Print Friendly
Tuesday, May 14, 2013
On April 16, 2013, the Supreme Court handed down its 5-4 decision in US Airways Inc. v. McCutchen, U.S., No. 11-1285, 4/16/13) ruling that while equitable principles cannot trump a plan’s unambiguous terms regarding reimbursement, such principles may aid in properly construing ambiguous or absent plan terms.  The majority opinion held that since the employer plan at issue was silent as to the allocation of attorneys’ fees following a participant’s third-party recovery, it was appropriate to use the equitable “common fund” doctrine (i.e., the doctrine which provides that a litigant (or a lawyer) who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund as a whole) to fill that gap.  As discussed more fully below, this decision reminds plan sponsors to carefully craft their reimbursement language to help ensure the desired result.  It’s not just what the provision specifically requires; no gaps regarding important issues should be left unaddressed.

For this purpose, the facts at issue in McCutchen are quite simple:

An ERISA plan participant suffered severe injuries in a car accident caused by a third party, and his employer, US Airways, paid nearly $67,000 toward his medical expenses through the company’s group health plan.  By its terms, the plan entitled US Airways to reimbursement of amounts paid if the participant later recovered money from the third party. After filing suit, the participant was awarded $110,000 in damages attributable to his injuries – of which the participant retained $66,000 after deducting the lawyers’ 40% contingency fee and expenses. US Airways sought reimbursement of the full amount it had paid.

When the participant refused to reimburse the plan, US Airways filed suit in the U.S. District Court for the Western District of Pennsylvania against both the participant and his attorney seeking to enforce the reimbursement provision of the plan pursuant to ERISA Section 502(a)(3) which, on its face, authorizes civil actions by fiduciaries “to obtain…appropriate equitable relief…or…to enforce…the terms of the plan.”

The district court rejected the participant’s argument that the common fund doctrine should apply to require US Airways to contribute to the costs of recovery and, instead, granted summary judgment to US Airways holding that plan terms required reimbursement from “any monies recovered.”  On appeal, the participant argued under a couple of different theories that it would be “inequitable” to reimburse US Airways in full when he had not been fully reimbursed for all his medical expenses. The Third Circuit agreed and reversed the lower court.  In its decision, the Third Circuit held “Congress purposefully limited the relief available to fiduciaries under [ERISA] Section 502(a)(3) to appropriate equitable relief.” The appellate court found that it would be inequitable for US Airways to be fully reimbursed when the participant received less than full payment for his medical expenses.

The Supreme Court granted US Airways’ petition for certiorari and ultimately reversed the Third Circuit decision.  In doing so, the high Court majority concluded that the participant could not rely on equitable defenses to trump the plan’s clear reimbursement provision. However, since the plan at issue was silent with respect to the allocation of attorneys’ fees, it was appropriate to apply the common fund doctrine The Court reinforced that US Airways could have provided in the plan that the common fund doctrine did not apply to the application of the reimbursement provision, but since it did not, “the common-fund doctrine provides the best indication of the parties’ intent.”  The majority’s analysis indicates that the well-established application of the common fund doctrine in equity cases supports the conclusion that the parties must have intended for this default rule to govern “in the absence of a contrary agreement.”

A brief dissent (authored by Justice Scalia and joined by Chief Justice Roberts and Justices Thomas and Alito) disagreed with the majority’s use of the common fund doctrine, finding that this issue was not properly before the court.  The dissenting opinion, however, agreed with the portion of the majority’s opinion concluding that equity cannot override unambiguous plan terms.

Suggested Steps for Employers

The holding of this case provides a good reminder that the reimbursement language in health plans should be dusted off and carefully reviewed.  Most notably, the issue of whether a participant’s attorneys’ fees will reduce the reimbursement obligation should be specifically addressed, with express language indicating whether the common fund doctrine or any other equity doctrine may be applied to reduce the plan’s reimbursement right.  Scrutiny should be placed on the reimbursement provision with other aspects of third party litigation in mind to ensure that the reimbursement the plan expects is what the plan ends up with.

Comment

Leave a Reply


− three = 2