For example, a plan typically provides that if a participant receives benefits to pay medical costs covered by the plan for injuries caused by another, and then the participant recovers from the tortfeasor, the participant is obligated to reimburse the plan to the extent of benefits paid out. Similar obligations arise through subrogation, which is designed to transfer certain legal rights of the participant or beneficiary to the plan as a condition of benefit coverage.
In most of these situations, ERISA preempts the state laws that would otherwise apply to medical insurance subrogation or reimbursement claims. Accordingly, what the plan documents provide for the plan’s right to subrogation or reimbursement, backed by ERISA’s enforcement scheme, dictates the plan’s rights in this area, rather than state law.
Until recently, these arrangements and outcomes were reasonably predictable throughout the nation by reason of ERISA preemption, and group health plans could rely on the enforceability of their reimbursement provisions. In 2002, however, the Supreme Court issued a controversial decision, accompanied by two vocal dissenting opinions, interpreting the key ERISA provision on which these settled expectations turn. In Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the Court addressed the ability of group health plans to enforce their plan provisions for reimbursement through ERISA § 502(a)(3), which permits the plan’s fiduciaries to seek “equitable relief” to enforce the plan’s terms. The majority held that Section 502(a)(3) did not authorize the reimbursement action in that case because the petitioners were seeking legal relief, not equitable relief.
Great-West is having a huge effect on the lower courts and the practices of those involved in ERISA health plan reimbursements. As the lower courts apply the holding in Great-West, personal injury attorneys, defense counsel, counsel for group health plans, plan sponsors, group insurers, and claim administrators need to be aware of the evolving law that affects the enforceability of ERISA reimbursement claims. Beyond that, the majority opinion in Great-West, which focused on the meaning of the term “equitable relief” in ERISA’s enforcement provision, may have an effect that reaches beyond the realm of ERISA. As the majority opinion in Great-West noted, the term “equitable relief” appears in 77 provisions of the United States Code. Thus, the decision will likely be used by practitioners and judges in arguing the scope of relief available in a variety contexts outside of reimbursement rights under ERISA-governed health plans.
The Supreme Court’s Decision in Great-West
In Great-West, the Supreme Court addressed whether, under the equitable relief clause contained in ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(1)(B), a group health plan could sue a plan participant, who in a separate lawsuit had obtained money from a tortfeasor, to recover the cost of medical benefits associated with the participant’s treatment for injuries caused by the third party. In that case, Janette Knudson was rendered quadriplegic as a result of a car accident. The group health plan sponsored by her employer, which was funded by an insurance policy issued by Great-West, paid more than $400,000 for her medical treatment associated with the accident. Knudson filed a lawsuit in state court against the manufacturer of her car and negotiated a settlement of that lawsuit. The bulk of her settlement recovery was allocated to her attorneys and to a special needs trust. Only $13,828.70 of the judicially approved settlement was allocated by her attorneys for payment of her medical expenses. A check for this amount was tendered to Great-West. Great-West refused to accept the payment and sued Knudson under ERISA to recoup an amount equal to the benefits paid.
The plan documents in Great-West gave the plan the right to recover from a participant such as Knudson any amount the plan paid for medical expenses if a recovery is made against a third party. The plan documents described this right of reimbursement as “a first lien upon any recovery whether by settlement, judgment, or otherwise,” up to the amount paid by the plan for medical expenses or the amount recovered by the injured party (whichever is less), and provided further that in the event an injured party recovered from a third party, but failed to reimburse the plan, the injured party would be personally liable to the plan. The plan assigned its lien and reimbursement rights to the plan’s insurer, Great-West.
Great-West brought an action against Knudson under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3), to enforce the plan’s right to reimbursement contained in the plan document. Section 502(a)(3) provides:
A civil action may be brought—
. . .
by a participant, beneficiary or fiduciary (A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan.
A five-Justice majority held that Great-West’s lawsuit to enforce the reimbursement provision of the plan actually sought a legal remedy—recovery of damages—under a theory of restitution. The majority rejected Great-West’s argument that there was a viable cause of action in the nature of equitable restitution. The majority concluded that ERISA’s enforcement provision limited Great-West to relief that not only is equitable, but “equitable” as that term was interpreted in the days when there were differences between law and equity, that is, before 1937 when the Federal Rules of Civil Procedure merged the courts of law and equity under Rule 2. The majority rejected Great-West’s argument that its desired remedy was equitable because an action for restitution in equity must seek not to impose personal liability on the defendant generally, but rather to restore to the plaintiff particular funds or property in the defendant’s possession. Although the remedy could be characterized as “restitution,” the majority held that historically not all restitution claims were equitable, and if the claim is ultimately to recover damages generally, rather than recovering specific assets tied to particular accounts, or assets on which an equitable lien or constructive trust could attach, the action is to be characterized as legal not equitable. According to the majority, because Congress chose to limit the remedies available under Section 502(a)(3) to just equitable relief, Great-West could not proceed under that section to recover damages against Knudson because the settlement funds Great-West sought were not funds or property in Knudson’s possession, but had been transferred to the special needs trust and to Knudson’s attorneys. A contractual claim asserting liability against a defendant is legal in nature, while a constructive trust or lien on particular property is equitable. In sum, the majority held that Congress’s choice to limit Section 502(a)(3) relief to “equitable relief” compelled the Court to distinguish between legal and equitable forms of restitution because “equitable relief” means “less than all relief.”
The majority left unanswered whether Great-West would have had a viable equitable claim for restitution by seeking a lien or a constructive trust for the special needs trust or the settlement funds still held by Knudson’s attorneys, as those issues were not presented. Also, the majority expressly declined to opine on whether Great-West could have intervened in the state court tort action brought by Knudson or whether a direct action brought by Great-West against Knudson asserting state law claims such as breach of contract would have been preempted by ERISA. The only claim presented and addressed by the Court was Great-West’s claim directly against Knudson under Section 502(a)(3) to enforce the plan provision making her personally liable to reimburse the plan out of her general assets.
Great-West makes it extremely difficult if not impossible for a benefit plan to obtain recovery against a plan participant generally, even if the claim is ostensibly a claim for “restitution.” The majority, however, did acknowledge that equitable relief might be available to a plan under different circumstances:
[A] plaintiff could seek restitution in equity, ordinarily in the form of a constructive trust or an equitable lien, where the money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession. . . . A court of equity could then order a defendant to transfer title (in the case of the constructive trust) or give a security interest (in the case of the equitable lien) to a plaintiff who was, in the eyes of equity, the true owner. . . . Thus, for restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.
Great-West , 534 U.S. at 213–14.
Great-West was a 5–4 decision. In two minority opinions, the dissenting Justices criticized the majority’s view as reading ERISA’s enforcement provision in an overly narrow manner, and leaving a wrong (nonpayment of money clearly owed under the terms of an ERISA plan) without a remedy. Justice Ginsburg’s opinion, in which all of the dissenters concurred, found the majority’s decision to be overly rigid and believed it “will at least protract and perhaps preclude judicial resolution of the nub of the controversy— i.e., what recoupment does [a] Plan’s reimbursement provision call for.” Id. at 226. The dissenters would not have interpreted the term “equitable” in Section 502(a)(3) in a static and time-bound fashion. In the dissent’s view, equity has historically been, and should remain, “an evolving and dynamic jurisprudence.” According to the dissent, Congress could not have intended its reference to equitable relief in ERISA to limit the relief allowed to just relief that was historically purely equitable. Moreover, noted the dissent, aside from the fact that recent Supreme Court decisions have not dwelled on the ancient distinctions between legal and equitable relief, even the standard authorities on which the majority relied are not consistent with each other in their view of the scope of specific equitable remedies. The dissent concluded, “Today’s decision needlessly obscures the meaning and complicates the application of [ERISA’s enforcement provision]. The Court’s interpretation of that provision embroils federal courts in ‘recondite controversies better left to legal historians,’ . . . and yields results that are demonstrably at odds with Congress’ goals in enacting ERISA.” Id. at 234.
The Lower Courts
Predictably, the clash of views over the scope of “equitable relief” articulated by the Great-West majority and the dissenting opinions has triggered similar differences in the lower courts. The Westlaw history on the case lists one case under “Not Followed as Dicta,” four cases are listed under “Declined to Extend by,” and twenty-five cases are listed as “Distinguished by.” In Bauhaus USA, Inc. v. Copeland, 292 F.3d 439 (5th Cir. 2002), the majority ruled that the fiduciaries of a health plan had no available remedies under ERISA to obtain a declaratory judgment that the plan was entitled under the plan’s subrogation clause to recover from a plan participant’s settlement, and therefore, absent equitable remedies under Section 502(a)(3), the district court did not have jurisdiction to entertain the case. In a lengthy and thoughtful opinion, however, one dissenting judge of that panel, referring to the problems foreseen by Justice Ginsburg, found the facts to be distinguishable from those in Great-West ( Bauhaus involved subrogation, not reimbursement or restitution) and concluded that the plan’s claim should be subject to federal jurisdiction. The dissent also concluded that under ERISA’s preemption provisions, the district court should have entertained the case and possibly found a basis for equitable relief. In the dissent’s view, the relief sought by the plan was “undeniably equitable.”
The Ninth Circuit has read Great-West broadly as holding that even when the funds are separately identifiable, in escrow, a claim asserted against a plan participant was not actionable under Section 502(a)(3). Westaff (USA), Inc. v. Arce, 298 F.3d 1164 (9th Cir. 2002).
Still other courts have considered Great-West in contexts extending beyond disputes over recoupment of ERISA health plan benefits, when notions of equitable relief are key. In Gerosa v. Savasta & Co., Inc., 329 F.3d 317 (2d Cir. 2003), the Second Circuit rejected an action for restitution brought by a multiemployer plan against an actuary based on the actuary’s alleged negligence, concluding that the claim for restitution did not qualify as equitable relief. The court, however, allowed state law claims against the actuary to proceed, finding that they were not preempted by ERISA.
The Ninth Circuit in Honolulu Joint Apprenticeship and Training Committee of United Ass’n Local Union No. 675 v. Foster, 332 F.3d 1234 (9th Cir. 2003), rejected a multiemployer plan’s action alleging unjust enrichment and seeking recovery of training costs from a plumber who received training but then failed to meet his contractual commitments associated with such training. The court held that “[t]he Supreme Court cases interpreting
§ 1132(a)(3) mark a steadily shrinking field of ‘appropriate equitable relief’ available to plan fiduciaries.” 332 F.3d at 1237.
In Administrative Committee of the Wal-Mart Stores, Inc. Associates’ Health & Welfare Fund v. Varco, 338 F.3d 680 (7th Cir. 2003), the Seventh Circuit applied Great-West and allowed an ERISA subrogation claim, distinguishing the facts from those in Great-West and concluding that the plan’s claim was equitable because the funds sought by the plan were identifiable, in the control of the defendant, and the plan was rightfully entitled to the money under the terms of the plan. The plan thus prevailed on its claim for a constructive trust on those funds.
In Empire Kosher Poultry, Inc. v. United Food and Commercial Workers Health and Welfare Fund, 285 F. Supp. 2d 573 (M.D. Pa. 2003), the district court held that despite Great-West the federal court still had jurisdiction. Also, the court found that Great-West had no effect on the common law question claim of restitution that has been recognized in the Third Circuit.
As a practical matter, ERISA plans faced with potentially expensive litigation over whether they can pursue truly “equitable” claims to recoup benefit payments may wish to compromise the reimbursement claim and take less than a full recovery. Plans may find that identifying property or assets that can be traced to the recovery on which a constructive trust or an equitable lien can be imposed will be difficult.
Likewise, a participant and his or her personal injury lawyer may be willing to agree to allowing the plan a more generous recoupment to avoid expensive and protracted litigation by the plan, which if successful could result in most if not all of the funds recovered being allocated to the plan, and even an award of attorney fees in favor of the plan and against the participant under ERISA.
One approach to avoid recoupment litigation between a plan and a participant who has been injured by another might be for the participant’s personal injury attorney and the plan to address the reimbursement issue at the onset of litigation against the third party and to make arrangements at that time for the division of any recovery. Given the apparent inability of plans to make a general damages recovery against a participant after Great-West, and possibly no recovery, plans will likely now have an economic incentive to work with a participant’s personal injury attorney and in some cases to consider taking less than a full recoupment and sharing the participant’s personal injury attorney fees. This is because the plan’s alternative—no recoupment at all for the cost of treating the participant’s injuries—will likely make plans prefer a substantial recovery over either no recovery or having to litigate a difficult recoupment claim against the participant. Moreover, if the plan were the sole litigant against the tortfeasor under its subrogation rights, it would inevitably have to pay for legal services anyway.
One problem that a plan might encounter in agreeing to accept less than full recoupment is an argument by other plan participants that the plan administrator is not following the terms of the plan by agreeing to less than a full recovery, when the plan says it is entitled to full recovery without reduction for the participant’s expenses. But given the practical limits on the plan’s ability to obtain any recovery from the participant, let alone a full recoupment, after Great-West, obtaining a substantial recovery would appear to be defensible.
Beyond ERISA health plan reimbursement cases, in other lawsuits when the meaning of “equitable relief” is presented, Great-West’s majority and minority opinions on the meaning of that term will likely influence the outcome—but not necessarily with greater predictability.
The Supreme Court’s decision in Great-West has made it more difficult for ERISA plans to enforce their reimbursement provisions and recover from plan participants and beneficiaries the costs of medical treatment when a third party is liable for the injury. The Court refused to enforce plan terms and allow general contractual type claims against participants and beneficiaries when specific property subject to lien or constructive trust is absent. It offered no guidance on whether state law claims to recoup benefit payments would provide an alternative mechanism to obtain reimbursement or whether such claims are preempted by ERISA. Plan reimbursement claims, however, do appear to remain viable, but in limited circumstances.
Counsel need to be aware of how the lower federal courts are applying Great-West, and then craft and time their reimbursement lawsuits accordingly. As a result, greater cooperation with a participant’s personal injury attorney may be required to facilitate efficient reimbursement recoveries. Also, plans may want to establish new administrative arrangements such as notices to and communications with and from participants to help reduce the risk that recoupment of benefit payments will be foreclosed because of the plan’s not having knowledge of a reimbursement opportunity until the funds paid by the third-party tortfeasor are dissipated.
Finally, litigators may well find in contexts other than ERISA reimbursement, when notions of “equitable relief” are at issue, that their claims will be affected by the antiquarian view of equitable relief embraced by the Great-West majority. Amid this current landscape of uncertainty, it appears at least one thing is certain: Great-West will be cited many times in future cases.