On April 16, the U.S. Supreme Court issued its decision in US Airways v. McCutchen, resolving an important monetary issue in which plan sponsors, on one hand, and plan participants, on the other, had significantly opposing interests.1 The issue the court resolved was whether and how a medical plan under the Employee Retirement Income Security Act could obtain reimbursement for its payments for a participant's injuries from the total amount that the participant recovered from a third-party tortfeasor, even if the reimbursement exceeded the participant's net recovery after expenses. In its ruling, the Supreme Court affirmed its long-standing view that the actual terms of the plan will apply in governing the rights and obligations of the plan and its participants.
Many observers had hoped the court would provide meaningful guidance on the proper interpretation of ERISA's provision authorizing recovery of “appropriate equitable relief.” This expectation appears to have been frustrated, as the court refrained from any sweeping pronouncements. However, the McCutchen decision does provide greater clarity in the resolution of plan reimbursement claims and—depending on how lower courts choose to apply it in other contexts—may have a major effect on defining the equitable remedies under ERISA.
As an overarching background matter, all reimbursement and recovery cases are brought under, and need to be viewed in the context of, Section 502(a)(3) of ERISA.2 That section only permits orders providing “appropriate equitable relief.” Thus, the issues are (i) what is the type of relief available in equity and (ii) whether it is “appropriate.”
James McCutchen, a participant in US Airways' medical plan, suffered serious injuries in a car accident. The US Airways plan paid $66,866 to cover medical treatment for McCutchen's injuries.3 The summary plan description4 required McCutchen to reimburse the plan in full if he was to ever recover any money from third parties for the same injuries:
“If [US Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party,…[y]ou will be required to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise.”5
McCutchen brought a personal-injury suit and ultimately settled his claims, including claims for medical expenses, for a total of $110,000. After satisfying his attorneys' contingency fee, McCutchen received $66,000 in satisfaction of his injury claims. US Airways, as the plan administrator, then demanded reimbursement of the $66,866 it had paid in medical expenses, citing the plan's reimbursement language.6
When McCutchen refused, US Airways brought suit to enforce its reimbursement rights under the plan terms.7McCutchen raised various equitable defenses to this claim. First, McCutchen argued that the principles underlying ERISA's equitable-relief provision (i.e., Section 502(a)(3)) would not support plan recovery of the entire amount of its claim, when McCutchen himself had not been made whole. McCutchen also argued that the plan would be unjustly enriched if it were allowed to recover its medical costs without sharing in the costs of the litigation that yielded the third-party recovery.
The district court granted summary judgment in favor of US Airways, holding that the plan “clearly and unambiguously provided for full reimbursement of the medical expenses paid.” The court rejected McCutchen's contention that equitable principles shielded him from the reimbursement claims.8
The Third Circuit vacated this ruling, holding that suits for “appropriate equitable relief” under ERISA Section 502(a)(3) are subject to traditional equitable doctrines and defenses that might limit the claimant's relief.9 The court further reasoned that the principle of unjust enrichment should serve to limit the plan's reimbursement provision. In reaching this conclusion, the Third Circuit reasoned that US Airways would realize a windfall if it were allowed to tap into McCutchen's personal-injury recovery without bearing any of the associated costs; similarly, McCutchen would actually be in a worse position than if he had not filed suit. With this guidance, the Third Circuit remanded the case for a determination of the “appropriate equitable relief” to be awarded the plan.10
US Airways appealed to the U.S. Supreme Court. The Supreme Court accepted the case to decide “whetherERISA Section 502(a)(3) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan's terms give it an absolute right to full reimbursement.”11
Writing for the majority, Justice Elana Kagan rejected McCutchen's contention that equitable principles such as unjust enrichment or common-fund doctrine can be applied to override the express terms of an ERISA plan. Instead, the court held that the express terms of an ERISA plan will control, in spite of competing equitable considerations, at least in an action predicated on an equitable lien created under the express terms of the parties' agreement—here, the plan itself.12 Neither general unjust enrichment principles nor specific doctrines reflecting those principles—such as the double recovery or common fund rules invoked by McCutchen—can override the applicable contract.13 The Supreme Court unanimously agreed that the plan agreement itself “becomes the measure of the parties' equities.”14
Specifically, Section 502(a)(3) of ERISA does not authorize “appropriate equitable relief at large; rather, it countenances only such relief as will enforce the terms of the plan or the statute.”15 The court unanimously agreed that the terms of the plan control and that equity principles, including the common-fund doctrine, may be applied to unclear plan terms.
Whether the plan terms in US Airways' were clear was a topic of a close call amongst the justices. The court was split 5-4 in Parts III and IV of the opinion, in which the majority applied the common-fund doctrine to interpret plan terms that it thought were unclear. The majority found the plan was silent with respect to attorneys' fees and therefore, equitable principles ought to be used to interpret the parties' intent. It also found there was a “contractual gap” and that the common-fund doctrine would be the best indicator of the parties' intent.16
Justice Antonin Scalia dissented, joined by Chief Justice John G. Roberts Jr. and Justices Clarence Thomas and Samuel Anthony Alito Jr. Scalia would have reversed the Third Circuit decision and disagreed whether the terms of the plan were “not plain” in the first place. The dissenting justices insisted that certiorari was granted “on a question that presumed the contract's terms were unambiguous—namely, “where the plan's terms give it an absolute right to full reimbursement.”17 The dissenting justices stated, on technical grounds, that the majority, in dealing with the issue of ambiguity or omission of a term, had decided an issue that was not properly before the court and should not have been decided.
In Sereboff v. Mid Atlantic Medical Services Inc., 18 the Supreme Court allowed a health-plan administrator to bring a reimbursement suit similar to McCutchen under Section 502(a)(3) of ERISA under principles of “equitable liens by agreement.”19 Relying on Sereboff, McCutchen argued two specific equitable doctrines meant to prevent unjust enrichment and defeat the reimbursement provision of the plan.20
First, McCutchen argued that, in equity, US Airways should not be able to recover more than the amount the insured has received from a third party to compensate for the same loss the insurance covered. This would limit the recovery to medical expenses; in other words, McCutchen would keep any tort recovery for loss of future earnings or pain and suffering; importantly, the order of recovery would be that McCutchen would first recover for his tort-type losses, the plan only recovering secondarily from what remains after.21
Secondly, McCutchen argued that the equitable common-fund doctrine would reduce any recovery by US Airways.22 Under this rule, “a litigant or lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole.”23 McCutchen argued that common-fund doctrine required apportionment of a share of attorney's fees to US Airways, regardless of the plan language.24 Because of this, McCutchen took the position that the contract-based relief that US Airways sought was not “appropriate” under Section 502(a)(3) under ERISA because it contravened equitable principles.25 However, in the end, the court rejected the claims in Sereboff and further rejected the claims in McCutchen.
The court concluded that Sereboff’s logic required rejection of McCutchen's arguments, because US Airways sought to enforce a claim in the nature of an equitable lien by agreement.26 The court reasoned that this lien serves to carry out a contract's provisions, in that it “hold[s] the parties to their mutual promises.”27Accordingly, the court concluded, confirming both parties' rights to the clear terms of the plan was both “appropriate” and “equitable.” Thus, the court held that it must reject equitable principles, even well-established ones, that conflict with the parties' express commitments.28 The court did not stop there, however.
In a portion of the opinion that commanded only a 5-4 majority, the court held that equitable rules can be applied to interpret unclear plan terms.29 The majority opined that the plan language was unclear because it did not directly state whether US Airways should be reimbursed on every dollar received by the beneficiary from a third party or whether US Airways ought to be reimbursed on the “net proceeds.”30 Using this as its rationale, the majority then applied the common-fund doctrine to resolve the ambiguities it found on the question of attorneys' fees.31 The court insisted that third-party recoveries do not come free—the insurer must contribute something to the labor. Here, US Airways will be expected to contribute its fair share to the total costs of recovery before claiming their reimbursement for all monies received from a third party. The court then remanded for further proceedings.
The court's decision establishes firmly that the clear terms of a welfare, e.g., medical, plan covered by ERISA will supersede general equitable principles, even when the relief sought is equitable in nature, as in suits for “appropriate equitable relief” under Section 502(a)(3) of ERISA. However, when plan terms are ambiguous or unclear, courts may apply equitable principles to interpret the plan, or otherwise determine what form of equitable relief is “appropriate.”
Thus, plan sponsors and insurers, the parties that control plan drafting, can also structure the nature and extent of the plan's reimbursement through clear and precise drafting of reimbursement provisions.
The court's endorsement of the primacy of plan language, however, appears to go farther than only reimbursement claims.32 Sponsors of ERISA plans may consider opportunities to expand plan-recovery rights or limit the nature or extent of equitable claims against plans or plan fiduciaries.
In the short term, sponsors of welfare plans should consider revising their plans to ensure that reimbursement language clearly disclaims application of common-fund principles. As a practical matter, this may force plans to negotiate fee arrangements with personal injury attorneys representing injured participants. Otherwise, those attorneys might simply exclude recovery of medical costs in the language of any settlement or forsake such a recovery altogether. After all, if a reimbursement provision eliminates any incentive for participants to seek recovery from a third party, plans may see their aggregate reimbursement revenues diminished over time. A “lose-lose” situation may entice alternative fee arrangements from plans and attorneys to incentivize any recoveries for the insured and the plan.
In the longer term, lower courts will continue to define the meaning of “appropriate equitable relief” underSection 502(a)(3) of ERISA. Although McCutchen likely provides greater of clarity in reimbursement claims, the courts will have to extrapolate these concepts into various other types of ERISA litigation seeking equitable relief. For example, the extent to which this case permits plan recovery of overpayments from pension plans is unclear; however, logical extension of the case is that a plan provision expressly creating a right of recoupment may well be enforceable. Amara, McCutchen, and their progeny leave open the possibility of varying results. In this regard, the full impact of McCutchen may not be understood for some time.
Charles F. Seemann III is a partner in the New Orleans office of Jackson Lewis. His practice emphasizes ERISA and employment law, including the representation of ERISA plans and plan fiduciaries at both public and private companies, multiemployer plans and plan fiduciaries, and financial institutions providing services to ERISA plans. Hasnain Valika is an associate in the Houston office of Jackson Lewis, and works on various pensions and benefits matters.
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