TO CONSIDER OR NOT TO CONSIDER — Equitable Defenses in an Action for Equitable Relief under ERISA: Supreme Court to Decide

by ALBERT SU

In its next term, the U.S. Supreme Court will address a split among the federal Circuit Courts of Appeals regarding whether equitable defenses may limit a plan's reimbursement rights in an action for equitable relief under the Employee Retirement Income Security Act of 1974 ("ERISA"), despite express plan terms that disclaim such defenses or give the plan a right to full reimbursement. Six years after the Supreme Court opined that a plan fiduciary may seek reimbursement of benefits provided to a participant in Sereboff v. Mid Atlantic Medical Services, Inc., the Court now has an opportunity in U.S. Airways, Inc. v. McCutchen to again clarify the scope of relief permitted to employee benefit plans under ERISA section 502(a)(3). It is likely that the Supreme Court will consider the same issue in CGI Technologies and Solutions, Inc. v. Rose.

ERISA section 502(a)(3) allows a fiduciary of an ERISA plan to bring suit for "appropriate equitable relief" to enforce the terms of a plan. Benefit plans often contain provisions requiring the participant to reimburse the plan if he or she recovers from other sources, including others causing an injury for which the plan has paid benefits. If a participant refuses to reimburse the plan, the plan may sue to seek recovery and, as held in Sereboff, establish a valid claim for equitable relief if:

• the plan specifically identifies a particular fund distinct from the participant's general assets; and

• the plan specifies a particular share of that fund to which it is entitled.

However, Sereboff did not address the next question — whether the word "appropriate" in Section 502(a)(3) allows a court to consider equitable defenses despite plan terms that disclaim such defenses or give the plan a right to full reimbursement, thereby reducing or eliminating the amount of reimbursement to the plan. This is the question determined by the Third Circuit in McCutchen and the Ninth Circuit in Rose. Participants may seek to assert a variety of equitable defenses, such as unjust enrichment, the "make-whole doctrine," and the "common fund doctrine." Unjust enrichment occurs when one party retains a benefit conferred by another party without paying compensation. The "make-whole doctrine" states that an insurer acquires the right to subrogation or reimbursement only after the insured has been fully compensated. And, the "common fund doctrine" allows a litigant who recovers a common fund for the benefit of persons other than himself or herself to recover litigation costs and attorney's fees from that fund.

As such, the issue remains as to whether courts must enforce reimbursement provisions as written, or whether a court may apply equitable defenses to determine the "appropriate" amount of relief notwithstanding express plan terms that disclaim such defenses or give the plan a right to full reimbursement. The Courts of Appeals are divided on the issue. The Fifth, Seventh, Eighth, and Eleventh Circuits have upheld broad, express reimbursement provisions in plans as written, without placing any unwritten equitable limitations on such provisions. These circuits have stressed the primacy of a plan's express language and that basic contract principles provide for full reimbursement under express plan terms. On the other hand, according to recent decisions from the Third and Ninth Circuits, a court may consider in determining "appropriate equitable relief," equitable defenses in a Section 502(a)(3) action notwithstanding express plan terms that disclaim their application or give the plan a right to full reimbursement.

US Airways, Inc. v. McCutchen
The Third Circuit created a circuit split when it ruled in January 2012 in US Airways, Inc. v. McCutchen that requiring a plan participant to reimburse a health plan in full from the participant's personal injury settlement constituted inappropriate and inequitable relief. The Supreme Court will hear the case during its term beginning this October.

FACTS
In 2007, James McCutchen suffered serious injuries in an automobile accident. McCutchen was a participant in the US Airways Health Benefit Plan ("US Airways Plan"), a self-administered and self-funded plan. The US Airways Plan paid $66,866 in accident-related medical expenses on McCutchen's behalf. McCutchen eventually settled for $10,000 with the driver who struck him and received another $100,000 in underinsured motorist benefits from his own automobile insurance policy. After paying attorney's fees and expenses, McCutchen's net recovery was less than $66,000. US Airways then sought reimbursement for the $66,866 it had paid for McCutchen's medical expenses. When McCutchen refused to pay, US Airways sued to recover the full amount.

US Airways brought an action under ERISA section 502(a)(3) for "appropriate equitable relief" in the form of a constructive trust or an equitable lien on the $66,866, seeking to enforce the US Airways Plan's subrogation and reimbursement provisions, which stated that "the Plan will be subrogated to [the participant's] rights of recovery" and that the participant must "reimburse the Plan for amounts paid for claims out of any monies recovered from a third party."

US Airways claimed that this language permitted it to recoup the $66,866 it provided under the US Airways Plan from any third-party recovery McCutchen received.

McCutchen invoked the make-whole doctrine, arguing that because his underlying personal injury claim was valued between $1 million and $1.75 million, it would be unfair and inequitable for him to reimburse US Airways in full when he had not been fully compensated for his injuries. In addition, McCutchen contended that US Airways, which did not contribute to his attorney's fees and expenses, would be unjustly enriched if it were permitted to recover from him without any allowance for these costs.

DISTRICT COURT HOLDS THAT THE US AIRWAYS PLAN'S LANGUAGE CLEARLY REQUIRES FULL REIMBURSEMENT
On August 30, 2010, the U.S. District Court for the Western District of Pennsylvania granted summary judgment to US Airways and found the language of the US Airways Plan to be clear and unambiguous, requiring McCutchen to reimburse the US Airways Plan from "any monies recovered." The district court held that the make-whole doctrine was inapplicable in the face of the US Airways Plan's clear reference to "all rights of recovery" and to "any monies recovered." Moreover, because the US Airways Plan unambiguously required reimbursement of any payments made by the US Airways Plan to a participant, the district court concluded that US Airways was entitled to full reimbursement without reduction for attorney's fees and expenses.

McCutchen then appealed the district court's decision to the Third Circuit.

THIRD CIRCUIT HOLDS THAT EQUITABLE DEFENSES MAY BE CONSIDERED
On January 4, 2012, the U.S. Court of Appeals for the Third Circuit vacated the district court's judgment, holding that courts must exercise discretion to limit relief to what is "appropriate" by considering traditional equitable defenses and principles. The Third Circuit explained that "Congress intended to limit the equitable relief available under Section 502(a)(3) through the application of equitable defenses and principles that were typically available in equity." As such, the Third Circuit expressly disagreed with Fifth, Seventh, Eighth, and Eleventh Circuits which have held that applying equitable limitations on equitable claims despite express plan terms would be pioneering federal common law. The Third Circuit pointed out that the Supreme Court's 2011 decision in CIGNA Corp. v. Amara demonstrates that "the written benefit plan is not inviolable, but is subject — based upon equitable doctries and principles — to modification and, indeed, even equitable reformation under Section 502(a)(3)."

Applying the equitable principle of unjust enrichment, the Third Circuit concluded that requiring McCutchen to provide full reimbursement to US Airways would constitute "inappropriate and inequitable relief" because the amount of the reimbursement would exceed McCutchen's net recovery and would amount to "a windfall" for US Airways. (McCutchen did not argue for application of the makewhole doctrine on appeal, and therefore, the Third Circuit did not address it.) Accordingly, the Third Circuit remanded the case for the district court to engage in additional fact-finding to fashion "appropriate equitable relief."

US Airways promptly petitioned the Supreme Court to review the case on the issue of whether Section 502(a)(3) "authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plans for benefits paid, even where the plan's terms give it an absolute right to full reimbursement," as stated in its petition for review.

SUPREME COURT GRANTS CERTIORARI
The U.S. Supreme Court granted certiorari on June 25, 2012. Incidentally, the day before the Supreme Court conferred to decide whether to grant certiorari, the Ninth Circuit issued its decision on CGI Technologies and Solutions, Inc. v. Rose and expressly agreed with the Third Circuit's decision in McCutchen.

CGI Technologies and Solutions, Inc. v. Rose
The Ninth Circuit held in Rose that under Section 502(a)(3), a court may consider, in granting "appropriate equitable relief," equitable defenses despite express terms disclaiming their application. The Ninth Circuit's decision deepens the split between the circuits.

FACTS
In 2003, Rhonda Rose was seriously injured in an automobile accident. Rose was a participant in the CGI Technologies and Solutions, Inc. Welfare Benefit Plan ("CGI Plan"), a self-funded plan. The CGI Plan included a reimbursement and subrogation clause that expressly gave CGI the right to full reimbursement for medical expenses paid on behalf of a participant from any funds recovered by the participant from a third-party tortfeasor. In addition, the CGI Plan exempted CGI from responsibility for attorney's fees paid in any such recovery, thereby disclaiming the common fund doctrine. Also, the CGI Plan required full reimbursement to CGI regardless of whether the participant was made whole by the recovery, thereby disclaiming the make-whole doctrine.

CGI paid $31,581 in medical expenses on Rose's behalf. Rose's underlying personal injury claim was valued at least $1.7 million. Rose recovered a combined total of $376,907 against the third-party tortfeasor and from her automobile insurance provider in underinsured motorist benefits. After Rose's recovery of damages, CGI demanded reimbursement for the full amount it had paid for Rose's medical expenses. Rose declined to reimburse CGI, and when CGI filed suit, her law firm placed the disputed amount in a trust.

CGI brought suit against Rose, arguing that it had a valid equitable claim in the form of a constructive trust and/or an equitable lien against Rose pursuant to Section 502(a)(3). Rose invoked the make-whole doctrine, countering that CGI was not entitled to full reimbursement because she had not been fully compensated. Rose argued that CGI was entitled to only a pro rata share of the reimbursement amount according to her limited recovery of her total damages.

DISTRICT COURT CONCLUDES THAT CGI IS ENTITLED TO FULL RECOVERY, LESS ATTORNEY'S FEES
On January 19, 2011, the U.S. District Court for the Western District of Washington ruled in favor of CGI. Citing Sereboff, the district court held that a valid claim for equitable relief under Section 502(a)(3) was established because:

• CGI specifically identified a distinct fund, separate from the Rose's general assets (the fund held in trust by Rose's law firm); and

• CGI specified a particular share to which it was entitled (the $31,581 reimbursement amount).

Furthermore, the district court found that the language of the CGI Plan was clear in reserving CGI's right of reimbursement. Also, the district court pointed out that "the law in the Ninth Circuit is clear in establishing that the ‘make whole' doctrine … is merely a default rule which applies in the absence of any terms or language to the contrary." Here, the district court determined that the language of the CGI Plan was clear and that Rose had accepted the benefit of a plan that expressly disclaimed the make-whole doctrine. As such, the district court concluded that CGI was entitled to recover the amount it paid on Rose's behalf. However, despite the CGI's Plan's language, the district court also ruled, without providing an explanation, that CGI was responsible for its proportional share of the attorney's fees and costs and that this amount should be deducted from CGI's recovery.

Both parties appealed the district court's decision. Rose appealed the district court's determination that CGI was entitled to reimbursement without consideration of equitable defenses. CGI appealed the district court's reduction of its recovery from Rose by a proportional share of Rose's fees and costs.

NINTH CIRCUIT HOLDS THAT EQUITABLE DEFENSES MAY BE CONSIDERED
On June 20, 2012, the U.S. Court of Appeals for the Ninth Circuit vacated the district court's judgment, expressly agreeing with the Third Circuit's decision in McCutchen. The Ninth Circuit held that "under Section 502(a)(3), the district court, in granting ‘appropriate equitable relief,' may consider traditional equitable defenses notwithstanding express terms disclaiming their application." The Ninth Circuit explained that "[b]oth the make-whole doctrine and the common fund doctrine are rooted in concerns about unjust enrichment, a traditional principle of equitable relief," and that traditionally at equity it was within the court's province to consider unjust enrichment when fashioning equitable remedies, even where contract terms attempted to limit their application.

Moreover, the Ninth Circuit observed: "Neither Congress nor the Supreme Court has said that any such contractual limitation necessarily curtails the district court's equitable powers under Section 502(a)(3). To the contrary, the [Supreme] Court in Amara reasoned that the district court, sitting as a court of equity in a Section 502(a)(3) action, need not honor the express terms of the Plan where traditional notions of equitable relief so require." The Ninth Circuit further held that parties may not by contract deprive a court of its power to act as a court in equity in a Section 502(a)(3) action. The Ninth Circuit concluded that despite express terms in the CGI Plan disclaiming the make-whole and common fund doctrines, the district court has broad equitable powers under Section 502(a)(3) not to give those provisions controlling weight in fashioning "appropriate equitable relief."

As such, the Ninth Circuit remanded the case for the district court to determine what would be "appropriate equitable relief" by applying traditional equitable principles and defenses.

In early August 2012, the parties agreed that the Ninth's Circuit's order should be stayed pending CGI's filing of a petition for writ of certiorari for Supreme Court review.

Implications
The Supreme Court is scheduled to hear oral arguments in McCutchen during its next term. If the Supreme Court grants the petition for writ of certiorari for Rose, the Supreme Court will likely hear McCutchen and Rose jointly.

If the Supreme Court sides with the Fifth, Seventh, Eighth, and Eleventh Circuits, courts may not consider equitable defenses in an ERISA section 502(a)(3) action when express plan terms disclaim such defenses or give the plan a right to full reimbursement, and instead must adhere to the express language in a plan. This would be a victory for health benefit plans which seek to protect contractually defined benefits and parties' expectations by enforcing clear and unambiguous plan language. In addition, such a decision would allow ERISA plans — in particular, self-funded plans — to continue to rely on their reimbursement and subrogation rights. These rights are essential to recoup losses, calculate actuarial assumptions which assume a certain level of recoveries, and maintain plan benefit levels.

If the Supreme Court sides with the Third and Ninth Circuits, courts will be authorized to consider equitable defenses in a Section 502(a)(3) action despite express plan terms that disclaim such defenses or give the plan a right to full reimbursement. This would be a victory for plan participants who could assert equitable defenses, thereby reducing or eliminating the amount they owe.

Until the Supreme Court issues its decision, the Third and Ninth Circuits are disinclined to consider solely the express terms of a plan in light of equitable defenses. Even so, a plan still should have express language requiring reimbursement from any monies recovered. Plans should, though, anticipate possible difficulties in obtaining full reimbursement if a participant asserts equitable defenses such as the make-whole and common fund doctrines.

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