Tuesday, April 16, 2013

Supreme Court Holds That Plan Language Controls, But Equitable Doctrine Still Relevant

Supreme CourtToday, the Supreme Court issued decisions in two employment-related cases.  I'll do a separate post on each.  This post is US Airways v. McCutchen, an ERISA case decided 5-4.  Because this is out of my range of expertise (Paul might chime in later), I'll just post the Court syllabus:

The health benefits plan established by petitioner US Airways paid $66,866 in medical expenses for injuries suffered by respondent McCutchen, a US Airways employee, in a car accident caused by a third party. The plan entitled US Airways to reimbursement if McCutchen later recovered money from the third party. McCutchen’s attorneys secured $110,000 in payments, and McCutchen received $66,000 after deducting the lawyers’ 40% contingency fee. US Airways demanded reimbursement of the full $66,866 it had paid. When McCutchen did not comply, US Airways filed suit under §502(a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), which authorizes health-plan administrators to bring a civil action “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.” McCutchen raised two defenses to US Airways’ request for an equitable lien on the $66,866 it demanded: that, absent over-recovery on his part, US Airways’ right to reimbursement did not kick in; and that US Airways had to contribute its fair share to the costs he incurred to get his recovery, so any reimbursement had to be reduced by 40%, to cover the contingency fee. Rejecting both arguments, the District Court granted summary judgment to US Airways. The Third Circuit vacated. Reasoning that traditional “equitable doctrines and defenses” applied to §502(a)(3) suits, it held that the principle of unjust enrichment overrode US Airways’ reimbursement clause because the clause would leave McCutchen with less than full payment for his medical bills and would give US Airways a windfall.


     1. In a §502(a)(3) action based on an equitable lien by agreement—like this one—the ERISA plan’s terms govern. 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. Pp. 5–11.

          (a) Section 502(a)(3) authorizes the kinds of relief “typically available in equity” before the merger of law and equity. Mertens v. Hewitt Associates, 508 U. S. 248 . In Sereboff v. Mid Atlantic Medical Services, Inc., 547 U. S. 356 , the Court permitted a health-plan administrator to bring a suit just like this one. The administrator’s claim to enforce its reimbursement clause, the Court explained, was the modern-day equivalent of an action in equity to enforce a contract-based lien—called an “equitable lien ‘by agreement.’ ” Id., at 364–365. Accordingly, the administrator could use §502(a)(3) to obtain funds that its beneficiaries had promised to turn over. The parties agree that US Airways can do the same here. Pp. 5–6.

          (b) Sereboff’s logic dooms McCutchen’s argument that two equitable doctrines meant to prevent unjust enrichment—the double-recovery rule and common-fund doctrine—can override the terms of an ERISA plan in such a suit. As in Sereboff, US Airways is seeking to enforce the modern-day equivalent of an equitable lien by agreement. Such a lien both arises from and serves to carry out a contract’s provisions. See 547 U. S., at 363–364. Thus, enforcing the lien means holding the parties to their mutual promises and declining to apply rules—even if they would be “equitable” absent a contract—at odds with the parties’ expressed commitments. The Court has found nothing to the contrary in the historic practice of equity courts. McCutchen identifies a slew of cases in which courts applied the equitable doctrines invoked here, but none in which they did so to override a clear contract that provided otherwise. This result comports with ERISA’s focus on what a plan provides: §502(a)(3) does not “authorize ‘appropriate equitable relief’ at large,” Mertens, 508 U. S., at 253, but countenances only such relief as will enforce “the terms of the plan” or the statute. Pp. 6–11.

     2. While McCutchen’s equitable rules cannot trump a reimbursement provision, they may aid in properly construing it. US Airways’ plan is silent on the allocation of attorney’s fees, and the common-fund doctrine provides the appropriate default rule to fill that gap. Pp. 12–16.

          (a) Ordinary contract interpretation principles support this conclusion. Courts construe ERISA plans, as they do other contracts, by “looking to the terms of the plan” as well as to “other manifestations of the parties’ intent.” Firestone Tire & Rubber Co. v. Bruch, 489 U. S. 101 . Where the terms of a plan leave gaps, courts must “look outside the plan’s written language” to decide the agreement’s meaning, CIGNA Corp. v. Amara, 563 U. S. ___, ___, and they properly take account of the doctrines that typically or traditionally have governed a given situation when no agreement states otherwise. Pp. 12–13.

          (b) US Airways’ reimbursement provision precludes looking to the double-recovery rule in this manner because it provides an allocation formula that expressly contradicts the equitable rule. By contrast, the plan says nothing specific about how to pay for the costs of recovery. Given that contractual gap, the common-fund doctrine provides the best indication of the parties’ intent. This Court’s cases make clear that the doctrine would govern here in the absence of a contrary agreement. See, e.g., Boeing Co. v. Van Gemert, 444 U. S. 472 . Because a party would not typically expect or intend a plan saying nothing about attorney’s fees to abrogate so strong and uniform a background rule, a court should be loath to read the plan in that way. The common-fund rule’s rationale reinforces this conclusion: Without the rule, the insurer can free ride on the beneficiary’s efforts, and the beneficiary, as in this case, may be made worse off for having pursued a third party. A contract should not be read to produce these strange results unless it specifically provides as much. Pp. 13–16.

663 F. 3d 671, vacated and remanded.

     Kagan, J., delivered the opinion of the Court, in which Kennedy, Ginsburg, Breyer, and Sotomayor, JJ., joined. Scalia, J., filed a dissenting opinion, in which Roberts, C. J., and Thomas and Alito, JJ., joined.


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The decision provides a unique reading of Section 502(a) (3) of ERISA, which provides for “appropriate equitable relief.”

This case involves a health plan trying to recoup monies from a third party that through the efforts of the injured plan beneficiary after the health plan provided medical cost coverage. The health plan did not bring the claim itself and after the attorneys’ made a recovery, the health plan wants a free-ride and not to pay its share of attorneys’ fees.

The Court makes two conclusions. First, that this self-funded welfare-benefit-plan is more akin to a contract between the employees and the employer rather than a trust instrument concerning benefit eligibility. That means that equitable defenses don’t apply, because the action falls into the contract box rather than the equity box. Given that relief under Section 502(a) (3) of ERISA has always thought to be equitable (even an equitable lien by agreement talked about in some recent Supreme Court cases), the decision is unique in that the Court states that enforcement of plan terms is contractual rather than equitable. Forever the Supreme Court has emphasized the ERISA abounds with trust law rather than contract law. Nevertheless, in this case contract law controls.

The Court goes on and says that a reimbursement provision can be enforced if it excludes doctrines such as having the plan pay for attorneys’ fees, or waiting in line before the injured participant is made whole. Second, the court finds that the USAirways plan is ambiguous . The plan did not exclude contribution toward attorneys’ fees so the lower court will need to look to the common fund doctrine to determine the amount that the USAirways plan must contribute to attorneys’ fees since this plan benefited from the lawyers’ work.

The fall-out from the decision is unknown. On the one hand, at least when it comes to self-funded plans, to be distinguished from insured benefit plans, a plan can draft around doctrines such as “make-whole” and “common fund” and force participants to pay it back first dollar and until paid in full. Insured plans may not be able to contract around these concepts as those plans are subject to state insurance laws.

At first plan sponsors may think this is great, because the plan must be paid back first and full regardless of the circumstances. The draw-back is that attorneys’ know they will not be paid, then attorneys will not pursue third party wrongdoers. Neither will the beneficiary under the plan. Plans will need to be able to waive or modify tightly drafted prohibitions against paying attorneys’ fees or allowing injured persons to be made whole first.

An alternative is that plans could subrogate, step into the shoes of the injured persons and pursue the wrongdoers. History suggests so far that plans do not like to bring subrogation actions.

Jonathan M. Feigenbaum

Posted by: Jonathan Feigenbaum | Apr 21, 2013 1:03:51 PM

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