                           In the

United States Court of Appeals
              For the Seventh Circuit

No. 07-2778

R ONALD P. O RTH and E UFEMIA B. O RTH,

                                             Plaintiffs-Appellees,
                               v.


W ISCONSIN S TATE E MPLOYEES U NION,
    C OUNCIL 24, and G ROUP INSURANCE P LAN
    W ISCONSIN S TATE E MPLOYEES U NION,

                                         Defendants-Appellants.


           Appeal from the United States District Court
              for the Eastern District of Wisconsin.
           No. 07-C-149—William C. Griesbach, Judge.



      A RGUED M AY 7, 2008—D ECIDED O CTOBER 22, 2008




 Before B AUER, P OSNER, and W ILLIAMS, Circuit Judges.
  P OSNER, Circuit Judge. The plaintiffs in this suit under
both ERISA and the Taft-Hartley Act charge the defen-
dants, 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 modifi-
cation 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 collec-
tive 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 agree-
ment 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 ambigu-
ous—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 deduc-
tions. 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 insur-
ance 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 defen-
dants’ 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 ex-
trinsic 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 (“acqui-
esced,” 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 main-
tained 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 promis-
sory estoppel can never be used to vary an ERISA plan
may seem inconsistent with requiring that all modifica-
tions 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 Brother-
hood 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 Telecommuni-
cation 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 agree-
ment—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 addi-
tional 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 third-
party 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); Curtiss-
Wright 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 modifi-
cations 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 reim-
bursement 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 Mainte-
nance 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 mat-
ter. 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). Accomplish-
ing that purpose will often require a fee award equal to
or larger than the damages awarded.
                                                    A FFIRMED.




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