United States: Supreme Court Decision Alert - January 20, 2016

Last Updated: January 20 2016
Article by Brian D. Netter

Today, the Supreme Court issued two decisions, described below, of interest to the business community.

  • Class Actions And Federal Jurisdiction—Effect of Unaccepted Offers of Judgment on Mootness
  • Employee Retirement Income Security Act—Enforcement of Plan Subrogation Clauses

Class Actions And Federal Jurisdiction—Effect of Unaccepted Offers of Judgment on Mootness

Campbell-Ewald Company v. Gomez, No. 14-857

Article III of the Constitution limits the jurisdiction of federal courts to "cases" and "controversies." As the Supreme Court recently explained in Genesis HealthCare Corp. v. Symczyk, 133 S. Ct. 1523 (2013), a lawsuit does not present an Article III case or controversy and "must be dismissed as moot" when "an intervening circumstance deprives the plaintiff of a 'personal stake in the outcome of the lawsuit,' at any point during the litigation." Today, in Campbell-Ewald Co. v. Gomez, No. 14-857, the Supreme Court held that a defendant's unaccepted offer to satisfy the claims of a named plaintiff in a putative class-action lawsuit is not sufficient to render the suit moot.

The decision—closely watched by plaintiffs who bring class action lawsuits and defendants who face them—holds that simply making an offer of full relief to a named plaintiff in accordance with the process outlined in Federal Rule of Civil Procedure 68 is not enough to moot the plaintiff's individual claim. At the same time, the Supreme Court did not address whether a defendant that actually tenders a payment for full individual relief can moot a named plaintiff's claim.

Today's decision originated in a putative class action filed by respondent Jose Gomez against petitioner Campbell-Ewald Co. for alleged violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227. Gomez's complaint alleged that Campbell-Ewald violated the TCPA when it sent him am unsolicited text message as part of a recruiting campaign for the U.S. Navy. Gomez's complaint sought relief in the form of treble statutory damages, costs, attorney's fees, and an injunction.

Before Gomez moved to certify the class, Campbell-Ewald made a settlement proposal and also filed an offer of judgment under Federal Rule of Civil Procedure 68, which permits a defendant to make a pre-trial offer to allow judgment. Campbell-Ewald offered to pay Gomez $1,503 for each unsolicited text message he received—which would more than satisfy his claim for treble statutory damages—as well as costs. Campbell-Ewald also proposed an injunction that would bar it from sending the allegedly offending text messages. Campbell-Ewald's offer was made without an admission of liability; to the contrary, like most defendants, the company disclaimed liability. Gomez did not accept Campbell-Ewald's offer, instead allowing it to expire.

Campbell-Ewald then moved to dismiss Gomez's complaint for lack of subject-matter jurisdiction, arguing that its offer of judgment mooted Gomez's individual claim by providing him complete relief. Campbell-Ewald also argued that the putative class claims were moot because Gomez had not yet moved for class certification by the time his claim became moot.

The district court denied this motion, but later granted summary judgment for Campbell-Ewald on the ground that Campbell-Ewald, as a naval contractor, enjoyed sovereign immunity. Gomez appealed, and the Ninth Circuit held that both Gomez's claim and the putative class claims remained live. The court of appeals also vacated the district court's sovereign immunity ruling.

The Supreme Court affirmed in an opinion authored by Justice Ginsburg and joined by Justices Kennedy, Breyer, Sotomayor, and Kagan. The Court addressed mootness first. According to the Court, "basic principles of contract law" established that "Campbell-Ewald's settlement bid and Rule 68 offer of judgment, once rejected, had no continuing efficacy." In the face of Gomez's rejection of the offer and Campbell-Ewald's continued denial of liability, Gomez had no entitlement to the relief Campbell-Ewald had offered. According to the Court, "We hold today, in accord with Rule 68 of the Federal Rules of Civil Procedure, that an unaccepted settlement offer has no force. Like other unaccepted contract offers, it creates no lasting right or obligation." With no such entitlement, in turn, the parties were still adverse, and so their dispute remained a live one that a federal court could decide. The majority expressly adopted the mootness analysis that Justice Kagan had outlined in her dissenting opinion in Genesis Healthcare. 133 S. Ct. 1523, 1532 (2013) (Kagan, J., dissenting).

Crucially, the Court reserved judgment on the question whether "the result would be different if a defendant deposits the full amount of the plaintiff's individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount." As we have previously detailed, the question of whether tendering a payment (as opposed to simply making an offer) would moot a claim had featured heavily at oral argument, but the Court determined that the "question is appropriately reserved for a case in which it is not hypothetical."

On the issue of sovereign immunity, the Court held that federal contractors do not "share the Government's unqualified immunity from liability and litigation." As the Court explained, "[w]hen a contractor violates both federal law the Government's explicit instructions"—which, the record demonstrated, authorized Campbell-Ewald to send recruiting text messages only to consenting recipients—"no 'derivative immunity' shields the contractor from suit by persons adversely effected by the violation."

Justice Thomas concurred in the judgment of the Court, but asserted that the Court should have based its reasoning on the "common-law history of tenders," which required that defendants actually produce a payment for full relief. As with the dissenters in this case, Justice Thomas did not address the majority's sovereign immunity holding.

Chief Justice Roberts filed a dissent, joined by Justices Scalia and Alito, explaining that "[i]f the defendant is willing to give the plaintiff everything he asks for, there is no case or controversy to adjudicate, and the lawsuit is moot." As the Chief Justice put it, "the federal courts exist to resolve real disputes, not to rule on a plaintiff's entitlement to relief already there for the taking." And although vigorously disputing the majority's holding, the Chief Justice went on to note that "this case is limited to its facts," and that while the majority holds that "an offer of complete relief is insufficient to moot a case," it "does not say that payment of complete relief leads to the same result."

Justice Alito also filed a separate dissent to "emphasize what" he saw "as the linchpin" for the dissenters' mootness finding: that "[t]here is no real dispute that Campbell-Ewald would 'make good on [its] promise' to pay Gomez the money it offered him if the case were dismissed." And Justice Alito also stated that a defendant could "make 'absolutely clear' that it will pay the relief it has offered" by, among other things, "deposit[ing] the money with the district court (or another trusted intermediary) on the condition that the money be released to the plaintiff when the court dismisses the case as moot."

Campbell-Ewald should be of significant interest to any class-action defendant. Today's opinion makes simple offers of settlement insufficient to moot a case. But it leaves open the possibility that settlement offers combined with additional commitments to pay claims—if accepted by plaintiffs—might suffice to end both individual and class claims.

Employee Retirement Income Security Act—Enforcement of Plan Subrogation Clauses

Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723

Many employee benefit plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) require employers to pay covered medical expenses when a plan participant is injured by a third party. These plans usually contain subrogation clauses requiring the participant to reimburse the plan if he or she sues the third-party tortfeasor and recovers money damages.

Section 502(a)(3) of ERISA allows plan fiduciaries to sue to "obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan." It is settled that plan fiduciaries may invoke Section 502(a)(3) to recover particular assets owed the plans—as when the tort judgment has been segregated in an identifiable fund. Today, the Supreme Court held in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723, that when the participant spends the proceeds of the tort judgment, the plan cannot sue under Section 502(a)(3) to recover the expenses it paid from the participant's general assets.

The petitioner in the case was injured by a drunk driver. He sustained serious injuries, and his employer's benefit plan paid over $120,000 to cover his medical expenses. The petitioner later sued the drunk driver and recovered a $500,000 settlement. The plan fiduciary contacted petitioner's attorney, seeking reimbursement for the plan, but petitioner's attorney refused. The attorney notified the fiduciary that unless it objected within 14 days, he would disburse the settlement funds (less attorneys' fees) to petitioner. The fiduciary did not respond, and the attorney gave petitioner the remaining settlement funds.

Six months later, the fiduciary sued petitioner under Section 502(a)(3), seeking to recover the medical expenses it had paid. Because petitioner represented that he had spent almost all the settlement funds, the fiduciary sought an equitable lien against petitioner's general assets. The Eleventh Circuit held that this lien was enforceable, even after the petitioner had spent the specific fund (i.e., the settlement money) to which the lien had originally attached.

By a vote of 8 to 1, the Supreme Court reversed. Writing for the majority, Justice Thomas explained that the "equitable relief" available under Section 502(a)(3) is limited to the forms of equitable relief that were typically available in equity prior to 1938, when courts of law and equity were merged. He consulted equity treatises and concluded that plaintiffs could ordinarily enforce equitable liens only against "specifically identified funds that remain in the defendant's possession or against traceable items" purchased with those funds. If the defendant dissipated all of the specifically identified funds, the equitable lien was eliminated, leaving the plaintiff with only a personal claim for damages—which was a legal remedy, not an equitable one.

Thus, the Court concluded, when a plan participant dissipates all of the money recovered for personal injuries on nontraceable items, the plan fiduciary may not sue under Section 502(a)(3) to enforce its equitable lien against the participant's general assets.

In a brief dissent, Justice Ginsburg criticized the previous decisions of the Court that had interpreted Section 502(a)(3) to authorize only those forms of equitable relief available prior to 1938. That interpretation, she argued, was a "mistake" that the Court should not "perpetuate."

Montanile is an important decision for administrators and fiduciaries of ERISA benefit plans that pay covered medical expenses for their participants. In light of the Court's reading of Section 502(a)(3), actions to enforce a plan's right of subrogation against a participant who recovers money for injuries from a third party should be brought as soon as possible; indeed, where appropriate, plan fiduciaries may wish to consider intervening in tort actions filed by plan participants, because participants will be advised to dissipate any recoveries they might obtain as quickly as possible.

This decision will likely have implications for other actions brought under Section 502(a)(3), as well. Overpayments from retirement plans are typically accidental, and will rarely result in a lien on identifiable funds. This decision will make it more difficult for such overpayments to be recouped. Other actions under Section 502(a)(3) are brought by plan participants against plan fiduciaries. Insofar as the Court has reaffirmed the rule that a plaintiff may seek only those forms of "equitable relief" that were typically available in equity prior to 1938, Montanile can be expected generally to limit remedies in actions filed against plan fiduciaries.

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© Copyright 2016. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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