Many ERISA plans contain “subrogation” or “reimbursement” provisions. Can equitable defenses change the Plan’s reimbursement rights?

You need to know about US Airways Inc. v. McCutchen — a critical case before the United States Supreme Court, with oral argument set for tomorrow.

THE ISSUE: Whether “equitable defenses” can limit a plan’s recovery under ERISA § 502(a)(3).

The case will most likely have a huge impact on ERISA reimbursement. Here is a mini-summary of the case.

FACTS. McCutchen was a plan participant. He was seriously injured when a car crossed the center-line and hit him head-on.  The US Airways ERISA plan paid out over $66,000 in medical expenses. McCutchen received $110,000 in settlement of the tort claims, and after his attorney received 40%, McCutchen’s net proceeds from settlement was $66,000—about equal to the reimbursement sought by the ERISA plan. McCutchen refused to reimburse the plan for medical expenses. The ERISA plan sued under ERISA § 502(a)(3) for full reimbursement of medical expenses.

DISTRICT COURT. The District Court granted summary judgment to US Airways, as plan administrator, based on language in the plan allowing full reimbursement of any monies recovered by the participant.

THIRD CIRCUIT. The Third Circuit vacated and remanded. 663 F.3d 671 (3d Cir. 2011). The Third Circuit rejected the plan’s claim for full reimbursement concluding that ERISA § 502(a)(3) incorporates traditional equitable defenses. Id. at 678-79. Requiring the participant to provide full reimbursement to the plan (without allowing offset for his attorneys’ fees and expenses) would be “inappropriate and inequitable relief.” Id. at 679. (This holding conflicts with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits.)

UNITED STATES SUPREME COURT: Here are the legal arguments being made tomorrow:

US AIRWAYS (ERISA PLAN) LEGAL ARGUMENT:  ERISA does not empower the courts to “use free-floating equitable principles to rewrite benefit plans.” First, § 502(a)(3) authorizes only appropriate equitable relief to “enforce . . . the terms of the plan.” McCutchen’s approach would improperly “obliterate[]” the plan terms. Second, the equitable relief sought by the Plan (an equitable lien by agreement) requires the court to enforce the actual agreement of the parties, which allows full reimbursement, rather than rewrite the parties’ agreement. Third, McCutchen’s approach conflicts with the goals of ERISA by making liabilities unpredictable. The Third Circuit’s decision threatens the stability of self-funded ERISA plans, and will discourage employers from offering benefits.

McCUTCHEN’S LEGAL ARGUMENT:   First, the Plan’s approach is neither appropriate nor ‘equitable’ because it ignores principles of unjust enrichment in favor of “rote enforcement of contract terms.” Second, the Third Circuit’s approach  is like how a court should handle an insurer’s subrogation claims — limited to a pro rata share of a recovery. Third, the equitable common fund rule requires that US Airways pay its proportional share of the attorney fees and costs incurred in obtaining the damages recovery.  Fourth, “the plans have not offered a scintilla of actual evidence that their apocalyptic vision of life under the Third Circuit’s approach will come to pass.” “[T]here is every reason to believe that [the Plan’s] full-reimbursement approach would increase litigation costs by making it less likely that tort claimants would be willing to settle cases.”

DISCUSSION. A very tough factual case—McCutcheon was seriously injured and is now disabled.  His attorneys already took 40% of the very limited settlement proceeds—the tortfeasor had little or no assets or insurance; if the ERISA plan wins, McCutchen will have little or no recovery. Tough facts could result in some bad law.