. 07-2778 11

agreement required the plan to pay. Zielinski v. Pabst

Brewing Co., Inc., 360 F. Supp. 2d 908, 922-23 (E.D.

Wis. 2005). But all they are seeking is the premium reimbursement to which the contract entitles them.

The defendants challenge the district judge’s awarding

attorneys’ fees to the plaintiffs. They argue that the

judge was mistaken to think that there had been no

reasonable basis (or, equivalently, as the Supreme Court

noted in Pierce v. Underwood, 487 U.S. 552, 565-66 (1988),

“substantial justification”) for the defendants’ position.

Herman v. Central States, Southeast & Southwest Areas

Pension Fund, 423 F.3d 684, 696 (7th Cir. 2005); Production &

Maintenance Employees’ Local 504 v. Roadmaster Corp., 954

F.2d 1397, 1404 (7th Cir. 1992); Cline v. Industrial Maintenance Engineering & Contracting Co., 200 F.3d 1223, 1236 (9th

Cir. 2000). 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.

The defendants complain finally about the amount of

attorneys’ fees awarded to the plaintiffs—nearly $41,000.

That is almost as much as the plaintiffs’ remedial award,

which consisted of $36,000 restored to Mr. Orth’s sick

leave account ($40,000 minus 10 percent) plus $7,200 in

premium reimbursement. Even if the attorneys’ fee

award had exceeded the plaintiff’s remedial award
12 No. 07-2778

(which it may have done, since the sick leave account is

merely a credit against insurance premiums not yet

charged), the disproportion would not necessarily matter. For the general principle, see City of Riverside v. Rivera,

477 U.S. 561, 580-81 (1986); Molnar v. Booth, 229 F.3d 593,

605 (7th Cir. 2000); Tuf Racing Products, Inc. v. American

Suzuki Motor Corp., 223 F.3d 585, 592 (7th Cir. 2000), and for

its application to ERISA see United Automobile Workers Local

259 Social Security Dept. v. Metro Auto Center, 501 F.3d 283,

292-93, 296 (3d Cir. 2007); Building Service Local 47 Cleaning

Contractors Pension Plan v. Grandview Raceway, 46 F.3d 1392,

1401 (6th Cir. 1995).

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.

AFFIRMED.

10-22-08