The Supreme Court's recent decision in US Airways, Inc. v. McCutchen dealt with a narrow issue under ERISA (enforcement of a plan's reimbursement provision), but the way in which the Supreme Court answered that question is good news for all plan sponsors. The Court's decision reaffirmed the primacy of the plan document, noting that the plan document "is at the center of ERISA," and that ERISA's statutory scheme "is built around reliance on the face of written plan documents." Accordingly, the Court held that in an action brought under § 502(a)(3) of ERISA, "equitable defenses" such as unjust enrichment cannot be used "to override the clear terms of the plan." A clearly worded reimbursement provision will be enforced as written, no matter how inequitable that result might seem from the plan participant's perspective.
The Specific Dispute in McCutchen
McCutchen, a participant in the US Airways self-funded medical plan, was seriously injured in a car accident. The plan paid medical expenses on his behalf totaling approximately $67,000, but there was no dispute that he had other damages (lost earnings, pain and suffering, etc.) that were likely more than $1 million. He hired a lawyer on a 40 percent contingency basis and sued the driver of the other vehicle. He ultimately settled that lawsuit for only $110,000 because of limited insurance coverage and multiple injured parties. After paying 40 percent to his attorney, his net recovery was $66,000. Upon learning of his recovery, the plan sued him for repayment of all of the medical benefits it had paid on his behalf ($67,000), citing the plan's reimbursement provision, which required him to reimburse the plan "out of any monies recovered from the third party."
McCutchen countered by raising two "equitable defenses" to the reimbursement claim. First, he argued that he should not have to reimburse the plan at all, because there had been no "double recovery" of medical expenses. That would not happen until he had been fully compensated for his non-medical damages, which far exceeded the amount of the settlement. Second, he argued that, at a minimum, if the plan was going to share in the recovery, it should also be required to share in the attorney's fees incurred to obtain the recovery, and thus its reimbursement should be $67,000 minus 40 percent for attorneys' fees.
The plan brought its suit under ERISA § 502(a)(3), which authorizes a suit "to obtain … appropriate equitable relief … to enforce … the terms of the plan." Consistent with prior precedent, the Court's analysis of what constituted "appropriate equitable relief" required it to delve into the types of relief and defenses available in courts of equity back in the late 1800s and early 1900s, before the merger of the courts of law and equity. Readers interested in that arcane analysis should read the full opinion. For these purposes, it is sufficient to say that the Court's ultimate holding was that "equitable rules … cannot trump a reimbursement provision." Thus, if the plan's reimbursement provision is drafted to give the plan the first claim to any money recovered from a third party, as was the case here, then that provision will be enforced as written. And if the plan's reimbursement provision clearly states that the plan is entitled to recoup every dollar it paid out in benefits, and that it does not have to bear any portion of the attorneys' fees incurred in obtaining the recovery, then that provision will also be enforced as written. In this case, the plan's reimbursement provision did not address the attorneys' fee issue, so the Court applied the equitable "common-fund" doctrine and held that the plan was required to share in those fees (a partial victory for McCutchen). But the Court made clear it was doing so only because the plan was silent on that issue.
There are a number of lessons to be learned from the Court's McCutchen decision.
First, plan sponsors may want to review their reimbursement language to make clear precisely how it is intended to apply. A well-drafted provision should address first-dollar recovery, whether the plan is going to share in the legal fees incurred in pursuing the recovery, and many other issues. As McCutchen makes clear, a well-drafted reimbursement provision will be enforced as written.
Second, plan sponsors should keep in mind the reality that a completely one-sided reimbursement provision may give a participant (and the participant's attorney) little incentive to bring a lawsuit against a third party which, in turn, will mean no reimbursement for the plan. Thus, a plan sponsor may want to include language in the reimbursement provision stating that it is willing to consider alternative arrangements in individual cases, but that those arrangements must be negotiated in advance.
Third, McCutchen reaffirms that the plan is the operative document, and that the SPD is simply a communication about the plan. Thus, if a plan sponsor wants to be able to enforce a reimbursement provision, the plan sponsor should make sure that provision is part of the plan, and not just the SPD. In this regard, McCutchen is the exception that proves the rule. In McCutchen, the reimbursement provision appears to have been in the SPD rather than the plan, but the Court stated it was overlooking that problem because the parties and the two lower courts had all treated the reimbursement provision as if it were part of the actual plan. Other plan sponsors will not be so lucky.
Fourth, while the Court's decision is good news for plan sponsors because it reaffirms the primacy of the plan document, it is not entirely clear how those statements are to be squared with the Court's decision just last term in CIGNA Corp. v. Amara. In that case, a majority of the Court suggested that in a lawsuit brought under § 502(a)(3) the terms of the plan are not necessarily controlling, and that participants might be able to recover amounts above and beyond those provided in the plan using theories such as estoppel or surcharge. It will be up to the lower courts to reconcile those two positions.
Justice Kagan delivered the Court's opinion, which was joined by Justices Kennedy, Ginsburg, Breyer and Sotomayor.
Justice Scalia filed a dissenting opinion, in which Chief Justice Roberts and Justices Thomas and Alito joined. The dissent would have ruled against McCutchen on the attorneys' fee issue as well, but for procedural reasons that had nothing to do with the substance of the dispute.