Individuals who participate in a benefit plan sponsored by their employer are often entitled to have medical expenses paid for by the plan if they are injured.  But if the employee later sues a third party responsible for the injury and recovers damages, to what extent is he or she obligated to reimburse the plan?  And does the answer change if (as is frequently the case) a significant percentage of the damages award goes to pay the employee’s attorneys?

These are the questions that the Supreme Court will consider on Tuesday when it hears arguments in U.S. Airways, Inc. v. McCutchen.  At issue in the case is the scope of a provision in the Employee Retirement Income Security Act of 1974 (ERISA) that allows a plan administrator to seek “appropriate equitable relief” to enforce the terms of an ERISA-covered plan.  The issue before the Court is whether that statutory enforcement right is subject to traditional equitable principles, including those relating to payment of attorney’s fees.

Background

In 2007, James McCutchen was severely injured in an automobile accident.  At the time, he was an employee of U.S. Airways and a participant in the company’s self-funded health plan.  The plan paid $66,866 in medical expenses resulting from McCutchen’s injuries.

McCutchen retained attorneys and filed a negligence action against the driver who caused the accident.  The case ultimately settled, but because the driver had limited insurance coverage, and three other people were injured or killed in the accident, McCutchen received a payment of only $10,000.  With assistance from his attorneys, McCutchen and his wife also obtained $100,000 in underinsured motorist coverage from their own insurance company.  Out of the total $110,000 recovery, McCutchen’s attorneys received a forty-percent contingency fee, and thus McCutchen’s net recovery was approximately $66,000 – marginally less than the $66,866 he had received from the plan.

Subsequently, U.S. Airways demanded reimbursement of its full $66,866 payment, arguing that it was entitled to that amount under the terms of the plan.  It cited the following language:

If the Plan pays benefits for any claim you incur as the result of negligence . . . of a third party, the Plan will be subrogated to all your rights of recovery.  You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company.

McCutchen rejected the company’s demand, and the company brought suit under Section 502(a)(3) of ERISA, which authorizes a fiduciary of an ERISA plan to bring a civil action to obtain “appropriate equitable relief” to “enforce . . . the terms of the plan.”  The district court granted summary judgment to U.S. Airways, holding that the plan’s “any monies recovered” language entitled the company to full reimbursement.

The U.S. Court of Appeals for the Third Circuit vacated the district court’s order.  The court agreed with McCutchen that the statutory term “appropriate” in Section 502(a)(3) means that courts must exercise discretion to limit relief “to what is ‘appropriate’ under traditional equitable principles.”  The court acknowledged that its interpretation conflicts with that of several other circuits, each of which has held that courts may not apply equitable theories to alter the express terms of a plan.

Applying its understanding of Section 502(a)(3), the court held that awarding full reimbursement to U.S. Airways was inequitable under the principle of unjust enrichment because it would leave McCutchen “with less than full payment for his emergency medical bills.”  The court also believed that full reimbursement would amount to “a windfall for US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery.”  The court remanded the case to the district court for a determination of what would constitute appropriate equitable relief in this case.

U.S. Airways then filed a petition for certiorari, which the Court granted on June 25, 2012.

Supreme Court arguments

In its briefs on the merits at the Court, U.S. Airways challenges the Third Circuit’s decision on textual, common-law, and policy grounds.  The company argues that the lower court’s rule is incompatible with the plain language of Section 502(a)(3), which, it contends, authorizes equitable relief only “to enforce . . . the terms of the plan.”  Even if the statute were not so limited, the company argues, the type of equitable relief it is seeking in this case – an “equitable lien by agreement” – historically has existed to enforce agreements between parties and does not allow courts to adjust contractual terms on equitable grounds.  Finally, the company argues that the Third Circuit’s rule would threaten the stability of ERISA plans by “reduc[ing] the reimbursements on which self-funded plans rely to remain solvent,” thereby “discourag[ing] employers from offering benefits in the first place.”

In response, McCutchen and the attorneys who obtained the settlements on his behalf argue that the airline’s claim under Section 502(a)(3) must be decided in accordance with the common-law doctrine of subrogation, which refers to the right of an insurer to recover payments from the insured or a third party.  At common law, they argue, an insurer’s subrogation right was always limited by the principle of unjust enrichment and the common fund rule – the obligation to contribute to the attorney’s fees and costs incurred in securing a benefit.  In addition, they contest the airline’s interpretation of Section 502(a)(3), arguing that the phrase “to enforce . . . the terms of the plan” limits the types of claims that can be brought, but does not foreclose the application of equitable principles.  And they dispute the airline’s policy argument by contending that reimbursement amounts have little actual effect on plan coverage or premium rates.

In its amicus brief in support of neither party, the United States advocates for something of a middle-ground approach.  It agrees with the airline’s position that the equitable relief authorized by Section 502(a)(3) relates to the enforcement of plan terms, and that the Third Circuit erred in reducing the company’s reimbursement on the basis of unjust enrichment.  However, the government argues that a court may use its inherent equitable power to reduce an insurer’s reimbursement in order to apportion attorney’s fees under the common fund doctrine.  In the government’s view, when a plan elects not to file a subrogation action against a third party, but then benefits from an award obtained by a beneficiary, the court may require the plan to share in the cost of the attorney services that secured that benefit.  The government thus is asking the Court to affirm the Third Circuit’s decision insofar as it remands for application of the common fund doctrine, but to reverse the decision to the extent it requires the application of other equitable theories on remand.

Posted in U.S. Airways v. McCutchen, Featured, Merits Cases

Recommended Citation: Kevin Amer, Argument preview: What is “appropriate equitable relief” under ERISA?, SCOTUSblog (Nov. 26, 2012, 12:08 PM), http://www.scotusblog.com/2012/11/argument-preview-what-is-appropriate-equitable-relief-under-erisa/