Contributed by Russell L. Hirschhorn, Proskauer Rose LLP
It is well-established that the written employee benefit plan document is sacrosanct. Section 402(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA)1 requires plan documents to be in writing, and employers are free to provide in their plan documents whatever level of benefits they so choose. Only upon proof of the elements of an equitable claim have participants been able to recover benefits not provided for in plan documents. Consistent with these principles, courts have generally enforced employee welfare benefit plan reimbursement provisions that provide to the plan the right to recover payments for medical expenses when a participant achieves a collateral recovery. When clearly written, these provisions have been enforced even if the participant has not been made whole by the third party recovery. Efforts by plan participants to limit such recoveries based on federal common law principles have generally been rejected as being inconsistent with ERISA's intent to enable plan sponsors to specify the benefits provided by their plans. A recent decision from the U.S. Court of Appeals for the Third Circuit substantially departs from these principles. In US Airways, Inc. v. McCutchen, No. 10-CV-3836, 2011 BL 292983 (3d Cir. Nov. 16, 2011), the Third Circuit refused to enforce a plan provision that expressly entitled the plan to full reimbursement of the medical expenses it paid to participant James McCutchen, based on his recoveries from a collateral litigation. The Court found that because McCutchen had not received a full recovery for his injuries in the collateral litigation and US Airways had not exercised its subrogation rights (i.e., it did not participate in the prosecution of the collateral litigation or contribute to the cost of obtaining a third party recovery), full reimbursement to the plan did not constitute "appropriate equitable relief." If adopted elsewhere, this ruling could substantially upset the expectations of plan sponsors, who until now were led to believe that they could limit their benefits costs through proper plan draftsmanship.
The facts giving rise to the ruling in US Airways fit a familiar pattern. James McCutchen was seriously injured in a car accident. A plan administered by US Airways paid $66,866 for his medical expenses. Because the other driver was underinsured, McCutchen recovered only $110,000 from third parties: he settled with the other driver for $10,000 and received an additional $100,000 in underinsured motorist coverage. McCutchen ultimately pocketed less than the amount paid by US Airways, however, as 40% of his recovery was due to his attorney. His attorney placed $41,500 of the amount he recovered in a trust account until it could be decided whether the plan's claim for reimbursement was valid.2 The summary plan description describing the US Airways plan stated the following with respect to subrogation and right of reimbursement: The purpose of the Plan is to provide coverage for qualified expenses that are not covered by a third party. If the Plan pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, the Plan will be subrogated to all your rights of recovery. You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise. In addition you will be required to assist the administrator of the Plan in enforcing these rights and may not negotiate any agreements with a third party that would undermine the subrogation rights of the Plan. US Airways, as the plan administrator, commenced an action under Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), seeking "appropriate equitable relief" in the form of an equitable lien on the $41,500 held in trust and on an additional $25,366 held personally by McCutchen. US Airways contended that the phrase "any monies" permitted it to recoup the full amount of medical expenses it paid to McCutchen whether or not McCutchen was made whole in his recoveries as a result of his legal expenses or otherwise. McCutchen argued that it would be inequitable to require him to reimburse US Airways in full when he had not been fully compensated for his injuries, including pain and suffering, and that US Airways, which made no contribution to his attorneys' fees and expenses, would be unjustly enriched if it were now permitted to recover from him without any allowance for those costs. He thus contended that a full recovery for the plan would not constitute "appropriate equitable relief" within the meaning of Section 502(a)(3).
The Third Circuit's Decision
As the Third Circuit observed, the Supreme Court has on several occasions interpreted the phrase "appropriate equitable relief" in Section 502(a)(3) as referring to those categories of relief that were typically available in equity. While the Supreme Court has in two prior rulings established the circumstances under which equity provided a right of recovery for a reimbursement claim, it did not address the question presented here: whether the requirement that the equitable relief be "appropriate" could limit the scope of that recovery.3 The Third Circuit concluded that the requirement that "equitable relief" also be "appropriate" meant that a plan fiduciary's recovery from a beneficiary is limited by the defenses that were typically available in equity. The Court reasoned that, since the Supreme Court had held that "'equitable relief' means something less than all relief, "appropriate equitable relief" must be something less than all equitable relief. Observing that the word "appropriate" is defined by Webster's as meaning "specially suitable," "belonging peculiarly [to]," or "attached as an accessory possession," the Court concluded that "remedies that peculiarly belong to traditional categories of equitable relief would typically have been defeated by equitable principles and defenses." Applying these principles to the facts of the case and, in particular, the equitable principle of unjust enrichment, the Court viewed the district court's ruling requiring McCutchen to fully reimburse the plan as "inappropriate and inequitable relief." The Court reasoned that McCutchen was left with less than full payment of his medical bills in light of the fact that the amount of the district court's judgment in favor of the plan exceeded the net amount of McCutchen's third-party recovery. The Court also determined that full reimbursement would amount to a windfall for US Airways since US Airways did not exercise its subrogation rights, and thus did not bear the cost of pursuing recovery from collateral sources. The Court therefore vacated the district court's ruling and remanded the case for further proceedings consistent with the Court's findings. In rendering its ruling, the Court acknowledged that there were several rulings, both in the Third Circuit and elsewhere, that had strictly enforced the terms of plan reimbursement clauses, without regard to whether the plan participant was made whole.4 In the Court's view, by categorically excluding the equitable limitations that Section 502(a)(3) necessarily contains, those decisions "depart[ed] from the text of ERISA." Lastly, the Court found support for its ruling in the Supreme Court's recent decision in Cigna v. Amara, 131 S. Ct. 1866 (2011), which authorized equitable reformation under Section 502(a)(3) as a potential remedy for an intentional misrepresentation. Although the Third Circuit acknowledged that US Airway's conduct did not amount to an intentional misrepresentation, as it was neither fraudulent nor dishonest, the Court nevertheless found it appropriate to reform the US Airways plan to limit the plan's right to reimbursement. According to the Court, "the broader and more relevant point is that when courts were sitting in equity in the days of the divided bench (or even when they apply equitable principles today) contractual language was not as sacrosanct as it is normally considered to be when applying breach of contract principles at common law."
The Third Circuit's ruling departs from existing case law in at least two significant respects. First, the Court applied equitable considerations in circumstances where the plan provisions specifically addressed the reimbursement issue and were not found to be ambiguous. Prior authorities applied equity only where plan terms were ambiguous or participants were misled as to what these terms were. Second, the Court used its equitable authority to reform the plan without finding that the conditions for reformation identified in Amara had been satisfied. On a more fundamental level, the ruling potentially undermines ERISA's goal of encouraging employers to make benefits available to employees by enabling them to control and limit their exposure through plan design. Although the ruling may be limited to cases involving reimbursement provisions, the notion that benefit recoveries can be expanded beyond those contemplated by explicit plan provisions is troubling.
Mr. Hirschhorn is a Senior Counsel in Proskauer's Employee Benefits, Executive Compensation & ERISA Litigation Practice Center, resident in the New York Office.
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