Supreme Court Forbids Rewrite Of ERISA Plan

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The supremacy of a written ERISA-governed plan still reigns as the U.S. Supreme Court reversed the ruling of an appellate court which had held that a court in equity can ignore unambiguous subrogation reimbursement language, and simply rewrite the terms of an ERISA-governed plan in line with its own ideas of what was “fair and equitable.” McCutchen v. U.S. Airways.

Background

James McCutchen was an employee of U.S. Airways and a participant in a self-funded benefits plan governed by ERISA. The plan covered McCutchen’s medical expenses in the event that he was ever injured by a third party, which McCutchen would then reimburse in full “out of any monies recovered” from third parties. The plan also required that McCutchen would not “negotiate any agreements” that would divert the plan’s reimbursement monies to others.

McCutchen suffered injuries in a non-work-related accident and incurred medical bills totaling $66,866. In accordance with the plan, U.S. Airways paid for McCutchen’s medical care. McCutchen hired a lawyer to sue the third party, and ultimately recovered $110,000. McCutchen paid his lawyer 40% out of the $110,000 settlement fund, but then refused to reimburse the plan the $66,866 it paid in advance to cover treatment for his injuries. U.S. Airways filed suit in federal district court to enforce its rights under the plan to seek reimbursement of the full amount paid. The district court held in favor of U.S. Airways. McCutchen appealed.

On appeal to the U.S. Court of Appeals for the 3rd Circuit, U.S. Airways argued that under Section 502(a)(3) of ERISA, plan fiduciaries may enforce written reimbursement provisions in court by seeking “appropriate equitable relief” to enforce “the terms of the plan.” The 3rd Circuit reversed the decision of the district court reasoning that the principle of unjust enrichment overrode U.S. Airways’ reimbursement clause. U.S. Airways appealed to the Supreme Court.

The question on appeal was whether the 3rd Circuit correctly held – in conflict with the 5th, 7th, 8th, 11th, and D.C. Circuits – that ERISA Section 502(a)(3) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan’s terms give it an absolute right to full reimbursement.

The Positions Of The Parties

ERISA was designed to respect the primacy of written benefit plans. ERISA recognizes that plans are contracts between employers and employees. U.S. Airways argued that Section 502(a)(3) authorizes appropriate equitable relief to enforce the terms of a plan, not rewrite it. There was no issue in this case that the plan engaged in any sort of fraud or misrepresentation in the agreement with McCutchen. The Supreme Court previously held in the case of CIGNA Corp. v. Amara, that fraud or misrepresentation may permit such discretion in fashioning equitable relief.

U.S. Airways further claimed that the type of “equitable relief” sought, an equitable lien by agreement, “does not authorize a court to do equity in the abstract, adjusting burdens and benefits long after the fact.” An equitable lien by agreement enforces the parties’ actual agreement. Finally, it argued that McCutchen’s position “runs headlong into the goals of ERISA” as the legislation seeks to minimize litigation burdens and his position would undoubtedly multiply them. ERISA encourages employers to offer benefits, makes liabilities predictable, and eliminates ambiguities.

U.S. Airways reasoned that McCutchen’s position, and that of the 3rd Circuit, could lead to disastrous results for ERISA-governed plans because a court could simply rewrite the reimbursement or subrogation provisions and leave the plan holding the bag.

McCutchen argued that the language of ERISA stating that a court may award “appropriate equitable relief” for claims brought under 502(a)(3), permitted reformation of the bargained for and agreed terms of the plan between himself and U.S. Airways. Here, after paying his attorneys and repaying the plan, McCutchen would be left with no monetary recovery for himself.

McCutchen, with no apparent regard for the fact that U.S. Airways advanced him in excess of $66,000 so he could receive medical treatment, argued that he should be made whole before the plan was reimbursed. This would include compensation for his lost wages, physical and emotional damages, future medical expenses, attorneys’ fee and the like.

Alternatively, he argued that the plan should only receive a percentage of what it paid for care and only after a payment of fees was made to his attorney for the suit against the third party who injured him. This theory is known as the common-fund doctrine. McCutchen wholly rejected the agreement he made in accepting benefits via the plan wherein the plan gets paid first from any moneys secured by judgment or settlement.

Finally, McCutchen argued that since the plan fiduciaries did not do anything to assist in the case against the third party who injured him, that it was not “equitable” for the plan to seek full reimbursement after the settlement was made. He claimed that allowing the plan to swoop in at the end of the matter and take its 100% reimbursement off the top of the settlement amounted to a double recovery for the plan – even though all the plan would take was exactly what it paid out of pocket to care for McCutchen’s injuries.

The Court’s Decision

In reversing the holding of the 3rd Circuit, the Supreme Court held “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.”

The Supreme Court reasoned that the logic of its prior ruling in the case of Sereboff v. Mid Atlantic Medical Services, Inc. doomed McCutchen’s legal position. In Sereboff, like U.S. Airways, the plan administrator sought to enforce an equitable lien by agreement found in the reimbursement provision of the plan. “Enforcing the lien means holding the parties to their mutual promises….” When the contract contains clear reimbursement provisions, ERISA governs, not general equitable doctrines.

But Sereboff left open the question of whether a future litigant, such as McCutchen, could assert that contract based relief, while “equitable,” was not “appropriate” under §502(a)(3) because it contravened principles like the make-whole doctrine. The Court’s ruling today closed that gap in favor of the written ERISA-governed plan.

The Court also held that while “equitable rules cannot trump a reimbursement provision, they may aid in properly construing it.” This is directed at McCutchen’s claim for allocation of attorneys’ fees. U.S. Airways’ plan is silent in this regard. Thus, the Court noted that the common-fund doctrine provides the default rule to fill this gap. When a contract is silent, courts must look outside the four corners of the document and take into account other doctrines that have traditionally been applied in similar situations. Under the common-fund doctrine, litigants or lawyers who recover an amount (common fund) for themselves or their clients are entitled to a reasonable attorneys’ fee from the recovery as a whole. The case will now be remanded to the lower court for proceedings consistent with this decision.

What Does This Mean For Employers?

Although this is a win for those self-funded plans governed by ERISA, plan fiduciaries and administrators are wise to review with their counsel the subrogation, reimbursement and attorney fee and costs provisions in the written documents to ensure conformity to the law in this area.

Undoubtedly, those who litigate in the personal-injury arena will continue to develop new theories to test the sufficiency of ERISA, since taking the claim of injured persons who have had their expenses paid by a medical plan will be less attractive if the ability to collect fees and recover damages for their client will be secondary to the rights of the plan.