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U.S. Supreme Court Decision

U.S. Airways, Inc. v. McCutchen

The United States Supreme Court issued an opinion on April 16, 2013 in an ERISA case regarding the breadth of Section 502(a)(3) relief, and the common-fund doctrine. While the decision was unanimous on the primary issues, the Court surprised us with a 5-to-4 split on a secondary issue. Overall, the decision in U.S. Airways, Inc. v. McCutchen is favorable for employers sponsoring health care plans. The decision is also favorable for health care plan participants in the aggregate because it allows for control of plan costs, and premiums, at a critical time when plans are gearing up for 2014 health care reform cost increases.

We discussed the facts and prior decisions in this case in considerable detail in a prior blog. You might want to review that blog to put this decision in context. To summarize, a health care plan provided that it would cover expenses caused by a third-party, subject to the condition that the plan be reimbursed from any monies recovered from a third party. (This is a common provision in ERISA health care plans, intended to control costs for all participants and to avoid costly litigation over recovery.) Mr. McCutchen was in an auto accident with another vehicle, and the plan paid $66,866 of health care plan expenses he incurred due to that accident. After Mr. McCutchen recovered funds from the other driver and his own insurer for underinsured motorist coverage, the plan sought reimbursement of expenses it had paid, in accordance with plan terms. He refused to repay anything, and the case headed to court.

Eventually, the U.S. Supreme Court agreed to hear the case to resolve a circuit split on whether “equitable defenses” could override an ERISA plan’s reimbursement provision. Justice Kagan delivered the opinion, joined by four other justices. Applying prior case law (Sereboff v. Mid Atlantic Medical Services, Inc.), the Court first held that in a Section 502(a)(3) action based on equitable lien by agreement, the ERISA plan’s terms govern. Neither general unjust enrichment principles nor specific doctrines reflecting those principles can override the applicable contract. Accordingly, the plaintiff’s argument that double-recovery rules prevailed over plan terms was rejected. The participant was being held to the agreement to reimburse in the event of recovery.

The Court next rejected the Department of Labor’s argument that the common-fund rule has a special capacity to trump a conflicting contract. The common-fund rule provides that “a litigant or 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.” The Court found that this rule was treated the same as any other rule: ERISA plan terms prevail.

Then, the Court took a somewhat surprising next step. It found a “contractual gap” in the plan document regarding the cost of recovery. The Court found that the common-fund doctrine provided the best indication of the parties’ intent, requiring the attorney’s fees to be paid before the plan was reimbursed. The Court’s majority thought it was unfair that plaintiff would have been “in the hole” for $866 if the common-fund doctrine had not been applied.

The $866 arose based on four agreements the plaintiff entered into: with the plan, attorney, and two other parties. Another view of the $866, from the other plan participants’ perspectives, is that the $866 was not a hole, but was plaintiff’s gamble that he could pay an attorney a 40% contingency fee on the entire recovery, and keep the approximately $66,000 remaining, rather than repaying anything to the plan.

In a dissent, Justice Scalia (joined by three other justices, including Chief Justice Roberts) agreed with the majority on the primary issues, but disagreed regarding the “contractual gap.” In the dissent’s view, the parties had conceded that the plan provided for full reimbursement, without any contribution to attorney’s fees and expenses. Therefore, the issue of whether the plan was ambiguous as to attorney’s fees was not before the Court, and the Court should not have applied the common-fund doctrine.

What does this decision mean for plan sponsors? U.S. Airways, Inc. v. McCutchen informs us that ERISA plan provisions prevail: health care plan sponsors can write provisions regarding reimbursement from recovery, and participants who accept payment of expenses under those conditions are expected to honor the agreement. The decision also leaves plan sponsors with a decision to make regarding whether to explicitly disclaim the common-fund doctrine in their plan documents. The Court’s majority explained that where a plan rejects the common-fund doctrine, people like the plaintiff would make different judgments. Whether such a change in judgment is a bad thing, or a good thing, is something for plan sponsors to consider as they redesign their health care plans to comply with health care reform.