In ERISA We Trust: U.S. Supreme Court Rules that ERISA Plan Language Cannot Be Trumped by Equitable Defenses in Fiduciary Action for Reimbursement
By Benjamin R. Garbe, Anderson, Helgen, Davis & Nissen, P.A., Minneapolis, MN
In a landmark decision that defined the trajectory of ERISA1 reimbursement litigation, the United States Supreme Court held in US Airways v. McCutchen2 that the express terms of an ERISA benefits plan could not be overridden by subsequent equitable defenses asserted by a participant who had received a tort recovery. Since McCutchen was handed down on April 16, 2013, much ink has been spilled with ERISA lawyers praising or bemoaning the decision. However, any lawyer who encounters ERISA plans in his or her practice — even tangentially — should be cognizant of McCutchen’s implications.
Factual and Procedural Background
James McCutchen, an airline mechanic, participated in a self-funded health benefits plan (“the Plan”) established under ERISA by his employer, US Airways.3 Pursuant to its terms, the Plan was obligated to pay the medical expenses of a participant who was injured by a third party, and the participant was in turn required to reimburse the Plan if money was later recovered from the tortfeasor.4 In January 2007, McCutchen was seriously injured when a young driver lost control of her car and caused a deadly multiple car accident.5 The Plan subsequently paid $67,000 in medical expenses on McCutchen’s behalf.6 McCutchen later hired counsel to seek a tort recovery, and although his damages were estimated in excess of $1,000,000, the total recovery was $110,000.7 After deducting attorney’s fees and costs, McCutchen was set to pocket $66,000.8
Upon learning of the recovery, US Airways brought an action for reimbursement pursuant to Section 502(a)(3) of ERISA, which allows a fiduciary to seek “appropriate equitable relief” to enforce the terms of the Plan.9 US Airways argued that the Plan had a first-priority right to recover the full $67,000 it paid, even if it meant McCutchen paying back $1,000 more than his in-pocket recovery.10 McCutchen countered that the Plan’s recovery should be reduced by certain equitable defenses.11 The Western District of Pennsylvania agreed with US Airways.12 The Third Circuit agreed with McCutchen.13 The Supreme Court granted certiorari to resolve a notorious circuit split that continued to produce conflicting results.14 With 13 amicus briefs filed, there was no lack of interest in McCutchen’s outcome.15
Legal Argument and Public Policy: The Plan
In petitioning for reversal of the Third Circuit, US Airways argued that the text of ERISA should be dispositive, as Section 502(a)(3) provides for equitable relief to “enforce the terms of the plan,” not to re-write them through equitable defenses.16 Citing to the Court’s precedent in Sereboff v. Mid Atlantic Medical Services, Inc.,17 US Airways argued that it was seeking to enforce an “equitable lien by agreement” and therefore equitable defenses that contradicted the agreement were not available.18 With respect to policy concerns, US Airways cautioned that allowing equitable defenses to negate plan terms would undermine the predictability that Congress envisioned when enacting ERISA, increase costs for beneficiaries, and threaten the solvency of the plans.19 In other words, US Airways argued, the needs of the many should outweigh those of the few. US Airways also asserted that such a result would dramatically increase litigation costs for ERISA plans and incentivize participants to intentionally structure settlements to reduce a plan’s reimbursement interest.20
Legal Argument and Public Policy: The Participant
McCutchen argued that the Third Circuit’s opinion was sound, because, as Congress chose to invoke the powers of equity in Section 502(a)(3), equitable defenses should accordingly operate to limit US Airways’ recovery — just as the defenses would have operated in the days of the divided bench.21 McCutchen argued that in equity, an insurer’s recovery was historically limited by equitable defenses grounded in unjust enrichment, namely, the double-recovery rule and common-fund doctrine.22 The double-recovery rule limited an insurer’s recovery to the portion which compensated the insured for losses paid by the insurer,23 while the common-fund doctrine mandated that the insurer contribute a proportional amount to the effort that produced the recovery (attorney’s fees and costs).24 McCutchen argued that public policy favored his position, as these equitable defenses prevented a windfall where insurers reap the benefits of a recovery while contributing nothing to the effort that produced it.25 McCutchen also asserted that the full-reimbursement approach advanced by US Airways would actually increase litigation costs for ERISA plans, as participants would be less willing to settle tort claims.26
The Court was ostensibly leaning in McCutchen’s favor during oral argument, as Justices Breyer, Ginsburg, Kennedy, and Sotomayor seemed critical of US Airways’ position. Justice Scalia was the lone justice openly telegraphing deference to US Airways.27 Noteworthy comments included:
- “If you go to equity, why aren’t you bound by equity?”28
- “[W]here you have language, even if it was the word ‘any,’ it doesn't mean wheat grown on Mars, okay? And so you'd say - if it says you can recover anything, that ‘any expense,’ it means, yes, you can recover that which was paid, but not money that you had to pay to get the amount paid.”29
- “Excuse me. Do you really think that if an equity court finds the agreement to be unfair, it can say, ‘he who seeks equity must do equity,’ and rewrite the agreement, so that it’s fairer?”30
- “Suppose, in order to get the 100,000, you had, for example, to build a model car to demonstrate to the manufacturer what caused the injury, and it cost you 98,000 to do it. And they pay you 100,000. You're saying that - it wouldn't be unjust to say the 100,000 has to go to - back to pay US Air?”31
The Opinion: A Court United and Divided
Justice Kagan delivered the opinion of the Court which vacated the Third Circuit’s decision and held that the express terms of an ERISA plan cannot be overridden by equitable defenses derived from unjust enrichment.32 In affirming the foundation of Sereboff, the Court noted that evaluating an equitable lien by agreement in a fiduciary reimbursement33 action requires both enforcing the plan’s express terms and rejecting equitable defenses contradicting the same. In other words, “[t]he agreement itself becomes the measure of the parties’ equities; so if a contract abrogates the common-fund doctrine, the insurer is not unjustly enriched by claiming the benefit of its bargain.”34 As ERISA mandated that employee benefit plans be established pursuant to written instruments, the Court opined that the result “fits lock and key with ERISA’s focus on what a plan provides.”35 The Court summated that “[t]he plan, in short, is at the center of ERISA. And precluding McCutchen’s equitable defenses from overriding plain contract terms helps it to remain there.”36
But the Court’s opinion was a two act play, and the second act favored McCutchen. The Court elaborated that if an ERISA plan is silent or ambiguous with respect to the apportionment of settlement proceeds, equitable principles may be used to fill these gaps.37 Although the double-recovery rule had been abrogated by US Airways, the Court found that the Plan did not specifically address attorney’s fees and therefore the common-fund doctrine could be applied to interpret the agreement.38 The issue of attorney’s fees was thus remanded.39 It was this holding that splintered the Court from a potentially unanimous decision to an ultimate five-to-four split. The dissent would have granted full victory to US Airways, believing that McCutchen had conceded that the Plan abrogated the common-fund doctrine, and the argument was thus waived and procedurally barred.40
Implications and Practice Pointers
Pursuant to McCutchen, courts must now permit the express terms of an ERISA plan to control the course of reimbursement litigation and cannot apply equitable defenses based in unjust enrichment unless the plan is silent or ambiguous. Of the numerous implications flowing from McCutchen, practitioners should consider the following:
- Pre-litigation, the message to ERISA plans is clear: The terms of the plan should articulate how damages will be apportioned vis-à-vis the plan and participant, and whether or not any methods of recovery are expressly abrogated. While to some it seems a foregone conclusion that ERISA plans will revise plan documents to align with McCutchen’s roadmap for full reimbursement, fiduciaries are ultimately tasked with electing a philosophy. Not all ERISA plans hunger for full reimbursement. It is noteworthy that the Mid Atlantic plan document in Sereboff expressly applied the common-fund doctrine, mandating that reimbursement to the plan be prorated for reasonable attorney’s fees and costs.41
- During discovery, attorneys for participants should always request a copy of the actual ERISA plan document, not just the summary plan description (“SPD”). The McCutchen Court reiterated its holding in CIGNA Corp. v. Amara that the SPD is a communication to beneficiaries about the plan, but does not constitute the terms of the plan.42 Anecdotally, the lion’s share of ERISA reimbursement cases that don’t settle are decided on summary judgment. Leaving a court to speculate as to the precise plan language could create an inherent issue of material fact and ultimately defeat either party’s dispositive motion. The lack of a complete record benefits neither party and increases litigation costs for clients.43
- The evolution of McCutchen through the courts is a cautionary tale to both sides of the aisle. Beneficiaries and their attorneys are now on notice that the terms of an ERISA plan will be strictly enforced by the courts. The Supreme Court, however, clearly expressed disfavor at US Airways’ attempt to reach into the pocket of McCutchen to satisfy its reimbursement interest, with the Court noting that he would effectively be “[paying] for the privilege of serving as U.S. Airways' collection agent.”44 Thus, if a court perceives an ERISA plan to be overreaching, any whiff of ambiguity in the plan may fall in the favor of the participant — a fate that befell US Airways. Furthermore, plan attorneys should be mindful that even though attorney’s fees may be abrogated in the plan document with regard to the participant’s action against a third party, courts maintain the independent discretion under ERISA to award attorney’s fees to either party in the ensuing action for reimbursement.45 After all, “equity will not suffer a wrong to be without a remedy.”46
Mr. Garbe represents employee benefit plans in ERISA-related litigation and advises on various regulatory issues arising under ERISA, as well as the Health Insurance Portability and Accountability Act and the Patient Protection and Affordable Care Act. He is an associate at Anderson, Helgen, Davis & Nissen, P.A., a Minneapolis law firm specializing in employee benefits, business and commercial litigation, corporate transactions and business counseling, employment law, labor law, and real estate. firstname.lastname@example.org www.andersonhelgen.com.
Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq.
US Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013). As US Airways is considered a “common litigant,” this article will use the more identifiable McCutchen as the shorthand case name.
Resp.’s Br. at 1.
Id. at 673.
McCutchen, 133 S.Ct. at 1543 ($66,866).
Resp.’s Br. at 5-8.
McCutchen , 133 S.Ct. at 1543.
|9||“[A]… fiduciary [may bring a civil action] to obtain other appropriate equitable relief… to enforce… the terms of the plan.” 29 U.S.C. § 1132(a)(3)(B).|
McCutchen , 133 S.Ct. at 1543.
|11||Id. at 1544.|
|14||The Court noted the direct contradiction of the Third and Ninth Circuits vis-à-vis the Fifth, Seventh, Eighth, and Eleventh Circuits. Id. at fn. 2.|
|16||Pet.’s Br. at 17.|
|17||Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006).|
|18||US Airways did recognize that a “parcel of equitable defenses” could be applied to equitable liens by agreement, but argued that none were present or asserted by McCutchen. Pet.’s Br. at 37. US Airways argued that equitable defenses based in unjust enrichment could never be applied to defeat express terms. Id. at 37-40.|
|19||See generally Pet.’s Br. at 42-50.|
|20||Id. at 50.|
|21||Resp.’s Br. at 13-25, 26-32.|
|23||For example, if McCutchen’s $110,000 settlement had allocated $10,000 to medical expenses, the double-recovery rule would limit US Airways’ recovery to $10,000 even though it had paid $67,000.|
|24||McCutchen , 133 S.Ct. at 1545.|
|25||Resp.’s Br. at 55.|
|26||Id. at 53-54.|
|27||Chief Justice Roberts, whose sparse comments tended to favor US Airways, was more notable for instigating an exchange with Joseph Palmore, Assistant to the Solicitor General. In a surprisingly harsh tone, the Chief Justice took exception to the Department of Labor’s footnoting that its position had changed due to “further reflection,” when the Department was in fact under a new administration since the previous position. Mr. Palmore apologized for what the Chief Justice perceived, but respectfully noted that the Court’s decision in CIGNA Corp. v. Amara had motivated the Department’s revised position. 130 S.Ct. 1754 (2010). Although the Department’s footnote did articulate Amara as the inciter of the change, the Chief Justice was clearly frustrated, commenting that the Court was “seeing a lot of that lately.” Tr. of Oral Arg. at 32-33.|
|28||Id. at 4.|
|29||Id. at 14.|
|30||Id. at 31.|
|31||Id. at 60-61.|
|32||McCutchen , 133 S.Ct. at 1546.|
|33||The distinction between “subrogation” and “reimbursement” actions garnered much attention during oral argument, as the terms historically have been used interchangeably yet mandate different analysis. Ultimately, the Court dismissed the issue by footnote. Id. at fn. 5, 6. For additional discussion, See Sereboff, 547 U.S. at 368.|
|34||McCutchen, 133 S.Ct. at 1548. The Court also observed the lack of any precedent in which an equity court applied principles of unjust enrichment to override the terms of an agreement, and noted that McCutchen’s purported “best case” seemed more supportive of US Airways’ position. Id. at 1548.|
|35||Id. at 1548.|
|38||Id. at 1549-50.|
|39||Id. at 1551.|
|41||Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212, 220 (4th Cir. 2005) (“the provisions of the Plan mandate that any reimbursement to [Mid Atlantic] of payments made to the Sereboffs by a third party is subject to a deduction for ‘reasonable attorney fees and court costs prorated to reflect that portion of the total recovery which is due [Mid Atlantic] for benefits paid.’”).|
|42||McCutchen, 133 S.Ct. at 1543, fn 1.|
|43||This was a controversial issue in McCutchen. The justices openly quarreled over whether they should be looking to the terms of the plan when the parties had already stipulated to what the document said in briefing. US Airways claimed that McCutchen’s attorneys never specifically requested the plan document and failed to preserve this issue on appeal. See Tr. of Oral Arg. at 8-12. This issue ultimately led to the dissent.|
|44||McCutchen , 133 S.Ct. at 1550.|
|45||29 U.S.C. § 1132(g)(1).|
|46||See E.I. DuPont de Nemours and Co. v. Kolon Industries, Inc., 894 F.Supp.2d 691, 716 (E.D. Va. 2012) (citing John N. Pomeroy, Pomeroy's Equity Jurisprudence and Equitable Remedies: A Treatise on Equity Jurisdiction, §§ 364, 423 & 424 (1905)); See also CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1879 (2011) (citing R. Francis, Maxims of Equity 29 (1st Am. ed. 1823)).|
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