During the U.S. Supreme Court’s upcoming term, the court is scheduled to hear the case of U.S. Airways v. McCutchen, 663 F.3d 671 (3d Cir. 2011), which was the subject of an earlier article of mine (“McCutchen may influence other court decisions,” Nov. 25, 2011).

McCutchen will address the complex question of whether equitable principles may override contrary employee benefit plan provisions. Since the issuance of the 3rd U.S. Circuit Court of Appeals opinion, another opinion, CGI Technologies and Solutions, Inc. v. Rose, 683 F.3d 1113 (9th Cir. 2012), concurred with McCutchen in holding that equity trumps contract.

In McCutchen, the medical benefit plan sponsored by U.S. Airways sought reimbursement of benefits it had paid to McCutchen when he recovered damages in a personal-injury suit. McCutchen resisted reimbursing the full amount and sought a reduction based on the attorney fees he incurred in pursuing the injury claim. However, U.S. Airways maintained that its benefit plan expressly excluded recognition of equitable considerations such as the common fund doctrine.

The common fund doctrine was explained in Baier v. State Farm Insurance Co., 66 Ill.2d 119, 125, 5 Ill.Dec. 572, 361 N.E.2d 1100 (1977) as providing “that an attorney who performs services in creating a fund should, in equity and good conscience, be allowed compensation from all those who seek to benefit from the fund recovered.”

The issue before the Supreme Court was reserved in a prior ruling, Sereboff v. Mid-Atlantic Medical Services, Inc., 126 S.Ct. 1869 (2006), which also involved a reimbursement claim. There, the court noted in Footnote 2 of its opinion:

“The Sereboffs argue that, even if the relief Mid-Atlantic sought was “equitable” under Section 502(a)(3), it was not “appropriate” under that provision in that it contravened principles like the make-whole doctrine. Neither the district court nor the court of appeals considered the argument that Mid-Atlantic’s claim was not “appropriate” apart from the contention that it was not “equitable” and from our examination of the record it does not appear that the Sereboffs raised this distinct assertion below. We decline to consider it for the first time here. See National Collegiate Athletic Assn v. Smith. 525 U.S. 459, 470, 119 S. Ct. 924, 142 L. Ed. 2d 929 (1999).

In defining what is meant by “appropriate” equitable relief, the 3rd Circuit (and the 9th Circuit in CGI Technologies) relied on the same sources outlining the scope of equitable rights and remedies referenced by the Supreme Court in Great West Life & Annuity Ins.Co. v. Knudson. 534 U.S. 204 (2002): Dobbs on Remedies, Palmer on Restitution, Corbin on Contracts and the Restatements. Those sources all recognized the principle of unjust enrichment as a limit upon the trustee’s powers irrespective of the language in the benefit plan.

Hence, since Congress limited the relief available to plan administrators in ERISA cases pursuant to Section 502(a)(3) of the statute to “appropriate equitable relief,” the term “appropriate” meant the available relief had to be limited to what was equitable and just under the circumstances. Accordingly, both courts further ruled that contractual language in benefit plans is “not as sacrosanct as it is normally considered to be when applying breach of contract principles at common law.” McCutchen added that U.S. Airways would receive a “windfall” even though it failed to “exercise its subrogation rights or contribute to the cost of obtaining the third-party recovery. Equity abhors a windfall.” (citation omitted).

There is also a secondary issue as to whether U.S. Airways’ claim violates ERISA’s anti-inurement provision, 29 U.S.C. Section 1103(c)(1), which prohibits plan assets from inuring to the benefit of the employer. Professor Roger Baron of the University of South Dakota School of Law has written extensively on this issue, arguing that reimbursements are not paid to the respective benefit plans but inure either to the employer or the insurer underwriting the benefits. For example, in “ERISA Reimbursement Proceeds: Where Does the Money Go?” Minnesota Trial, Spring 2010 (available at erisawithprofessorbaron.com/published-articles/), Baron and his co-author lay out a convincing case questioning the legality of reimbursement actions. He also challenges the argument that reimbursements reduce premiums.

Although McCutchen does not directly address the “proportionality doctrine,” another equitable issue, it may also be considered by the court. The proportionality doctrine limits reimbursements to an amount proportionate to the plaintiff’s recovery – thus, if an injured party receives a recovery of only 25 percent of the value of her injuries, the reimbursement claim would be limited to the same percentage.

Several states are looking into legislation mandating consideration of proportionality and Illinois recently adopted an amendment to the Illinois Health Care Services Lien Act, 770 ILCS 23/1, et seq., which imposes a proportionality limitation on insurers’ reimbursement rights. See, Adam Lasker, “Insurance companies and P-I plaintiffs will share recoveries if governor signs bill,” Illinois Bar Journal (August 2012).

McCutchen is expected to be decided by the court by mid-2013.

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