1. The Facts

This decision could be significant because, if the ruling of the Third Circuit Court of Appeals is upheld and adopted by the Supreme Court, the ability of ERISA plans to enforce subrogation rights might be severely impaired. This result would depend on the extent to which the defenses available to plan participants with respect to subrogation claims are expanded.

The essential facts are straightforward. McCutchen was an employee of U.S. Airways and a participant in its self-funded health and welfare benefit plan (the “Plan”). He was severely injured in a non-work related accident. The Plan paid $66,866.00 for the medical services McCutchen required.

McCutchen filed a lawsuit against the individual who caused the accident and settlements in the aggregate amount of $110,000.00 were reached. McCutchen’s lawyers received 40% of that amount ($41,500.00) ,which they placed in a trust account. McCutchen received $66,000.00.

The Plan documents include a comprehensive and very specific subrogation clause squarely applicable to the circumstances, and U.S. Airways made a demand for reimbursement of the medical costs it paid. McCutchen refused and U.S. Airways filed suit seeking equitable relief under Section 502(a)(3) of ERISA. It sought to recoup the $41,500.00 placed in trust by the attorneys, and $25,366.00 personally from McCutchen.

 The District Court entered a judgment in favor of U.S. Airways and required McCutchen to transfer the $41,500.00 in the trust account and to pay an additional $25,366.00 personally. This award left McCutchen with $40,634.00 from the settlement and indebted to his lawyers in the amount of $41,500.00. McCutchen and his lawyers appealed.

  1. The Third Circuit’s Decision

The Third Circuit vacated the judgment and remanded the case to the District Court. The Third Circuit rejected its own precedents on subrogation on the ground that they had been superseded by subsequent Supreme Court decisions. The McCutchen court acknowledged that the Supreme Court decisions do not address the issue presented by the case (i.e. whether equitable defenses apply that limit either the right to or the amount of the plan’s recovery), and had left that issue as an “open question.” It decided to answer this “open question,” and accepted McCutchen’s argument that the term “appropriate,” which modifies “equitable relief” in §502(a)(3) makes equitable principles and defenses applicable to a claim brought under that section. Critically, it accepted the argument that the equitable doctrine of “unjust enrichment” is available as a defense to an insured in a subrogation action by a plan.

  1. Takeaways
  • The implications of McCutchen if its holding were to be upheld could be grave and could seriously limit the utility of subrogation clauses, or they might be mild;  
  • At one extreme, the argument could be made to and accepted by the courts that any carrier which is compensated for and profits from taking risk is unjustly enriched when it can recoup from its insured the costs it incurs by reason of performing the contractual obligations for which it has been compensated;  
  • Although the preceding argument might not be applicable to self-funded plans, McCutchen confirms that self-funded plans would be equally affected as the U.S. Airways’ plan was self-funded;  
  • Under an alternative construction, for which there is case law that suggests that this interpretation might prevail, unjust enrichment may be defined as a carrier, plan or plan sponsor taking a share of a settlement or judgment without bearing a commensurate share of the fees and costs incurred to obtain that settlement or judgment;  
  • Indeed, in many subrogation matters in which we have represented plans, we have avoided protracted and costly litigation through such cost sharing arrangements with the participant;  
  • Many subrogation agreements allow a plan to bring its own separate action against the individual or entity responsible for causing the injuries that required the medical services that were covered by the plan. The advantage of such provisions is that they do not involve a claim by the plan against its member for reimbursement;
    • The disadvantages are that: (i) the plan incurs external and internal costs for the conduct of its litigation, (ii) has to coordinate its strategy with the insured’s counsel in order to avoid the presentation of conflicting theories of liability, and (iii) it can be more difficult to negotiate individual settlements with a defendant faced with multiple plaintiffs and multiple liabilities.  
  • It also is our experience that courts are more receptive to subrogation claims from carriers, plans or sponsors when it is clear from the outset that they are willing to bear a proportionate share of the fees and costs of pursuing claims against the third party that caused the injury resulting in the health care costs.

In sum, although the McCutchen decision has a potential to generate seriously adverse effects, it is too soon to say that these effects will be unavoidable and could not be mediated by cost sharing arrangements. However, one very disturbing aspect of the Third Circuit decision is that it sets a precedent that clear and specific plan provisions regarding subrogation rights can be judicially nullified. ERIC is filing amicus brief before the Supreme Court in the U.S. Airways case.