Jones Day: Rescuing the Rust Belt
Jones Day's labor lawyers have used court-approved health care settlements with employees to fix GM's balance sheet.
Winner, Labor and Employment.
By 2007, General Motors Corporation needed major relief. Having long ago promised to cover every cent of its retirees' health care expenses, it carried a crippling long-term burden of $51 billion in retiree health care costs. GM had more than three retired workers for every active employee, and on each manufactured car paid roughly $1,500 in health care costs¿more than it spent on steel. "It was out of control," says Thomas Gottschalk, the longtime GM general counsel who is now of counsel at Kirkland & Ellis.
Desperate for a way out, the company turned to its chief labor counsel, Jones Day partner Andrew Kramer, whom Gottschalk calls GM's "go-to guy." Kramer came through. In September, GM signed a landmark class action settlement that transfers its entire health care liability off of its books and into a Voluntary Employees' Beneficiary Association. GM must put $35 billion into the VEBA¿but gets to exit the business of health care.
This is Jones Day's first appearance in the labor and employment category of The American Lawyer's litigation department of the year contest. The firm had an impressive two years in traditional cases, highlighted by aggressive pretrial work and successful appeals. Jones Day's litigators blocked certification for a class of Wal-Mart Stores, Inc., assistant managers who sought more than $400 million in overtime wages. They got portions of an age discrimination suit against International Business Machines Corporation thrown out after the company had previously suffered a major loss in the U.S. Court of Appeals for the Ninth Circuit and brought Jones Day in to bail it out. They convinced the Third Circuit to reverse an adverse federal district court ruling in an age discrimination case against CBS Corporation, creating new law in the process. And they're handling major employment matters for the likes of Verizon Communications Inc. and McDonald's Corporation.
But Jones Day won our competition this year because it offered a twist on the usual story. Jones Day's VEBA work combines hard-knuckled negotiation with the threat of unilateral modifications to labor contracts. It also requires collaboration with the dreaded plaintiffs bar to win court approval for universal class settlements¿and keep the settlements intact on appeal. "It's a creative litigation approach to a traditional labor problem," says Jones Day partner Willis Goldsmith. In a series of cases culminating in the 2007 GM deal, Jones Day labor lawyers have done nothing less than help restructure the Rust Belt through an innovative litigation strategy.
For industrial giants that face spiraling medical costs and an aging workforce, VEBAs are a way out that is acceptable to unions. Workers avoid the possibility of losing all their health care benefits in bankruptcy, while the company receives a significant discount on what it owes employees. The hope is that, over time, investment gains by the union-managed fund will make up for the discount. VEBAs have been around since the 1920s, and companies have long used them to prepay some of their benefits. But starting in 1993¿when new accounting rules required companies to list future retiree health care liabilities on their books¿VEBAs slowly came to be considered vehicles for heavy financial reengineering.
The stepping-stones to the big GM settlement were provided by GM itself and two auto suppliers, The Goodyear Tire & Rubber Company and Dana Corporation. Jones Day established proof of concept in a very partial deal, struck by GM in 2005, which set up a $3 billion VEBA in exchange for higher copays and lower wages. In December 2006 Kramer helped Goodyear reach a settlement with striking steelworkers to create a $1 billion VEBA wiping clean the company's health care liabilities. Goodyear's was the first full-scale VEBA accepted by workers even though the company was not already in bankruptcy. Then, in July 2007, Jones Day crafted a VEBA that rid Dana of $1.4 billion in liabilities. Dana's was the first complete VEBA negotiated with the autoworkers union. From there it was but a short leap to GM's $35 billion fund.
Though most of these deals were hashed out in conference rooms, Jones Day negotiators had to have litigation muscle behind them: Every VEBA negotiation begins, implicitly or explicitly, with the threat that the company will sue to unilaterally reduce benefits. Jones Day did just that for the can manufacturer Crown Cork & Seal Company, Inc. In April 2007, after the firm maneuvered the litigation into the more business-friendly forum of arbitration, the arbitrator ruled that Crown Cork could unilaterally impose benefit reductions on all workers who had retired since 1993. "All labor advice we give has a crucial litigation overlay," says Kramer.
A VEBA is useless unless a court approves a universal class of retirees represented by separate class counsel. Jones Day helped Kirkland & Ellis persuade a Detroit federal judge to approve the 2005 GM settlement after a few class members objected, and in August helped Kirkland win an affirmance of that ruling in the Sixth Circuit. Jones Day lawyers are working to get Goodyear's deal approved in Akron federal district court. They've already done so in bankruptcy court for Dana, and they're helping Kirkland defend GM's massive 2007 settlement in Detroit federal district court. A VEBA thus begins with the threat of litigation and ends with court approval.
VEBA work can also lead to more typical employment litigation, by way of cross-selling. When the U.S. Supreme Court granted certiorari in Ledbetter v. Goodyear, Jones Day's veteran high court advocate, Glen Nager, got the assignment thanks to Kramer's boardroom connections at the tire maker. Lilly Ledbetter, a 20-year employee from a tire plant in Alabama, realized that she was being paid less than her male colleagues and sued the company for sex discrimination. In a controversial 5-to-4 decision this May, the Supreme Court sided with Goodyear: Ledbetter had filed her claim too late.
The novelty of Kramer's VEBA work, meanwhile, is attracting attention throughout the Rust Belt¿and beyond. Kramer spoke at a conference for the HR Policy Association in November, and 60 companies showed up, mostly from the metals, auto parts, and telecom industries. Government agencies, which have their own health care crisis, have expressed interest in Kramer's VEBA concept. And so have private equity funds, which are on the prowl for undervalued assets. Kramer advised The Carlyle Group in a successful bid for Allison Transmission and counseled The Blackstone Group L.P. and Centerbridge Capital Partners in their run at Chrysler LLC.
Blackstone failed in its bid, but it will likely be back for more, as will other Jones Day clients. After all, if Jones Day can make the Rust Belt attractive to investors, then surely it can work miracles.
Practice Group Size:
Of Counsel: 11
Practice Group As Percent of Firm:
Of Counsel: 9%
Estimated Percent of Firm Revenue 2007: 6%
On The Docket: Defending Abbott Laboratories and AstraZeneca PLC in wage and hour cases; representing International Business Machines Corporation in an age discrimination class action.