Many ERISA plans contain “subrogation” or “reimbursement” provisions. Can equitable defenses change the Plan’s reimbursement rights?

You need to know about US Airways Inc. v. McCutchen — a critical case before the United States Supreme Court, with oral argument set for tomorrow.

THE ISSUE: Whether “equitable defenses” can limit a plan’s recovery under ERISA § 502(a)(3).

The case will most likely have a huge impact on ERISA reimbursement. Here is a mini-summary of the case.

FACTS. McCutchen was a plan participant. He was seriously injured when a car crossed the center-line and hit him head-on.  The US Airways ERISA plan paid out over $66,000 in medical expenses. McCutchen received $110,000 in settlement of the tort claims, and after his attorney received 40%, McCutchen’s net proceeds from settlement was $66,000—about equal to the reimbursement sought by the ERISA plan. McCutchen refused to reimburse the plan for medical expenses. The ERISA plan sued under ERISA § 502(a)(3) for full reimbursement of medical expenses.

DISTRICT COURT. The District Court granted summary judgment to US Airways, as plan administrator, based on language in the plan allowing full reimbursement of any monies recovered by the participant.

THIRD CIRCUIT. The Third Circuit vacated and remanded. 663 F.3d 671 (3d Cir. 2011). The Third Circuit rejected the plan’s claim for full reimbursement concluding that ERISA § 502(a)(3) incorporates traditional equitable defenses. Id. at 678-79. Requiring the participant to provide full reimbursement to the plan (without allowing offset for his attorneys’ fees and expenses) would be “inappropriate and inequitable relief.” Id. at 679. (This holding conflicts with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits.)

UNITED STATES SUPREME COURT: Here are the legal arguments being made tomorrow:

US AIRWAYS (ERISA PLAN) LEGAL ARGUMENT:  ERISA does not empower the courts to “use free-floating equitable principles to rewrite benefit plans.” First, § 502(a)(3) authorizes only appropriate equitable relief to “enforce . . . the terms of the plan.” McCutchen’s approach would improperly “obliterate[]” the plan terms. Second, the equitable relief sought by the Plan (an equitable lien by agreement) requires the court to enforce the actual agreement of the parties, which allows full reimbursement, rather than rewrite the parties’ agreement. Third, McCutchen’s approach conflicts with the goals of ERISA by making liabilities unpredictable. The Third Circuit’s decision threatens the stability of self-funded ERISA plans, and will discourage employers from offering benefits.

McCUTCHEN’S LEGAL ARGUMENT:   First, the Plan’s approach is neither appropriate nor ‘equitable’ because it ignores principles of unjust enrichment in favor of “rote enforcement of contract terms.” Second, the Third Circuit’s approach  is like how a court should handle an insurer’s subrogation claims — limited to a pro rata share of a recovery. Third, the equitable common fund rule requires that US Airways pay its proportional share of the attorney fees and costs incurred in obtaining the damages recovery.  Fourth, “the plans have not offered a scintilla of actual evidence that their apocalyptic vision of life under the Third Circuit’s approach will come to pass.” “[T]here is every reason to believe that [the Plan’s] full-reimbursement approach would increase litigation costs by making it less likely that tort claimants would be willing to settle cases.”

DISCUSSION. A very tough factual case—McCutcheon was seriously injured and is now disabled.  His attorneys already took 40% of the very limited settlement proceeds—the tortfeasor had little or no assets or insurance; if the ERISA plan wins, McCutchen will have little or no recovery. Tough facts could result in some bad law.

We will keep you advised on this important case before the Supreme Court.

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Photo of Mike Reilly Mike Reilly

Mike Reilly is a nationally recognized labor, employment and employee benefits attorney, named one of the “Top 100 Most Powerful Employment Attorneys in the Nation” for the past five consecutive years by Human Resource Executive®. He has decades of experience providing strategic employment…

Mike Reilly is a nationally recognized labor, employment and employee benefits attorney, named one of the “Top 100 Most Powerful Employment Attorneys in the Nation” for the past five consecutive years by Human Resource Executive®. He has decades of experience providing strategic employment advice, and has represented clients in more than 75 jury trials, arbitrations, bench trials and claims before the EEOC and Washington State Human Rights Commission.

Small and large employers retain Mike for his strategic advice and decades of experience in employment issues and litigation, business decisions and litigation avoidance. Mike provides advice in claims involving discrimination, retaliation, wrongful discharge, disability accommodation, ERISA and non-ERISA employee benefit claims, and wage/hour claims. He served as lead counsel in an employee raiding/trade secret case as reported in the Wall Street Journal, and defends employers in class action claims.

Mike’s remarks on employment issues have been quoted in NewsweekCorporate Legal TimesSeattle TimesEmployee Relations Law JournalPuget Sound Business, and other professional journals and management publications. Chambers USA’s Guide to America’s Leading Lawyers for Businessrates Mike in the top ranking (band one) for his work in labor and employment law, and has described him as “one of Seattle’s top-rate attorneys” who is “truly phenomenal [with] superb legal instincts” and “an amazingly assertive litigator.” His clients include Nordstrom, Seattle Seahawks, Home Depot, KeyBank, Starbucks, Fred Hutchinson Cancer Research Center, Red Robin and Seattle Chamber of Commerce, among others.