ERISA-Supreme Court Rules That Health Plan May Obtain Reimbursement Of Expenses It Has Paid When Injured Employee Collects Amounts From A Third Party For The Injury , Despite Employee’s Equitable Defenses To The Reimbursement

In US Airways, Inc. v. McCutchen, No. 11-1285 (U.S. Supreme Court 2013), the Supreme Court (the “Court”) faced the following situation. The health benefits plan established by plaintiff US Airways had paid $66,866 in medical expenses for injuries suffered by defendant McCutchen, a US Airways employee, in a car accident caused by a third party. The plan entitled US Airways to reimbursement if McCutchen later recovered money from the third party. McCutchen’s attorneys secured $110,000 in payments, and McCutchen received $66,000 after deducting the lawyers’ 40% contingency fee. US Airways demanded reimbursement of the full $66,866 it had paid. When McCutchen did not comply, US Airways filed suit under §502(a)(3) of ERISA. That section authorizes health-plan administrators to bring a civil action “to obtain . . . appropriate equitable relief . . . to enforce . . . the terms of the plan.”

The Court had ruled in an earlier case, Sereboff v. Mid Atlantic Medical Services, Inc., that a health-plan administrator- like US Airways- may enforce a reimbursement provision in a plan by filing suit under §502(a)(3). The question for the Court in this case: may the defendant raise equitable defenses? Here, the defendant has attempted to raise two such defenses, derived from the principles of unjust enrichment: (1) absent over recovery on McCutchen’s part, US Airways’ right to reimbursement did not kick in and (2) US Airways had to contribute its fair share to the costs McCutchen incurred to get his recovery, so any reimbursement had to be reduced by 40%, to cover the contingency fee.

As to defense (1), the Court said that in a §502(a)(3) action, based on an equitable lien by agreement created-as here- by a provision authorizing reimbursement in a plan subject to ERISA, the plan’s terms govern. Neither general unjust enrichment principles nor specific doctrines reflecting those principles–such as the double-recovery (insurer reimbursement limited to amount of medical expenses incurred and covered by the insurance) or common-fund rules (reasonable attorney’s fees may be paid out of funds collected)–can override the applicable contract. Thus defense (1) fails. As to defense (2), while equitable rules cannot trump a plan’s reimbursement provision, they may aid in properly construing it. US Airways’ plan is silent on the allocation of attorney’s fees between the plan and participant, and the equitable common fund doctrine provides the appropriate default rule to fill that gap. The plan’s reimbursement provision precludes looking to the equitable double-recovery rule, because it provides an allocation formula that expressly contradicts that rule. By contrast, the plan says nothing specific about how to pay for the costs of recovery. Given that contractual gap, the common-fund doctrine provides the best indication of the parties’ intent. The Court remanded the case, for the lower court to determine exactly how to apply the plan’s reimbursement provision in this case.

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