In U.S. Airways, Inc. v. McCutchen, the US Supreme Court recently considered whether certain equitable defenses override the terms of a welfare plan in a plan fiduciary's suit for reimbursement under § 502(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Court, adopting the rule followed in the Fifth, Seventh, Eighth, Eleventh, and District of Columbia Circuits, held that the terms of the welfare plan govern in such an action, but that equitable rules may aid in properly construing the plan's reimbursement provision. The takeaway from the McCutchen case for plan sponsors is that reimbursement provisions in plan documents should be reviewed to ensure they include specific provisions addressing the applicability of equitable defenses and, if not, those provisions should be amended.
In January 2007, 51-year old James McCutchen was involved in a car accident for which his medical and other damages were estimated to exceed $1 million. At the time of the accident, McCutchen participated in US Airways' health plan. The plan paid $66,866 in medical expenses arising out of the accident on McCutchen's behalf. McCutchen then retained lawyers, in exchange for a 40% contingency fee, who recovered $110,000 in damages. After the lawyers' contingency fee was deducted from the recovery, McCutchen received $66,000.
Upon learning of McCutchen's recovery, US Airways demanded reimbursement of the $66,866 the plan paid in medical expenses, based on language in the plan's summary plan description ("SPD") requiring participants to "reimburse the Plan for amounts paid for claims out of any monies recovered from a third party." Although McCutchen denied that US Airways was entitled to any reimbursement, his attorneys placed $41,500 (representing US Airways' full claim less a proportionate share of the lawyers' 40% contingency fee) in an escrow account pending resolution of the dispute. US Airways then filed an action under §502(a)(3) of ERISA, seeking "appropriate equitable relief" to enforce the plan's reimbursement provision.
The suit requested an equitable lien on $66,866, which included the $41,500 in the escrow account and $25,366 that was in McCutchen's possession. The Court noted that a reimbursement suit is a claim seeking "equitable relief" because such a suit is the modern-day equivalent of an action in equity to enforce a contract-based lien. The Court also noted that such an action is called an "equitable lien by agreement."
McCutchen raised two equitable defenses under the doctrine of unjust enrichment. First, under the "double recovery" defense, McCutchen argued that the plan's reimbursement should be limited to the amount of McCutchen's recovery that was attributable to the medical expenses that had already been covered by the plan. Because not all of his recovery was for the medical expenses (it also included compensation for pain and suffering and loss of future income), McCutchen argued that the plan was not entitled to the full $66,866.
Second, under the "common fund" doctrine, a litigant who recovers a common fund for the benefit of persons other than himself is entitled to reasonable attorney's fees from the fund as a whole. McCutchen argued that this doctrine enabled him to pass on a shares of his legal fees to the plan, no matter what the plan provides. Thus, any reimbursement the plan received would have to be reduced by 40%, to cover its portion of his lawyers' contingency fee.
The Supreme Court granted certiorari to resolve disagreement among the federal Courts of Appeals as to whether equitable defenses based on unjust enrichment can override an ERISA plan's reimbursement provision.
The Supreme Court's Decision
The Court was faced with deciding the role that equitable defenses alleging unjust enrichment can play in an action for an "equitable lien by agreement." The Court noted in its ruling that an action for "equitable lien by agreement" arises from a contract's provisions, and that enforcing the lien means holding the parties to their mutual promises. Conversely, the Court stated, it means declining to apply rules, even if they would be equitable in a contract's absence, at odds with the parties' expressed commitments. The Court stated that ERISA's principal function is to "protect contractually defined benefits," and that the statutory scheme "is built around reliance on the case of written plan documents." The Court noted that although statements in an SPD generally do not constitute the terms of a plan, it would treat the language in the SPD in this case as coming from the plan because that is what the parties and lower courts had done throughout the course of the litigation. The Court then held that in an action brought under ERISA § 502(a)(3) based on an equitable lien by agreement, the terms of the ERISA plan govern, and neither general principles of unjust enrichment nor specific doctrines reflecting those principles – such as the double-recovery defense or the common fund doctrine—can override the applicable contract.
However, the Court also noted that although the equitable rules cited by McCutchen cannot trump a reimbursement provision, they can nonetheless aid in properly construing it. The Court stated that while the plan's reimbursement provisions expressly override the double-recovery rule, the plan is silent on the allocation of attorney's fees and, in those circumstances, the common fund doctrine provides the appropriate default rule.
The Court explained the rationale for the common fund doctrine in the context of this case as follows:
"Third-party recoveries do not often come free: To get one, an insured must incur lawyer's fees and expenses. Without cost sharing, the insurer free rides on its beneficiary's efforts — taking the fruits while contributing nothing to the labor. Odder still, in some cases — indeed, in this case — the beneficiary is made worse off by pursuing a third party. Recall that McCutchen spent $44,000 (representing a 40% contingency fee) to get $110,000, leaving him with a real recovery of $66,000. But US Airways claimed $66,866 in medical expenses. That would put McCutchen $866 in the hole; in effect, he would pay for the privilege of serving as US Airways' collection agent."
Thus, the Court held that in this case the common fund doctrine should be used to interpret the plan's reimbursement provision and remanded the case for further proceedings.
For Plans to Consider
The Court in the McCutchen case reminds plan sponsors that plan documents control the outcome of disputes over plan terms. Plan sponsors that wish to deviate from common law equitable doctrines must specifically draft the plan to so provide. When a plan is silent or ambiguous as to a particular issue, equitable principles can be used to interpret the plan provisions. Thus, plan reimbursement and attorney's fee provisions should be revised to provide that equitable defenses, including the double recovery defense and the common fund doctrine, will have no effect on plan terms.