An ERISA Update: Some Thoughts on McCutchen and Heimeshoff

Last week was a momentous week for those of us who teach and practice employee benefits law under ERISA. 

First, the United States Supreme Court decided the reimbursement case of U.S. Airways v. McCutchen.  The syllabus is provided here in a post by Jeff from last week, but the long and the short is that U.S. Airways, a self-insured health plan provider, had provided medical benefits (some $67,000) to a participant (McCutchen) of their plan injured in a car accident.  Although U.S. Airways paid for the medicial expenses arising from the accident, when McCutchen received a settlement of his claim against the third-party tortfeasor (about $110,000), U.S. Airways exercised its rights under the plan's reimbursement clause to recover the amount it had already paid to McCutchen.  This would be mean that McCutchen would lose his full recovery because in addition to paying back U.S. Airways for the medical expenses, he owed a 40% contingency fee to his attorneys. He sought the use of two equitable doctrines - unjust enrichement based on double recovery and the common fund doctrine - to mitigate this harsh result.

The Court in McCutchen found that this was a contractual matter and that the plan terms overrode any possible equitable principles, as long as the terms of the plan were clear.  Although the reimbursement clause was clear with regard to U.S. Airways being able to collect the full amount it previously payed out in medical expenses and therefore equitable theories of unjust enrichment were unavailable, the plan was silent on how attorney fees should be split be McCuthchen and the company. Thus, the majorty five Justices applied the common fund doctrine to require U.S. Airways to ratably play its share of McCutchen's attorney fees.

Few take away points from McCutchen:

1) It would seem, a la Firestone, that plans henceforth could write their reimbursement clauses in their plans to make clear that the common fund doctrine does not apply and companies are not responsible for attorney fees. That would mean, without equitable principles available, participants like McCutchen could actually end up coming out behind after suing the third-party for their injures. As other have pointed out, however, companies may think twice before adding such language to their plans for fear that attorneys will not take such cases and/or participants will just not decide to sue the third-party since they would be worse off if they did.

2. It is strange that the Court that has gone previously out of its way to say that ERISA is imbued with trust law, would treat this issue as a purely contractual matter.  The Court, in deciding the standard of review in denial of benefit claim cases in Firestone and Glenn, came to the exactly opposite result and found that trust law principles applied.  Although Firestone was a 502(a)(1)(B) denial of benefit plan case and McCutchen is a 502(a)(3) claim for appropriate equitable relief under the terms of the pan, both provisions have been historically construed with trust law in mind, not contract law. Of course, trust law would have more likely provided the equitable remedies that McCutchen was seeking.

3. Applying contract principles seems particularly unfair in this context because employee benefit plans are essentially adhesion contracts.  Not only are participants unlikely to understand and know about such reimbursement clause provisions in their benefit plans, but even if they do, they would not be able to negotiate in any meaningful way with their employer over changing the terms of the plan. This is a true take-it-or-leave-it proposition.  This is why contract law is unsuited to 502(a)(3) for appropriate equitable relief and why trust law, given that the funds are placed in trust for the benefit of participants and beneficiaries, is the far better and appropriate model.

So, McCutchen seems wrong to me on many levels. What is depressing is not only that the usual Justices are aligned against ERISA plaintiffs, but normal allies of plaintiffs on the Court just don't seem to understand the consequence of their decision in a case like this.  In short, ERISA continues to baffles the Supreme Court. 

All this does not bode well for ERISA plaintiffs in the case the Supreme Court granted cert in last week, Heimeshoff v. Hartford.  This case concerns when the statute of limitations should begin to run in a case where a participant seeks disability benefits under an employer's welfare benefit plan.  ERISA only has a statutory SOL provision for breach of fiduciary claims, and courts usually look to state law analogs to find SOLs for denial of benefit claims like this one. However, the issue is not what the appropriate SOL is, but rather, when does that SOL begin to run?

Here is a summary of the case and the question presented from Proskauer's ERISA Practice Center Blog:

Heimeshoff had been a Wal-Mart employee for nearly twenty years. In 2005, she filed a claim for long term disability benefits as a result of various ailments caused by fibromyalgia. Hartford’s plan provided that its three-year limitations period ran from the time that proof of loss was due under the plan. Here, even accepting Heimeshoff’s arguments, the latest she could have filed a proof of loss was in September 2007, and she did not commence her lawsuit until November 2010.

The Second Circuit concluded that Connecticut law permits parties to an insurance contract to shorten the state-prescribed statute of limitations, and also permits the statute of limitations under an ERISA plan to begin before a claimant can bring a legal action. Accordingly, it held that the district court had properly dismissed Heimeshoff’s claim as untimely since she had filed her lawsuit several months after the three year period had expired.

The Supreme Court agreed to address the following question: “When should a statute of limitations accrue for judicial review of an ERISA disability adverse benefit determination?” According to the petition, the Circuits have not uniformly answered this question. 

This is really an interesting question from a number of different stand-points:

1.  From a preemption standpoint, it would appear that state law would apply, and override Hartford's insurance language to the contrary, since this is insured disability plan subject to state law insurance regulations since it is a law regulating insurance under ERISA Section 514(a)(2)(A) and saved from ERISA preemption.  In fact, it reminds one of the California notice-prejudice rule in the Court's UNUM v. Ward case from 1999 where the state law was found to be saved from preemption.  Yet, the Second Circuit concludes that under Connecticut insurance law, an insurer can shorten the statute of limitations in an insurance contract; but the Second Circuit then says the question of when a statute of limitations begins to run is a matter of federal law.

2. If federal applies, as the Second Circuit suggests, the federal law would appear to be based on the ERISA principles that generally written terms of the plan should be enforced as written. Of course, this is why the Court ends up deciding that Heimeshoff's disability claim must be dismissed under the applicable SOL. This conclusion also resonates with the contract-based analysis in McCutchen which says equitable principles cannot override a clearly written benefit plan provision.

3. On the other hand, if state law applied under the preemption analysis above, it could be possible that different insurance laws from different states might provide that such provisions like Hartford's violate laws that require insurance companies to explain to participants when their claims need to be filed in court to challenge the plan administrator's decision. No such law seems to exist in Connecticut, but of course there would be a host of different regimes that would then apply, seemingly inconsistent with the uniformity which is desired for such plans under ERISA. Perhaps a DOL regulation on this issue would helpful.

The Court could certainly go in a number of different directions here, but given recent precedent, a contract-based approach may seem the mostly likely scenario, which means the Second Circuit's decision would be upheld.

Also, as friend of the blog Don Bogan (Oklahoma) pointed out to me: "I have never heard of a contract, which requires internal appeals/exhaustion of administrative remedies, to also declare that the SOL begins to run even before internals appeals are exhausted—if Connecticut has no statute or case law on that issue, then perhaps the Supreme Court should certify the case to Connecticut Supreme Court for resolution of what Conn. insurance law is or would be on that question."

Perhaps so. Stay tuned.

PS