In its latest effort to navigate ERISA’s complex waters, the Supreme Court has declared, unequivocally: “The plan, in short, is at the center of ERISA.” This most recent decision comes out of a case from the Third Circuit that posed the question whether and to what extent equitable defenses were available to counter a plan’s reimbursement claim against a participant brought under section 502(a)(3) of the Employee Retirement Income Security Act of 1974 (“ERISA”), the section that authorizes claims for “appropriate equitable relief.” The Supreme Court held unanimously in US Airways, Inc. v. McCutchen, ___ S. Ct. ___, 2013 WL 1567371 (Apr. 16, 2013), that the terms of a benefit plan override equitable doctrines, even when the claims asserted are equitable in nature. A majority went on to hold that if, and only if, there were “gaps” in the terms of the plan that failed to address a particular issue, then traditional equitable doctrines could be used to fill those gaps when interpreting the plan. Four justices dissented, stating that they did not believe this latter “plan interpretation” question was properly before the Court. Justice Elena Kagan wrote for the majority, and Justice Antonin Scalia authored the dissent.

McCutchen, a participant in a US Airways health plan, was injured in a car accident caused by a third party’s negligence. The US Airways Plan paid $66,866 in medical expenses for his care. McCutchen sought recovery of his accident-related injuries (including medical expenses, pain and suffering, and lost wages), estimated to exceed $1 million, from the third party and his own automobile insurance policy. He settled for a total of $110,000, and after paying his attorneys their 40% contingency fee, was left with only $66,000.

The US Airways Plan includes a reimbursement provision requiring that, if the Plan pays for medical expenses and the participant then recovers from a third party, the participant must reimburse the Plan out of the third-party recovery. Relying on this provision, the Plan sought recovery of the entire $66,866 it paid for McCutchen’s injuries. McCutchen resisted, arguing that the Plan was only entitled to the portion of his recovery that represented medical expenses, that the Plan was not entitled to be reimbursed more than the net amount McCutchen actually received, and that his attorneys’ fees should be apportioned between him and the Plan.

ERISA § 502(a)(3) allows for “appropriate equitable relief” to enforce plan terms. In previous decisions, the Supreme Court has held that this provision authorizes the kinds of relief traditionally available in equity. More to the point, the Court specifically held in Sereboff v. Mid Atlantic Medical Services, Inc., 547 US 356 (2006), a case factually similar to McCutchen, that § 502(a)(3) authorizes a claim for reimbursement by a health plan where the plan provides for such reimbursement, characterizing the claim as the “modern-day equivalent” of an action in equity to enforce a contract-based lien, i.e., an “equitable lien by agreement.” The US Airways Plan sought this type of “equitable lien by agreement” in McCutchen.

McCutchen urged that because § 502(a)(3) provides for equitable relief, the Plan’s claim should also be subject to equitable defenses. Specifically, he argued that two equitable doctrines should be applied to limit the Plan’s recovery. First, he argued that, at equity, an insurer could recoup only the insured’s “double recovery” for medical expenses, and that under this “double recovery” doctrine the Plan’s recovery should be limited to the portion of the settlement attributable to his medical expenses, versus pain and suffering, lost wages, or any other types of damages. Second, he argued that the “common-fund doctrine” would have applied in equity to reduce the Plan’s recovery. Under that doctrine, if someone recovers a common fund for the benefit of himself and another party (here, the US Airways Plan), the other party must contribute a reasonable portion of the fees expended in procuring the recovery.

The United States District Court for the Western District of Pennsylvania granted summary judgment to the Plan, holding that McCutchen’s equitable defenses could not limit the recovery dictated by the terms of the Plan. The United States Court of Appeals for the Third Circuit reversed, ruling that equitable principles should apply to prevent unjust enrichment to the Plan, which, under these facts, would receive the windfall of recovering its entire outlay without sharing in the costs of the recovery, while McCutchen himself would be worse off, having to pay the Plan more than his actual net recovery. In effect, McCutchen would be paying the Plan for his own efforts to collect a full recovery on the Plan’s behalf.

The Supreme Court agreed to review the case “to resolve a circuit split on whether equitable defenses can ... override an ERISA plan’s reimbursement provision.” The Court unanimously held that they cannot, reinforcing every ERISA defense lawyer’s mantra that “Plan terms control.” The Court pointed out that § 502(a)(3) does not authorize equitable relief “at large,” but only appropriate equitable relief to enforce the terms of an ERISA Plan. Thus, the Court held that enforcing an “equitable lien by agreement” means enforcing the plan’s terms, and this in turn means “declining to apply rules — even if they would be ‘equitable’ in a contract’s absence — at odds with the parties’ expressed commitments.” According to the Court, quoting Sereboff, equitable doctrines and defenses are simply “‘beside the point’ when parties demand what they bargained for in a valid agreement.”

At this point, four justices considered the Court’s work finished. But a five-person majority went on to hold that while equitable principles cannot trump contrary reimbursement provisions in a plan, they may aid in construing plan terms where there is silence or an ambiguity. Here, the Plan did not specifically address the costs of recovering monies due to be reimbursed, i.e., it did not specify whether the “monies recovered” that are subject to reimbursement include every dollar paid by the third party, or just that portion recovered by the participant after paying attorneys’ fees. The majority held that the common-fund doctrine provided the appropriate default rule for filling the “contractual gap” left by the ambiguous Plan provision. “[I]f 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.” Accordingly, the Court’s majority held that the common-fund doctrine applied to apportion the attorneys’ fees between McCutchen and the Plan.

This second holding will likely prompt employers and other ERISA benefit plan sponsors to carefully review the terms of their plans providing for subrogation and reimbursement. In particular, if a plan sponsor wants to recover funds paid by a third party through its reimbursement provision, without any offset or discount for attorneys’ fees, the sponsor’s intent must be clearly and unequivocally written into the plan. But, once it is, it is the plan terms that will clearly govern. No matter how seemingly inequitable the result, the Supreme Court has declared that the plan shall rule.