The US Supreme Court upholds health plan’s right to damages recovered from third parties, but employers should carefully review plan terms. In a decision of great importance to ERISA-covered employee benefit plans, the Supreme Court unanimously held, in US Airways, Inc. v. McCutchen, 2013 WL 1567371 (April 16, 2013), that, when a plan pays a participant’s medical expenses and then seeks reimbursement out of damages that he recovers from a third party, the terms of the plan govern the parties’ rights. Hence, the participant could not defeat the plan’s claim by invoking equitable defenses. The plan’s victory was not unmixed, however. The Court went on to construe its terms with a narrow and jaundiced eye, indicating that employers will be well advised to review their own plan documents carefully to make sure that they leave no loopholes for clever judicial interpretation.
After James McCutchen was severely injured in an automobile accident, his employer’s health plan paid $66,686 in medical expenses. He then sought to recover his substantial economic and other damages from the person who had caused the accident. Though his claims amounted to over $1 million, he was able to obtain only $10,000 from the tortfeasor, who was underinsured and effectively judgment-proof, and $100,000 from his own insurance company. He had agreed to pay his lawyers a 40 percent contingency fee and thus was left with $66,000 net.
The health plan included the following fairly typical clause giving it a right to reimbursement to the extent of participants’ recoveries from third parties:
If the Plan pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, the Plan will be subrogated to all your rights of recovery. You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company, as the result of judgment, settlement, or otherwise. In addition, you will be required to assist the administrator of the Plan in enforcing these rights and may not negotiate any agreements with a third party that would undermine the subrogation rights of the Plan.
The plan notified Mr. McCutchen promptly that it would enforce its reimbursement rights. After he collected $110,000, it demanded $66,686. He refused to pay, and the plan sued him under section 502(a)(3) of ERISA, which authorizes actions by plan fiduciaries for “appropriate equitable relief . . . to enforce . . . the terms of the plan.”
The defendant’s theory as to why he was not bound by what the plan said was based on the meaning of “appropriate equitable relief.” The Supreme Court has interpreted that phrase to refer to the relief that was typically available in courts of equity back in the days when “law courts” and “equity courts” were separate institutions. Organizationally, “law” and “equity” were merged long ago (in the 19th and early 20th centuries), but the distinction still has weighty legal significance.
In this particular instance, Mr. McCutchen argued that equity actions for reimbursement were limited by the principle that the court would not allow “unjust enrichment.” There were, he asserted, two ways in which turning over the full $66,686 to the plan would “unjustly enrich” it. First, the plan covered only direct medical expenses, while the recoveries included compensation for economic losses, pain and suffering, and other consequential damages. Equitably, the plan should be entitled only to the portion that was attributable to medical treatment. Second, Mr. McCutchen’s lawyers took 40 percent off the top of the recovery. Under what is known as the “common fund” doctrine, a share of that reduction should be borne by the plan.
The Third Circuit Court of Appeals agreed with those arguments and sent the case back to the district court, which had ruled in the plan’s favor, to determine how much of the relief claimed by the plan would qualify as “appropriate” under the facts of the case.
In similar cases, the circuits had divided on whether the terms of the plan controlled or had to give way to equitable defenses. The Supreme Court took Mr. McCutchen’s case to resolve that conflict.
The Court’s resolution was, on its face, plain and simple. The defenses on which Mr. McCutchen wished to rely were available when the claimant had no contractual right to reimbursement but, instead, was contending that the defendant would be unjustly enriched if allowed to retain a “double recovery” of expenses that the claimant had already paid in his behalf. Given those facts, a court of equity would grant relief only if the defendant really had been double compensated and would require the claimant to bear a fair share of the expense of recovering from the third party.
Contrasting with such cases were ones that arose from an “equitable lien by agreement,” where the right to reimbursement was part of a contract. There, the Court found, equity courts had simply enforced the contract’s terms. There was no need to decide what would constitute “unjust enrichment,” because the contractual provisions embodied the parties’ view of the equities. Mr. McCutchen was unable to point to a single instance in which an equitable defense had successfully negated lien by agreement. Nor could the Court uncover any support for the argument, made by the Department of Labor as amicus, that, even if the contract was generally enforceable, the common fund doctrine overrode it.
But the story did not end there. Having found that the plan was entitled to the benefit of its own terms, a 5-4 majority of the Court decided that those terms said nothing about whether the plan had to bear a portion of Mr. McCutchen’s lawyer’s fees. (The dissenting Justices did not try to interpret the plan. In their view, Mr. McCutchen had conceded that issue, and it was not properly before the Court at this stage.) Because the plan was silent, the Justices filled the “gap” by importing the common fund doctrine, reasoning that it was so well-established in non-contractual cases that it “provides the best indication of the parties’ intent.”
The Court did not decide exactly how the doctrine would limit the plan’s recovery. That question was remanded. It certainly seems arguable that the plan should have to share only reasonable costs based on the actual work done by Mr. McCutchen’s lawyers rather than be bound by his contingent fee agreement (which could be seen as violating the prohibition against “negotiat[ing] any agreements with a third party that would undermine the subrogation rights of the Plan”).
In light of this part of the Court’s decision, employers may want to revisit their plan documents and, if necessary, amend them to make clear how lawyers’ fees incurred by participants are to be treated under reimbursement clauses.
There is one other drafting point to attend to. The reimbursement clause at the center of McCutchen appeared in the summary plan description. As a footnote in the Court’s opinion observes, its decision in CIGNA Corporation v. Amara, 131 S. Ct. 1866 (2011) held that “the statements in a summary plan description communicate with beneficiaries about the plan, but do not themselves constitute the terms of the plan” (internal quote marks, ellipsis and citation omitted; emphasis in original). It is now essential that reimbursement clauses be set forth in the plan document itself, not merely in the SPD. No one raised that issue in McCutchen, but one can be sure that it will not be overlooked in future litigation.