There have been two important Supreme Court ERISA Litigation developments in the past two days.
Today, the Court issued its much anticipated decision in US Airways v. McCutchen, one day after accepting certiorari in the case of Heimeshoff v. Hartford Life & Accident Insurance Co. Both cases address the fundamental ERISA principle that plan terms control dispute resolution.
The facts in McCutchen are common. (We have written about the case here , here and here). James McCutchen was injured in a car crash. He hired a lawyer to pursue claims against the other driver and his own insurer. The lawyer recovered $110,000, and Mr. McCutchen netted $66,000 net of his lawyer’s fee. Meanwhile, his employer’s medical plan had paid $66,866 for Mr. McCutchen’s medical care because of the accident. The plan terms required Mr. McCutchen to reimburse the plan. Mr. McCutchen refused, however, because his plan benefits exceeded his net recovery.
Mr. McCutchen argued that reimbursement would be unfair and inconsistent with equitable principles. He argued that equity should trump plan terms. He prevailed in the lower courts and an appeal to the Supreme Court followed.
The Supreme Court ruled that the ERISA plan terms, and not equity, control because the terms created an equitable lien by agreement.
In reaching its conclusion, the Court stressed the importance of plan terms: “If the agreement governs, the agreement governs . . . .” The Court continued: “The result we reach, based upon the historical analysis our prior cases prescribe, fits lock and key with ERISA’s focus on what a plan provides.” “The plan, in short, is at the center of ERISA. And precluding McCutchen’s equitable defenses from overriding plain contract terms helps it to remain there.”
But the Court struggled with the question of what the plan provided. A five justice majority, led by Justice Kagan, held that because the plan did not specifically say otherwise, the “common-fund doctrine” could be used to construe its terms. The common fund doctrine holds that someone who recovers money on behalf of another person can seek reimbursement from the amount recovered. “If the equitable rules [McCutchen] describes cannot trump a reimbursement provision, they still might aid in properly construing it.” The majority held that that “if US Airways wished to depart from the well-established common-fund rule, it had to draft its contract to say so–and here it did not.” The Court sent the case back the lower court to decide how much the plan was entitled to recover in light of McCutchen’s attorney’s fees.
The facts in Heimeshoff are also common.
Julie Heimeshoff’s claim for long-term disability benefits from her employer’s LTD plan was denied. The plan required Ms. Heimeshoff to sue within three-years from the time that proof of loss was due under the plan. Ms. Heimeshoff commenced her lawsuit more than three years after her proof of loss was due. She argued that the limitations period should not begin to run until her claim for benefits was finally denied by the plan itself. The three year period actually ran out before that final decision was made.
The Court of Appeals for the Second Circuit found for the plan, stating: “The policy language is unambiguous and it does not offend the statute to have the limitations period begin to run before the claim accrues.”
The Supreme Court accepted certiorari on this question presented: “When should a statute of limitations accrue for judicial review of an ERISA disability adverse benefit determination?”
McCutchen and Heimeshoff are important because they test the bedrock ERISA principle that ERISA plan terms control in ERISA Litigation. They test whether the question “what does the plan say” should be the first inquiry when an employer or fiduciary receives word that it, he or she has been sued.
McCutchen should put a stop to frequent motion practice by plan participants seeking to avoid their contractual reimbursement obligations. The decision also helps guide plan sponsors in drafting plan documents by emphasizing the need to address clearly participant reimbursement obligations. A footnote in the opinion reinforces the need for clear plan drafting — in the lower courts, the parties had referred only to language in the summary plan description. Before the Supreme Court, the parties produced the underlying ERISA plan document, which evidently differed from the summary. See Transcript. The Court ultimately relied on the summary plan description language because parties had done so throughout the case. Nevertheless, the footnote will serve as fodder for participants seeking to dodge their reimbursement obligations.
Heimeshoff raises the question when the benefits denial limitations period accrues and more particularly whether it can do so, and run out, before the final decision on a claim is rendered. It may reinforce the ERISA Litigation principle that limitations accrue upon a clear repudiation of rights, which can occur prior to a final claim decision. See discussion here. Once again, the Court will provide guidance to ERISA litigators on the sanctity of ERISA plan language in deciding ERISA controversies.