The U.S. Supreme Court has ruled that an ERISA health plan provision permitting the plan to seek reimbursement from a plan participant overrides such equitable defenses as unjust enrichment. US Airways, Inc. v. McCutchen, No. 11-1285 (U.S. Apr. 16, 2013).
The Court held that the terms of the plan document are at the “center of ERISA”; extrinsic equitable doctrines cannot override explicit plan language. Thus, the decision, which accords with earlier Court opinions, leaves employers latitude to structure relations with and obligations of participants and beneficiaries through plan language. The Court cautioned, however, that those terms need to be inclusive, clear, and, of course, consistent with the statute.
James McCutchen participated in an ERISA-covered health benefits plan sponsored by his employer US Airways. The plan contained the following reimbursement language:
If [US Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, . . . [y]ou will be required to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise.
McCutchen was injured in a car accident in 2007. Under the terms of the health plan, the employer paid $66,866 in medical expenses for McCutchen. Ultimately, McCutchen settled with the negligent driver for $10,000 and received an additional $100,000 from his automobile insurer. His attorney took a 40 percent contingency fee, leaving McCutchen with $66,000. The employer sought to recoup the $66,866 the Plan had paid in medical expenses, but McCutchen refused.
Lower Court Decisions
The employer then filed an action for “appropriate equitable relief,” under § 502(a)(3) of ERISA, seeking to enforce an “equitable lien by agreement” on $66,866 of McCutchen’s total recovery.
McCutchen said two equitable doctrines designed to prevent “unjust enrichment” stopped US Airways from enforcing the plan terms: (1) the double recovery doctrine, under which he claimed that the employer could recover only what it paid after he had recovered his losses, for, e.g., pain and suffering and other personal damages; and (2) the common fund doctrine, under which he claimed a right to receive from the amount recovered his share of the costs of recovery, e.g., attorneys’ fees, before US Airways could receive reimbursement for any part of what it had paid.
The district court granted summary judgment to the employer. On appeal, the Third Circuit Court of Appeals vacated the judgment, holding that “the principle of unjust enrichment” should “serve to limit the effectiveness” of the plan’s reimbursement provision. Otherwise, the Third Circuit reasoned, McCutchen would be left with less than full recovery and the employer would get a windfall.
The Supreme Court agreed to review the case to resolve a circuit split as to whether equitable defenses to a reimbursement claim can override an ERISA plan’s explicit terms.
Supreme Court’s Opinion
In a 5-4 decision vacating the Third Circuit’s decision, the Supreme Court explained that equitable principles are “beside the point when parties demand what they bargained for in a valid agreement.” The Court “declin[ed] to apply rules—even if they would be ‘equitable’ in a contract’s absence—at odds with the parties’ expressed commitments.” Because the plan’s reimbursement provision expressly contradicted the double recovery rule, that rule had no effect here. However, the Court’s majority also found that, because the plan was silent or ambiguous regarding the allocation of the costs of recovery, the “common fund doctrine” provided the default rule.
The dissent agreed with the majority regarding the first holding, but not the second. The dissent’s objection was technical. According to the dissent, the issue of whether the plan was silent or ambiguous regarding the allocation of the costs of recovery was neither preserved for review nor included in the question presented to the Court.
Takeaway for Plan Sponsors
The Supreme Court’s decision in McCutchen provides substantial guidance to plan sponsors on the need for explicitness and clarity in plan provisions of their intent regarding reimbursement, and by clear implication, other plan matters.
In a practical sense, the Supreme Court has made the scope and operation of reimbursement clauses a matter of the technical abilities of plan drafters. Careful and professional attention to the drafting of plan terms in order to express the intent of the sponsor is key.