High Court Holds Equitable Defenses Do Not Trump ERISA Plan's Clear Reimbursement Language

May 19, 2013  |  By: Gina M. Schneider, Esq.

The Supreme Court’s April decision in U.S. Airways, Inc. v. McCutchen resolves a circuit split on the issue of a medical plan’s right to reimbursement of medical expenses from a plan participant who recovers on a personal injury claim. In a unanimous decision, the Supreme Court adopted the approach taken by the Fifth, Seventh, Eighth, Eleventh, and District of Columbia Circuits and rejected the approach taken by the Third and Ninth Circuits, and held that equitable defenses, such as unjust enrichment, do not trump clear plan language.  The Supreme Court enforced the plan provision that required the participant to reimburse the plan to the extent he recovered his post-accident medical expenses from the third party.  In McCutchen the plan participant suffered injuries in an auto accident caused by third parties.  The plan paid $66,866 in resulting medical expenses the participant incurred. The participant separately recovered $110,000 from one third party and her insurance carrier. After deducting $44,000 for attorneys’ fees and litigation costs, the net recovery by the participant was less than $66,000.  The plan sought full reimbursement of the $66,866 the plan paid in accordance with plan subrogation, reimbursement and collateral source provisions. The participant refused to reimburse the plan and the plan sponsor sued in federal court pursuant to ERISA §502(a)(3) seeking appropriate equitable relief to enforce the plan’s reimbursement provision.  The District Court granted summary judgment to the plan finding that the plan document clearly required reimbursement of the monies recovered and rejecting the participant’s argument that application of the equitable common-fund and make whole doctrines required an offset of attorney’s fees against any plan reimbursement. On appeal, the Third Circuit vacated the District Court’s decision and held that equitable defenses could override the express reimbursement and subrogation provisions of a plan. The Supreme Court reversed the Third Circuit and held that in a reimbursement action under ERISA Section 502(a)(3), equitable doctrines do not trump plan terms.  However, on the issue of attorney’s fees, the Court held that when a plan is silent or ambiguous as to whether equitable defenses are available, equitable principles may apply to help the court interpret the plan or fill in gaps. In this case, the relevant plan language did not specifically require reimbursement without reduction for attorneys’ fees. The Court explained that if the plan sponsor did not want the common-fund doctrine to apply, it must state so in the plan.   Accordingly, the Supreme Court remanded the case back to the District Court to determine the appropriate adjustment to the plan’s reimbursement to account for attorneys’ fees under common-fund principles. This decision highlights the benefit to plan sponsors of drafting clear and comprehensive plan language to control employee benefit plan costs and avoid the judicial application of equitable rules to fill gaps in plan terms where the plan is silent or plan terms are ambiguous.  In view of the McCutchen decision, plan sponsors should review their plans’ subrogation, reimbursement and collateral source provisions to ensure they, primarily, are clear and unambiguous and, secondarily, address the issue whether the plan’s rights to subrogation and reimbursement extend to the attorneys’ fees portion of the participant’s recovery from a third party. For more information or assistance with drafting enforceable subrogation, reimbursement and collateral source provisions for your organization's employee welfare benefit plans and other ERISA plan provisions, please contact Patrick W. McGovern, Esq., pmcgovern@genovaburns.com, or Gina M. Schneider, Esq., gmschneider@genovaburns.com, in the Firm’s Labor Practice Group.

Tag: Employee Benefits