United States: Supreme Court Forbids Rewrite Of ERISA Plan

The supremacy of a written ERISA -governed plan still reigns as the U.S. Supreme Court reversed the ruling of an appellate court which had held that a court in equity can ignore unambiguous subrogation reimbursement language, and simply rewrite the terms of an ERISA-governed plan in line with its own ideas of what was "fair and equitable." McCutchen v. U.S. Airways.

Background

James McCutchen was an employee of U.S. Airways and a participant in a self-funded benefits plan governed by ERISA.  The plan covered McCutchen's medical expenses in the event that he was ever injured by a third party, which McCutchen would then reimburse in full "out of any monies recovered" from third parties.  The plan also required that McCutchen would not "negotiate any agreements" that would divert the plan's reimbursement monies to others. 

McCutchen suffered injuries in a non-work-related accident and incurred medical bills totaling $66,866.  In accordance with the plan, U.S. Airways paid for McCutchen's medical care. McCutchen hired a lawyer to sue the third party, and ultimately recovered $110,000.  McCutchen paid his lawyer 40% out of the $110,000 settlement fund, but then refused to reimburse the plan the $66,866 it paid in advance to cover treatment for his injuries.  U.S. Airways filed suit in federal district court to enforce its rights under the plan to seek reimbursement of the full amount paid.  The district court held in favor of U.S. Airways.  McCutchen appealed. 

On appeal to the U.S. Court of Appeals for the 3rd Circuit, U.S. Airways argued that under Section 502(a)(3) of ERISA, plan fiduciaries may enforce written reimbursement provisions in court by seeking "appropriate equitable relief" to enforce "the terms of the plan."  The 3rd Circuit reversed the decision of the district court reasoning that the principle of unjust enrichment overrode U.S. Airways' reimbursement clause. U.S. Airways appealed to the Supreme Court. 

The question on appeal was whether the 3rd Circuit correctly held – in conflict with the 5th, 7th, 8th, 11th, and D.C. Circuits – that ERISA Section 502(a)(3) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan's terms give it an absolute right to full reimbursement. 

The Positions Of The Parties

ERISA was designed to respect the primacy of written benefit plans. ERISA recognizes that plans are contracts between employers and employees.  U.S. Airways argued that Section 502(a)(3) authorizes appropriate equitable relief to enforce the terms of a plan, not rewrite it.  There was no issue in this case that the plan engaged in any sort of fraud or misrepresentation in the agreement with McCutchen.  The Supreme Court previously held in the case of CIGNA Corp. v. Amara, that fraud or misrepresentation may permit such discretion in fashioning equitable relief.  

U.S. Airways further claimed that the type of "equitable relief" sought, an equitable lien by agreement, "does not authorize a court to do equity in the abstract, adjusting burdens and benefits long after the fact." An equitable lien by agreement enforces the parties' actual agreement.  Finally, it argued that McCutchen's position "runs headlong into the goals of ERISA" as the legislation seeks to minimize litigation burdens and his position would undoubtedly multiply them.  ERISA encourages employers to offer benefits, makes liabilities predictable, and eliminates ambiguities.   

U.S. Airways reasoned that McCutchen's position, and that of the 3rd Circuit, could lead to disastrous results for ERISA-governed plans because a court could simply rewrite the reimbursement or subrogation provisions and leave the plan holding the bag. 

McCutchen argued that the language of ERISA stating that a court may award "appropriate equitable relief" for claims brought under 502(a)(3), permitted reformation of the bargained for and agreed terms of the plan between himself and U.S. Airways.  Here, after paying his attorneys and repaying the plan, McCutchen would be left with no monetary recovery for himself.   

McCutchen, with no apparent regard for the fact that U.S. Airways advanced him in excess of $66,000 so he could receive medical treatment, argued that he should be made whole before the plan was reimbursed. This would include compensation for his lost wages, physical and emotional damages, future medical expenses, attorneys' fee and the like.   

Alternatively, he argued that the plan should only receive a percentage of what it paid for care and only after a payment of fees was made to his attorney for the suit against the third party who injured him.  This theory is known as the common-fund doctrine.  McCutchen wholly rejected the agreement he made in accepting benefits via the plan wherein the plan gets paid first from any moneys secured by judgment or settlement.   

Finally, McCutchen argued that since the plan fiduciaries did not do anything to assist in the case against the third party who injured him, that it was not "equitable" for the plan to seek full reimbursement after the settlement was made.  He claimed that allowing the plan to swoop in at the end of the matter and take its 100% reimbursement off the top of the settlement amounted to a double recovery for the plan – even though all the plan would take was exactly what it paid out of pocket to care for McCutchen's injuries. 

The Court's Decision

In reversing the holding of the 3rd Circuit, the Supreme Court held "in a §502(a)(3) action based on an equitable lien by agreement – like this one – the ERISA plan's terms govern.  Neither general unjust enrichment principles nor specific doctrines reflecting those principles – such as the double-recovery or common-fund rules invoked by McCutchen – can override the applicable contract."

The Supreme Court reasoned that the logic of its prior ruling in the case of Sereboff v. Mid Atlantic Medical Services, Inc. doomed McCutchen's legal position.  In Sereboff, like U.S. Airways, the plan administrator sought to enforce an equitable lien by agreement found in the reimbursement provision of the plan.  "Enforcing the lien means holding the parties to their mutual promises...."  When the contract contains clear reimbursement provisions, ERISA governs, not general equitable doctrines.   

But Sereboff left open the question of whether a future litigant, such as McCutchen, could assert that contract based relief, while "equitable," was not "appropriate" under §502(a)(3) because it contravened principles like the make-whole doctrine.  The Court's ruling today closed that gap in favor of the written ERISA-governed plan.

The Court also held that while "equitable rules cannot trump a reimbursement provision, they may aid in properly construing it."  This is directed at McCutchen's claim for allocation of attorneys' fees.  U.S. Airways' plan is silent in this regard.  Thus, the Court noted that the common-fund doctrine provides the default rule to fill this gap.  When a contract is silent, courts must look outside the four corners of the document and take into account other doctrines that have traditionally been applied in similar situations. Under the common-fund doctrine, litigants or lawyers who recover an amount (common fund) for themselves or their clients are entitled to a reasonable attorneys' fee from the recovery as a whole.  The case will now be remanded to the lower court for proceedings consistent with this decision. 

What Does This Mean For Employers? 

Although this is a win for those self-funded plans governed by ERISA, plan fiduciaries and administrators are wise to review with their counsel the subrogation, reimbursement and attorney fee and costs provisions in the written documents to ensure conformity to the law in this area.   

Undoubtedly, those who litigate in the personal-injury arena will continue to develop new theories to test the sufficiency of ERISA, since taking the claim of injured persons who have had their expenses paid by a medical plan will be less attractive if the ability to collect fees and recover damages for their client will be secondary to the rights of the plan. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Wilson Elser Moskowitz Edelman & Dicker LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Wilson Elser Moskowitz Edelman & Dicker LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions