In our November 2012 ERISA Litigation Newsletter, we discussed a split among the several federal Courts of Appeals with respect to the ability of employee benefit plans to recover reimbursement for medical expenses paid for participants who are injured by third parties. More specifically, some courts (the Ninth Circuit and Third Circuit) had held that when plans sought reimbursement from participants who recover – through a settlement or a judgment – against a person who injured them, participants could apply “equitable defenses” to defeat clear plan provisions providing for reimbursement. However, the Fifth, Seventh, Eighth, Eleventh and DC Circuits had all held that equitable defenses could not trump the plan document. As we predicted in our November article, on April 16, 2013, the Supreme Court resolved the split between the Circuits by holding in US Airways, Inc. v. McCutchen that equitable defenses cannot override an ERISA plan’s express reimbursement provision.
Like most ERISA health plans, the Plan in US Airways was obligated to pay any medical expenses a participant incurred as a result of a third party’s negligent actions, but in turn, the Plan was entitled to reimbursement if the participant later recovered money from the third party or the participant’s own insurer. After McCutchen recovered, he refused to reimburse the Plan, raising two equitable defenses. First, he claimed that the plan was not entitled to reimbursement because he had not been made whole (i.e., the total amount of his damages exceeded the amount of his recovery). Second, he relied upon the “common fund” doctrine, under which the plan would have had to share the costs the participant incurred to get the recovery. Consequently any reimbursement to the Plan would be reduced by a portion of the fees that he had to pay to his attorney. The District Court rejected both arguments and entered judgment for the Plan. The Third Circuit reversed, concluding that the suit was for “appropriate equitable relief ” under ERISA §502(a) (3). It determined that, despite the clear plan provision mandating reimbursement, the principle of unjust enrichment should “serve to limit the effectiveness” of the plan’s reimbursement provision. The Third Circuit concluded that full reimbursement to the plan would leave McCutchen with less than full payment for his medical bills, resulting in a “windfall” if the Plan was reimbursed, since it had not contributed to the costs of obtaining the third party recovery.
The Supreme Court held that reimbursement provisions in a plan create an “equitable lien by agreement.” In the words of the Court, “[t]he agreement itself becomes the measure of the parties’ equities; so if a contract abrogates the common-fund doctrine, the insurer is not unjustly enriched by claiming the benefit of its bargain.” In so ruling, the Supreme Court reiterated its prevalent theme of the preeminence of the plan document. ERISA “is built around reliance on the face of written plan documents” and “the plan, in short, is at the center of ERISA.” The Court emphasized that its decision “fits lock and key with ERISA’s focus on what a plan provides.”
The Department of Labor argued that “when it comes to costs incurred, the terms of the plan do not control.” The DOL acknowledged in its brief, however, that plan provisions should typically be enforced, and the Court rejected the DOL argument that the common-fund rule has a “special capacity to trump” a full reimbursement provision in a plan. “But if the agreement governs, the agreement governs. The reasons we have given … for looking to the contract’s terms do not permit an attorney’s-fees exception.”
The case, however, was not a complete victory for the Plan. The Court’s Opinion had a second part. The Court held that the common-fund doctrine applied to the US Airways plan, because the Plan was silent as to the allocation of attorney’s fees. The Court referred to the silence as a “contractual gap” and stated “in those circumstances, the commonfund doctrine provides the appropriate default.
The lessons from US Airways are straightforward and generally favorable to plans. Express reimbursement provisions in plans are enforceable and cannot be supplanted, overridden or trumped by equitable defenses. If the plan addresses the common-fund issue explicitly, the plan provisions will govern. If the plan rejects application of the common-fund doctrine, a court cannot impose it. If the plan accepts the common fund doctrine, it will be applied. Last, if the plan is silent about the common-fund doctrine, the common-fund doctrine will be deemed to apply.
Shortly after the Supreme Court issued its ruling in the US Airways case, the Supreme Court vacated the Ninth Circuit’s ruling in CGI Technologies and Solutions, Inc. v. Rose. In the CGI case, the Ninth Circuit – like the Third Circuit – had ruled that equitable defenses can trump clear plan provisions. The Supreme Court vacated that ruling and remanded to the Ninth Circuit in light of the ruling in US Airways. The plan in the CGI case rejected both the common fund doctrine and the make whole doctrine. Presumably, the Ninth Circuit will now rule that the plan provisions trump any equitable defenses.
Of course, it is for each plan sponsor to decide whether or not the plan should include a provision that it will be entitled to full reimbursement (even if the participant is not made whole) or share in the attorney’s fees and costs of the underlying litigation. US Airways simply makes clear that a well drafted plan will control, as it should, the rights and duties of the plan fiduciaries and the participants in regard to reimbursement to the plan.