On April 16, 2013, the Supreme Court issued its opinion in U.S. Airways, Inc. v. McCutchen, — S. Ct. —-, 2013 WL 1567371 (2013), resolving a split among the circuits. We wrote about the lower court decisions in this case in our August 2012 newsletter. At issue in McCutchen was whether equitable defenses, such as unjust enrichment, could trump the clear terms of a plan to limit potential remedies in a fiduciary’s suit under ERISA §502(a)(3) for “appropriate equitable relief.” The Court, adopting the rule followed in the Fifth, Seventh, Eighth, Eleventh, and District of Columbia Circuits, rejected the approach taken by the Third and Ninth Circuits, and held that equitable defenses cannot override the terms of the plan. It is only when a plan is silent on an issue that courts may consult equitable principles to aid in the construction of plan language or to fill gaps. Accordingly, the plan fiduciary in this case was able to enforce the terms of the plan and require a participant to reimburse the plan from a tort recovery he obtained in connection with the automobile accident that led to the plan-paid medical expenses. The decision reinforces the idea that careful planning and drafting of ERISA plan language is an essential part of managing employee benefit programs.
In January 2007, James McCutchen suffered serious injuries in a car accident. He hired an attorney and secured a $110,000 settlement from the driver and his own insurance carrier. After deducting $44,000 for his attorney’s 40% contingent fee, McCutchen received a $66,000 recovery.
At the time of the accident, McCutchen was an employee of U.S. Airways and a participant in its self-funded health plan. The plan paid $66,866 in medical expenses arising out of the accident on McCutchen’s behalf. U.S. Airways’ plan contained a reimbursement provision that provided:
“If the Plan pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party . . . you will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company as a result of judgment, settlement, or otherwise.”
In reliance on this provision, U.S. Airways demanded reimbursement of the $66,866 it had paid in medical expenses. McCutchen refused.
Proceedings before the District Court
U.S. Airways filed suit in the Western District of Pennsylvania under ERISA §502(a)(3) seeking “appropriate equitable relief” to enforce the plan’s reimbursement provision. On U.S. Airways’ motion for summary judgment, the District Court dismissed McCutchen’s argument that equitable defenses, such as unjust enrichment, limited U.S. Airways’ recovery. The District Court found that “the Plan document clearly requires reimbursement by McCutchen of monies recovered including the UIM benefits paid by his insurance company” and the plan was thus entitled to full reimbursement.
The District Court also rejected McCutchen’s argument that application of the equitable common-fund and make-whole doctrines required deduction of attorney’s fees from the plan’s reimbursement. Although McCutchen and U.S. Airways agreed that the language of the plan was silent on the issue of attorney’s fees, the District Court held that “a plan or agreement need not specifically address attorney’s fees in order to unambiguously require full reimbursement.” According to the District Court, because U.S. Airways’ plan was unambiguous and required reimbursement of any payments made by the plan, it provided U.S. Airways with an equitable claim over the entirety of the fund consisting of McCutchen’s $110,000 tort recovery, and precluded deduction of McCutchen’s attorney’s fees from that amount.
The Third Circuit Decision and the Circuit Split
On appeal, the Third Circuit assessed whether McCutchen could assert certain equitable defenses, such as unjust enrichment, to U.S. Airways’ claim for “appropriate equitable relief” under ERISA §502(a)(3). The Third Circuit acknowledged that the terms of the plan unambiguously required reimbursement from monies the beneficiary recovered from a third party. Even so, the court held that use of “appropriate” to modify “equitable relief” in the statute was intended to limit the relief available under ERISA §502(a)(3) through the application of equitable defenses. Because a judgment requiring McCutchen to provide full reimbursement to U.S. Airways would constitute “inappropriate and inequitable relief,” the Third Circuit vacated the decision of the District Court.
The Third Circuit’s ruling placed it in conflict with decisions from the Fifth, Seventh, Eighth, Eleventh, and District of Columbia Circuits, all of which held that equitable defenses could not override express provisions of a plan. Roughly five months after the Third Circuit’s decision in McCutchen, the Ninth Circuit followed the Third in CGI Technologies and Solutions, Inc. v. Rose, 683 F.3d 1113 (9th Cir. 2012), applying equitable defenses to override a plan’s explicit terms.
In Rose, the plan at issue had a reimbursement clause that expressly:
- Gave CGI the right to full reimbursement for medical expenses paid
- Exempted CGI from responsibility for attorney’s fees paid in obtaining any such recovery, expressly disclaiming application of the common-fund doctrine
- Required full reimbursement of CGI regardless of whether the beneficiary was made whole
In Rose, the Ninth Circuit held that ERISA §502(a)(3) did not categorically exclude the application of equitable defenses to limit CGI’s remedies, even when the plan expressly disclaimed their application, because prohibiting assertion of equitable limitations to CGI’s remedies could not constitute “appropriate equitable relief.” The Supreme Court rejected the Third and Ninth Circuit’s construction of “appropriate equitable relief” in its April 16, 2013 opinion in McCutchen.
The Supreme Court’s Decision
The Supreme Court granted certiorari to resolve the circuit split and held that equitable defenses could not be used to defeat a plan’s clear terms because those equitable defenses were “‘beside the point’ when parties demand what they bargained for in a valid agreement.” ERISA §502(a)(3) provided plan fiduciaries with the right to obtain “appropriate equitable relief” to enforce “the terms of the plan,” which reflected “ERISA’s principal function: to protect contractually defined benefits.” Equitable defenses were therefore unavailable to alter express contract terms. “The agreement itself becomes the measure of the parties’ equities.”
The Supreme Court went on to hold, however, that equitable principles could be used to inform, explain, or fill in gaps where the plan was silent. If plan sponsors wish to depart from well-established common law equitable doctrines, they have to specifically draft the plan to say so. Because U.S. Airways’ plan was silent as to the allocation of attorney’s fees, the District Court erred when it found that the plan repudiated the equitable common-fund doctrine. Because a “party would not typically expect or intend a plan saying nothing about attorney’s fees to abrogate so strong and uniform a background rule” as the common-fund doctrine, “a court should be loath to read such a plan in that way.” Accordingly, because the U.S. Airways’ plan reimbursement provision did not expressly state how to address the costs of recovery and attorney’s fees, the plan was properly read to retain the common fund doctrine, enabling McCutchen to offset his attorney’s fees from U.S. Airways’ reimbursement claim.
In McCutchen, the Supreme Court resoundingly reinforced the notion that a plan’s terms, not background legal principles, are essential to defining the relationship and rights between participants, beneficiaries, fiduciaries, and the plan.1 “The plan, in short, is at the center of ERISA,” and the statutory scheme “is built around reliance on the face of written plan documents.” If a plan’s terms are clear, unambiguous, and in accord with ERISA, those terms should be enforced; background equitable principles cannot be used to alter or amend such a plan’s express terms. As the Supreme Court strongly suggested when it simultaneously granted certiorari, vacated and remanded the Ninth Circuit’s decision in Rose after publishing its decision in McCutchen, even terms as seemingly onerous as those at issue in Rose, expressly deviating from several common law rules, should be upheld by a court. It is only when a plan is silent or ambiguous as to a particular issue that background equitable principles can be used to fill the gaps. At its root, the Supreme Court’s decision in McCutchen strongly reinforces the notion that the terms of an ERISA plan should be reviewed periodically and carefully, because they are controlling.
1 Although the Supreme Court may sometimes use the imprecise term “beneficiaries” to refer to both participants and beneficiaries, we are careful to maintain the distinction.