It is common for an employer group health plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") to contain provisions that allow the plan to seek reimbursement of amounts paid by it to one of its beneficiaries for injuries if the beneficiary later recovers payment from a third party either through a judgment or a settlement. The enforceability of this type of plan reimbursement provision has been litigated by plans and beneficiaries for many years. In these situations, the beneficiaries often have alleged equitable defenses to try to deny the plan’s right to recover these amounts as described in the plan materials. These multiple lawsuits led to a split in the circuit courts as to whether the beneficiaries’ defenses could be used to defeat the plan’s language permitting the recovery of the amounts it paid for the medical care. This week, the U.S. Supreme Court weighed in on the dispute.
On April 16, the Supreme Court held that an ERISA plan participant may not rely on equitable defenses to defeat a reimbursement action when reimbursement is authorized by an ERISA plan. U.S. Airways, Inc. v. McCutchen, Case No. 11-1285. In so holding, the Supreme Court vacated a contrary decision by the U.S. Court of Appeals for the Third Circuit and resolved a circuit split created by the Third Circuit’s decision.
The case involved U.S. Airways employee James McCutchen, who received $66,866 under the company’s ERISA plan for medical expenses after he was in a car accident. McCutchen sued the driver of the other car and recovered $110,000 from the driver and his own insurer. However, once McCutchen paid his attorney a 40 percent contingency fee, McCutchen received only $66,000.
Under the terms of the U.S. Airways ERISA plan, the plan administrator sued McCutchen to obtain reimbursement for the money paid to him by the plan for his medical expenses. The administrator relied on ERISA Section 502(a)(3), which provides for "appropriate equitable relief" to enforce an ERISA plan’s terms.
McCutchen asserted two equitable defenses against the plan’s action. First, he argued that the plan had no right to reimbursement because he received less than the plan paid him. Second, he argued that if reimbursement was required, the plan should pay a share of his attorney’s fees, otherwise the plan would be permitted to free-ride on his efforts in the lawsuit against the other driver. The latter argument is known as the common fund doctrine.
While the Third Circuit held that ERISA Section 502(a)(3) permitted equitable defenses, the Supreme Court held that its prior precedent established that actions to enforce a reimbursement provision under Section 502(a)(3) function as a "modern-day equivalent of an ‘equitable lien by agreement.’" An equitable lien by agreement, the Court explained, is a way to enforce the provisions of a contract. Therefore, a party cannot rely on equitable defenses to defeat an action to enforce the terms of an ERISA plan.
After reaching this holding, the Court further held that the common fund doctrine did have merit in this case. The Court explained that the U.S. Airways plan did not address how to divide attorney’s fees in a third-party recovery action. Because the plan was silent, the Court held that equitable principles provided the best evidence of the parties’ intent. As a result of this holding, McCutchen can argue on remand that the plan should be responsible for some portion of his attorney’s fees from the action against the third-party driver.
In light of this decision, ERISA plan administrators should consider revisiting reimbursement provisions in their plans. Plan administrators may only be able to prevent participants from asserting equitable defenses if the plan addresses the reimbursement issues. Where a plan remains silent, participants may argue that courts should fill the void with equitable doctrines.