Supreme Court Reviews Employer Reimbursement Provisions in Employee Benefits Plans
In US Airways, Inc. v .McCutchen, decided on April 16, 2013, the U.S. Supreme Court once again emphasized that in disputes involving employee benefits plans governed by the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq. (“ERISA”), it is the unambiguous language of the plan in question that controls the rights of the parties and that general equitable principles cannot be used to supersede the terms of the plan. In areas where the plan is silent, however, courts may employ appropriate equitable principles to construe the plan. At issue in US Airways was the reimbursement provision of an employer’s health benefits plan that purported to give the employer the right to recoup medical benefits paid to an employee injured in an automobile accident who thereafter recovered funds from third parties as a result of the accident, although the amount the employee actually recovered after paying his attorney was less than the amount he owed his employer. The Supreme Court rejected the employee’s attempt to apply equitable principles of unjust enrichment to limit the application of the reimbursement provision. Holding, however, that the plan was silent as to the allocation of the costs, including attorneys fees, incurred by the employee in his efforts to recover from third parties, the Court further held the equitable principle known as “the common fund rule” should apply, entitling the employee to reasonable attorneys fees from the funds recovered. The decision makes clear the importance to employers of accomplishing the objectives of their benefits plans with clear-cut language.
After McCutcheon was seriously injured in an automobile accident, his medical bills, amounting to almost $67,000, were paid by the health plan of his employer, US Airways (“the Plan”). McCutchen sued the driver of the other car involved, claiming $1 million in damages. Unfortunately, the driver of the other car had insufficient insurance. Through the efforts of McCutchen’s attorney, working under a 40 percent contingency fee arrangement, McCutcheon was able to recover only a total of $10,000 from the driver of the other car and $100,000 from his own insurance company. This left him with a net recovery of $66,000 after paying his attorney, since US Airways did not contribute anything towards his attorneys fees.
US Airways, as Plan administrator, then brought suit in federal district court, seeking equitable relief under § 502(a)(3) of ERISA to recover from McCutchen the $67,000 in medical bills it had paid on his behalf, relying on the following Plan provision:
If [US Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, . . . [y]ou will be required to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise.
The District Court found for US Airways. On appeal, however, the United States Court of Appeals for the Third Circuit ruled that because US Airways’ suit was one for equitable relief under § 502(a)(3), the equitable principle of unjust enrichment should limit the Plan’s reimbursement provision. As full reimbursement would “leav[e] [McCutchen] with less than full payment” for his medical bills and, at the same time, would provide a “windfall” to US Airways, given its failure to “contribute to the cost of obtaining the third-party recovery,” the Third Circuit directed the District Court to determine what amount, shy of the entire amount sought by the Plan, would qualify as appropriate equitable relief.
The Supreme Court’s Opinion
Writing for the majority, Justice Kagen rejected the Third Circuit’s premise that courts are free to apply equitable principles merely because an employer’s recovery under a reimbursement provision constitutes equitable relief under § 502(a)(3). Justice Kagen noted, as the Court had held earlier in Sereboff v. Mid Atlantic Medical Services, that the Plan’s reimbursement provision created an “equitable lien by agreement.” Such a lien serves to carry out the terms of the Plan, which “means declining to apply rules – even if they would be ‘equitable’ in a contract’s absence – at odds with the parties’ expressed commitments.” Thus McCutchen could not rely on theories of unjust enrichment to defeat the Plan’s clear terms.
The Court, however, did not leave McCutchen without any relief. The Court concluded that the Plan’s reimbursement provision was silent as to “how to pay for the costs of obtaining” monies from third parties. The Court ruled that it was appropriate to fill this gap in the Plan’s provisions with the equitable “common-fund doctrine [as] the best indication of the parties’ intent, since it was unlikely that McCutchen would have pursued a recovery against third parties for the benefit of himself and US Airways had he known he would be unable to retain any of his recovery. The common-fund doctrine recognizes that someone “who recovers a common fund for the benefit of persons other than himself” is due “a reasonable attorney’s fee from the fund as whole.” Thus, in the absence of any Plan provision to the contrary, McCutchen was entitled to have US Airways contribute to the attorneys’ fees he incurred in securing a recovery that inured to the benefit of the Plan.
Overall, US Airways, Inc. v. McCutchen is favorable to employers because it allows them, through precise draftsmanship, to maximize the reimbursement of medical benefits paid on behalf of employees who subsequently recover against third parties. Employers should be mindful, however, that although their health plans’ reimbursement provisions can be drafted to preclude application of the common fund doctrine in all circumstances, reimbursement provisions that are so onerous as to dissuade plan participants from pursuing third parties will be counterproductive. When drafting new plans or reviewing their current plans, employers should keep these precepts in mind. For answers to any questions concerning ERISA or other employee benefits issues, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.