In its decision published yesterday in U.S. Airways, Inc. v. McCutchen, 2013 U.S. LEXIS 3156 (April 16, 2013), the United States Supreme Court said what the Eleventh Circuit has been saying all along: Recovery through (and defenses to) ERISA Sec. 502(a)(3) are limited to enforcement of the terms of the plan, and cannot be crafted in contradiction of clear plan terms.
The issue in McCutchen was the enforcement of a reimbursement clause in an ERISA health benefit plan. The plan provided that, if the participant recovered from a third party for injuries, he must reimburse the plan for any medical benefits paid to treat the injuries, out of "any monies recovered." Because the avenue of recovery for a plan's reimbursement claim is "appropriate equitable relief" under ERISA Sec. 502(a)(3), the participant argued that equitable defenses such as the make-whole doctrine and the common fund doctrine could be applied as well.
The Third Circuit Court of Appeals agreed with the participant, allowing these doctrines to reduce the amount of the reimbursement to the plan, even if these doctrines contradicted the terms of the plan. (The Third Circuit's holding was recently lambasted by a District Court in the 11th Circuit in Schwade v. Total Plastics, Inc., 2012 U.S. Dist Lexis 37091 (M.D. Fla. 2012) (See April 5, 2012 blog for a more detailed discussion) and was directly contrary to the Eleventh Circuit's holding in Zurich American Ins. Co. v. O’Hara, 604 F. 3d 1232 (11th Cir. 2010))
The Supreme Court reversed the Third Circuit. The Court recognized that the equitable doctrine by which the plan sought recovery under ERISA 502(a)(3) was most akin to an equitable lien by agreement, which "arises from and serves to carry out a contract's provisions." Because the boundaries of relief under ERISA § 502(a)(3) are limited to enforcing plan terms, any equitable defenses that resulted in undermining the plan terms could not be used as a defense.
Applying its holding to the plan in its case, the Supreme Court found that the "make-whole" doctrine could not defeat the terms of the plan to be reimbursed first-dollar from any recovery. However, it found that the plan did not specifically address the apportionment of attorneys' fees; therefore, the common fund doctrine could be used as a default rule to require the plan to contribute to those fees. (In contrast, the plan provision at issue in Zurich specifically disavowed the common fund doctrine; accordingly, it appears that Zurich would be factually distinguishable on this point and, under the McCutchen analysis, the plan provision in Zurich would not be subject to the common fund defense.)