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May 20, 2006
Sereboff and the Future of ERISA Remedies
By Guest Blogger: Prof. Colleen Medill, University of Nebraska College of Law
This is the first of what I hope will be a regular addition to the Workplace Prof Blog - comments and observations on legal and regulatory developments in employee benefits law. Chief Justice Roberts spoke at the American Law Institute meeting about 30 minutes after the decision in Mid-Atlantic Medical Services v. Sereboff was announced. In his remarks to the ALI members, Chief Justice Roberts characterized Sereboff as one of four decisions announced that morning by the Court that were "9-0" decisions that "simplified" the law. The audience was, of course, duly impressed with the new Chief Justice. Justice Roberts (who wrote Sereboff) could "simplify" ERISA. Wow!
Having had a few days to reflect on the opinion in Sereboff, and its future implications for ERISA remedies, I think "subtle change," rather than "simple," is a more accurate adjective. Although only 11 pages long, with only two footnotes (a true breath of fresh air after Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002)), this decision marks a turning point in the Court's philosophical approach to determining the scope of "appropriate equitable relief" under ERISA Section 502(a)(3). This change looks to be at three levels, described below, starting from most narrow to the most far reaching:
1. By characterizing the plan's reimbursement claim as an "equitable lien based on an agreement," rather than as a claim for subrogation, the Court neatly sidesteps the quagmire of the common fund doctrine and the make whole doctrine, equitable principles developed in the context of state insurance law claims for subrogation. As the Court says on p. 11 of the opinion, this "parcel of equitable defenses" to a subrogation claim "are beside the point" when the plan claim is characterized as an equitable lien based on an agreement (i.e., the terms of the plan). The "lien/agreement" theory suggests that at least a majority of the Court would enforce a plan reimbursement provisions that provide the plan must be fully reimbursed BEFORE the participant (or the participant's attorney, who likely took the tort case on a contingency fee). I discuss a caveat to this point, however, in point #3 below.
2. In Sereboff, the Court clearly is shifting the focus of judicial debate away from the technical nuances of the 18th century chancery court (emphasized by Great-West) toward a more flexible, conceptual approach to determining what remedies are "equitable." Otherwise, the Sereboffs' technical arguments concerning equitable tracing rules and the requirement that the lien funds must be identified at the time the agreement is made would have carried more weight in the decision. At the top of p. 8 of the opinion, the Court strongly signals that Great-West in the future will be limited to its unique facts (for those unfamiliar with Great-West, the crucial fact was that the defendant and plan participant in Great-West, Knudson, did not possess the tort recovery funds herself; rather, the funds were held by the trustee of a special needs trust for the benefit of Knudson).
Bottom line: After Sereboff, for a remedy under ERISA Section 502(a)(3) to qualify as "equitable," the Court is no longer going to require "application of all restitutionary conditions." In other words, the scope of potential remedies that could qualify as "equitable" under Section 502(a)(3) is going to broaden out considerably, having been freed of strict compliance with all of the possible (ancient) technical requirements for relief imposed by a chancery court of equity.
3. Having broadened out the scope of potential equitable remedies available under Section 502(a)(3), the future judicial battleground is signaled by footnote two of the opinion on p. 11. In footnote two, the Court notes that the Sereboffs' appear to have raised an additional argument for the first time in their arguments before the Court -- that even if the plan's claimed remedy is "equitable," the remedy is not "appropriate."
ERISA teachers will recall that the word "appropriate" has drawn the Court's attention once before, in its decision in Varity Corp. v. Howe, 516 U.S. 489 (1996). In Varity, the Court pointed to the word "appropriate" as a limitation on remedies available under Section 502(a)(3) by suggesting that where the plaintiff's claim could be brought under another, more specific provision of Section 502 with a more limited remedy than Section 502(a)(3) (in Varity, the alternative claim provision at issue was Section 502(a)(1)(B), which authorizes claims for wrongfully denied plan benefits), nornally more generous equitable relief under Section 502(a)(3) would not be "appropriate."
So, what does this all mean for the future of equitable relief available under Section 502(a)(3)? On the one hand, Sereboff is likely to broaden the scope of possible equitable remedies under Section 502(a)(3), particularly the potential for make whole relief under the common law of trusts for injury resulting from a breach of ERISA fiduciary duty. On the other hand, the Court has signaled in footnote two that it may still use the "appropriate" language in Section 502(a)(3) as a limitation. Harkening back to point #1 above, questions of unfairness in the allocation of a tort settlement where the recovery is far less than the participant's medical expenses (most likely due to the tort defendant's insurance coverage limitations) may creep back in through the back door of the "appropriate" language.
The crucial question left unanswered by footnote two is the criteria that the Court will use to determine "appropriate" equitable relief. Is it simply fairness as to the parties (this is, after all, supposed to be "equitable" relief)? Or will the Court consider ERISA's policy objectives, too? Such as a chilling effect on employers and plan service providers of a generous monetary award against them?
In conclusion, I think that characterizing Sereboff as a "simplification" of ERISA is, well, overly simplistic. Is weighing and balancing the appropriateness of a given equitable remedy a "simple" conceptual approach for the Court to take? No, clearly a bright line, "one size fits all cases" rule would be much easier to apply. Is Sereboff is a harbinger of a more sophisticated, and hopefully more equitable, judicial approach to relief available under Section 502(a)(3)? I think so. For merely suggesting the possibility, Chief Justice Roberts gets a grade of A+ from this professor for his opinion in Sereboff.
May 20, 2006 in Pension and Benefits | Permalink
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Read Colleen Medill's analysis of the recent U.S. Supreme Court opinion in Mid-Atlantic Medical Services v. Sereboff at the Workforce Prof Blog: "Sereboff and the Future of ERISA Remedies." Colleen is a Professor at the University of Nebraska College o... [Read More]
Tracked on May 20, 2006 11:06:47 PM
Comments
Prof. Medill: Thank you for your insightful comments.
You wrote At the top of p. 8 of the opinion, the Court strongly signals that Great-West in the future will be limited to its unique facts (for those unfamiliar with Great-West, the crucial fact was that the defendant and plan participant in Great-West, Knudson, did not possess the tort recovery funds herself; rather, the funds were held by the trustee of a special needs trust for the benefit of Knudson).
I would be delighted if Knudson were limited to its facts, but I wonder how broadly Sereboff should be read, since its unique facts, involving a "fund" held separately from the rest of the participants' money, meant that tracing would have been satisfied anyway.
The dismissal of equitable defenses (by sidestepping and discussing equitable liens by agreement, and not subrogation, as you say) does imply to me that many of the hoary and antiquated aspects of equity are not to be imported, despite Varity and Knudson. But how far does Sereboff go, by its own terms?
Posted by: Eh Nonymous | May 23, 2006 12:01:36 PM
This decision, without saying it with words, overrules Great West. An agreement to reimburse an insurer from a third party tort recovery is now characterized as an equiable lien under 502(a)(3). But why will the Supreme Court not come clean and state what this is: a breach of contract claim. The answer must be to limit the remedies of beneficiaries. Breach of contract analysis would allow beneficiaries to sue "fiduciaries" for damages. The Solicitor General appropriately argued in Bruch v. Firestone, "It is illogical to assume that the administrator of an unfunded plan whose benefits are paid from the employer's assets will function with the same impartiality as a neutral trustee of a funded plan, since the administrator's employer will sustain a financial loss with every award of benefits." How often does a third party recovery paid to to an insured welfare benefit plan inure to the benefit of anyone other than the insurance company?
Posted by: John Doe | May 23, 2006 11:00:59 PM
Sereboff was a "clean" set of facts. Your comments focus on more "messy" factual situations that are likely to arise in the future.
No one will know for certain which precedent will be more powerful in future decisions -- Sereboff or Great West. But at a conceptual/theoretical/philosophical level the two decisions are quite different. I'm inclined to think that the more current decision, Sereboff, will be the more persuasive decision, and that gradually over time the Supreme Court will limit and distinguish Great West into oblivion. But that's just my reading of the case. I have nothing more definitive to add via a blog post. I do have a lenthy forthcoming article on ERISA remedies
with a detailed analysis of equitable remedies that underlies my opinion.
For the detailed analysis, look for the next (2006) Employee Benefits Law Symposium Issue of the John Marshall Law Review.
CM
Posted by: Colleen Medill | May 24, 2006 11:40:54 AM
I appreciate Prof. Medill's comments here and I recognize that she has presented one logical reading of the language "the parcel of equitable defenses ... are beside the point."
I think there is another reading of this language, however. On pp. 3-4 of the slip opinion, the Court states, "The only question is whether the relief Mid Atlantic requested ... was 'equitable' under 502(a)(3)(B)." The primary basis for the Sereboffs attack on the complaint was that the plaintiff's claim was not cognizable as an "equitable claim." Since the Court resolved that it was cognizable as an "equitable" claim (because an equitable lien or constructive trust was sought to be imposed on money in the possession of the Sereboffs), it was not necessary for the Court to look at possible defenses.
What does the Court mean by “beside the point?” Does the Court mean that the equitable defenses are irrelevant because they are somehow inadequate? Or, does the Court mean that the presence of equitable defenses is irrelevant as to whether or not plaintiff’s claim is itself equitable? The latter interpretation is more likely, if one considers the issue as initially framed as being simply whether the plaintiff’s claim was equitable.
Posted by: Professor Roger Baron | May 24, 2006 3:11:27 PM
Professor Baron wisely, asks:
What does the Court mean by “beside the point?” Does the Court mean that the equitable defenses are irrelevant because they are somehow inadequate? Or, does the Court mean that the presence of equitable defenses is irrelevant as to whether or not plaintiff’s claim is itself equitable?
The answer seems to be that equitable defenses need not apply. The Supreme Court has turned a purely contractual agreement between the Sereboffs and Mid Atlantic into a special purpose equitable action for jurisdictional purposes under 502(a)(3), but not a traditional equitable action. As I stated before, if breach of contract claims were permitted, the convoluted protections of so called fiduciaries under ERISA would evaporate. If this was a state law civil action between a government employee (those lucky to be free of ERISA) and her health insurer, involving a third party tort recovery, would we be engaging in this discussion over the finest points in modern equity jurisprudence?
The second to last paragraph of the opinion states that Mid-Atlantic’s action is NOT a“freestanding” equitable action. Remember in Barnes there was a promise to pay the lawyer a fee. The Court states that Mid-Atlantic is pursuing an equitable remedy based on an agreement. If the action is only considered equitable for the limited purpose of jurisdiction under (a)(3), but is based on contractual terms, that requires foregoing equitable defenses, because those defenses do not apply to a breach of contract action. Equitable defenses only may be raised in a traditional equitable action – enjoin Mrs. Smith from continuing to trespass on my farm. You can’t enjoin Mrs. Smith because the farmer diverted water from his farm and flooded Mrs Smith’s land so she walked onto the farm to stay dry. You get the picture.
I would not give the SC an A+. This decision does not follow the statute or the history behind ERISA, protection of participants and beneficiaries. Last it undermines stare decisis, as it effectively over rules Great West. Is this an activist Court?
Posted by: John Doe | May 24, 2006 11:26:43 PM
Question: If the ERISA plan waits 3 years after the beneficiary receives tort recovery to bring its action to impose an equitable lien on the funds which are still in the beneficiary's possession, could the beneficiary assert that the claim is barred by laches, a traditional equitable defense?
Posted by: Professor Roger Baron | May 26, 2006 10:34:42 AM
Without belaboring the analysis of the decision, on a broader policy consideration, how does one ever suggest that the Sereboff's contracted for this. First, these are group policies by definition and the employee takes it without negotiation. Indeed, most employers have no negotiating power here either. These are insurance policies, almost by definition contracts of adhesion, and this clause is certainly unconscionable. What bargaining and negotiating was done here? And the argument that this clause reduces premiums has been wholly debunked. Insurer recoveries like these are windfalls to the insurance company who would have never pursued the recovery.
So the attorney who creates the fund works for the insurer first and for free, the costs and fees of litigation are borne by the victim, and the insurer ends up paying out nothing due to a fund created by an attorney and the victim. And given that few victims are ever made "whole", what is "appropriate" about this. In the end, just another ruling without equity, fairness or jurisprudential honesty or logic, creating an activist ruling for big business. How sad.
Posted by: scott Feder | Feb 21, 2007 5:04:59 PM
Add to Mr. Feder's honest appraisal that even if it is a "funded plan" and not a strict insurer, each creates a large enough reserve to provide a "profit" to keep the plan or insurance company funded. Thus, the windfall is exactly that - free money on top of its profits, paid out to large corporate interests, who, I note, are not reducing anybody's insurance premiums.
Hail fascism.
Posted by: Jeff Spellerberg | Jun 19, 2007 8:27:24 PM
