Disputes over what equitable remedies are “appropriate” under ERISA continue to percolate up to the Supreme Court. In its most-recent decision on the issue, US Airways, Inc. v. McCutchen (April 16, 2013), the Court held that an equitable doctrine cannot supersede the terms of an ERISA plan.
The dispute involved a relatively routine claim over a relatively small amount of money. McCutchen was injured in a car accident with a drunk driver. US Airways, through its self-funded health plan, paid McCutchen $66,866 in medical expenses related to that accident. McCutchen hired a lawyer to pursue claims arising out of the accident; though his total alleged damages exceeded $1 million, he settled for $110,000. His attorneys took a 40% contingency fee, leaving McCutchen with $66,000. US Airways sought recovery of the $66,866 it had paid, pursuant to a provision in the health plan requiring McCutchen to reimburse US Airways “for amounts paid for claims out of any moneys recovered from [a] third party.” McCutchen refused the indemnification demand, but his attorneys put $41,500 of hiss money in escrow pending resolution of the dispute. That sum represented US Airways’ full claim less a proportionate share of the attorneys’ fees.
US Airways filed suit under ERISA, seeking “appropriate equitable relief” to enforce the plan’s reimbursement provision.
In the Supreme Court, McCutchen agreed that US Airways had an equitable lien by agreement over his recovery, but the question was whether the lien was subject to one or more equitable defenses that might reduce, or eliminate, its recovery.
The Court held that, in an equitable claim under ERISA, the plan language is king; it determines what equitable relief is appropriate, and it cannot be overridden by equitable defenses:
In the end, however, Sereboff ’s logic dooms McCutchen’s effort. US Airways, like Mid Atlantic, is seeking to enforce the modern-day equivalent of an “equitable lien by agreement.” And that kind of lien—as its name announces— both arises from and serves to carry out a contract’s provisions. … So enforcing the lien means holding the parties to their mutual promises…. Conversely, it means declining to apply rules—even if they would be “equitable” in a contract’s absence—at odds with the parties’ expressed commitments. McCutchen therefore cannot rely on theories of unjust enrichment to defeat US Airways’ appeal to the plan’s clear terms. Those principles, as we said in Sereboff, are “beside the point” when parties demand what they bargained for in a valid agreement. … In those circumstances, hewing to the parties’ exchange yields “appropriate” as well as “equitable” relief. [citations omitted]
As the Court later said more succinctly: “if the agreement governs, the agreement governs[.]” And: “The agreement itself becomes the measure of the parties’ equities[.]” The Court reiterated that ERISA did not “authorize ‘appropriate equitable relief’ at large[;] … rather, it countenances only such relief as will enforce ‘the terms of the plan’ or the statute § 1132(a)(3)” [emphasis by the Court].
Having soundly rejected McCutchen’s argument that well-recognized equitable defenses could override the terms of an ERISA plan, the Court held that such equitable doctrines could aid in interpreting a plan.
In particular, the Court noted that US Airways’ plan did not discuss how the costs of obtaining any recovery would be allocated in determining reimbursement. Specifically, it does not address whether US Airways “has first claim [on] every cent the third party paid, or, instead, the money the beneficiary took away” after paying fees and costs. “Given that contractual gap, the common-fund doctrine provides the best indication of the parties’ intent.” The common-fund doctrine provides that, where a litigant recovers a common fund for the benefit of people other than himself, he is entitled to a reasonable attorneys’ fee.
The Court summed up its holding as follows:
Our holding today has two parts, one favoring US Airways, the other McCutchen. First, in an action brought under §502(a)(3) based on an equitable lien by agreement, the terms of the ERISA plan govern. Neither general principles of unjust enrichment nor specific doctrines reflecting those principles—such as the double-recovery or common-fund rules—can override the applicable contract. We therefore reject the Third Circuit’s decision. But second, the common-fund rule informs interpretation of US Airways’ reimbursement provision. Because that term does not advert to the costs of recovery, it is properly read to retain the common-fund doctrine. We therefore also disagree with the District Court’s decision. In light of these rulings, we vacate the judgment below and remand the case for further proceedings consistent with this opinion.
McCutchen provides guidance for those drafting reimbursement provisions in ERISA plans. If the intent is that the beneficiary must pay the costs of collecting from a third party (i.e., that the plan’s reimbursement comes out of the gross recovery, not the net), then the plan must expressly say so. Of course, requiring a beneficiary to foot the bill might make him less inclined to seek recovery from third parties.
Of particular interest to claim litigators is whether McCutchen’s reasoning will affect decisions in which courts have held that a beneficiary can assert equitable claims for recovery that would trump plan language. I’m thinking of cases like McCravy v. Met. Life Ins. Co., 690 F.3d 176 (4th Cir. 2012), in which the plaintiff paid premiums for dependent life insurance coverage for her daughter even after the daughter became too old under the terms of the plan to be covered. The Sixth Circuit held that recent Supreme Court precedent had expanded the rules on what equitable relief was “appropriate,” and held that plaintiff could assert equitable claims to recover the benefits that would be payable had her daughter been covered. However, McCutchen‘s emphasis on the plan defining the scope of equitable relief suggests a new line of attack on this type of ruling.