Supreme Court Reinforces Importance of Uniform Application of Clear ERISA Plan Language in U.S. Airways v. McCutchen

Last week, the U.S. Supreme Court issued its opinion in U.S. Airways v. McCutchen, No. 11-1285, 569 U.S. __ (Apr. 16, 2013), and resolved a Circuit split on a question left unanswered by two previous rulings – Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) and Sereboff v. Mid Atlantic Med. Services, Inc., 547 U.S. 356 (2006) – involving the equitable enforcement provision of ERISA § 502(a)(3) (29 U.S.C. § 1132(a)(3)) ("§ 502(a)(3)"). The open question was this:  if § 502(a)(3) entitles plan administrators to seek reimbursement from a beneficiary on theories of equitable relief in certain scenarios, can beneficiaries likewise claim traditional equitable defenses to limit or prevent reimbursement? A majority of Circuits had favored the explicit terms of the plan and not permitted equitable defenses to prevent reimbursement under the terms of the plan, but a minority (including the Third Circuit in U.S. Airways) had allowed beneficiaries to raise equitable defenses in such circumstances. The Supreme Court's opinion sides with the majority view and clarifies that the importance of giving consistent and uniform effect to plan language generally trumps the role of equity in resolving actions brought under §502(a)(3) based on an equitable lien by agreement, provided that the plan language is sufficiently clear.

Great-West Life & Annuity Ins. Co. v. Knudson began to set the stage for the issues resolved by U.S. Airways. In Great-West Life, the beneficiary (Knudson) was injured in a car accident and received medical benefits from Great-West pursuant to an ERISA-governed plan. Knudson sued the third-party tortfeasor and received a settlement. As part of the settlement, most of Knudson's recovery was placed in a Special Needs Trust, with only a small amount going to Great-West. As a result, Great-West brought suit pursuant to § 502(a)(3), seeking to enforce provisions of the plan requiring beneficiaries to reimburse prior payments made by Great-West after receiving any third-party judgment. The Court held that because the beneficiary did not possess the settlement funds (which had been dispersed to a client trust account and the beneficiary's other creditors), Great-West was not seeking a category of relief that was typically available in equity. Instead, Great-West sought to obtain a form of legal relief – namely, the imposition of personal liability for the benefits the plan conferred upon the beneficiary. Consequently, the Court held that the suit was not proper under § 502(a)(3).

However, four years later in Sereboff v. Mid Atlantic Med. Services, Inc., the Supreme Court confronted a structurally similar case but reached a different result. Like Knudson, Sereboff had been injured in a car accident, the plan paid medical expenses, and Sereboff sued the third-party tortfeasor and received a settlement. But in this case, after the suit was commenced, Mid Atlantic (the plan administrator) had sent letters asserting a lien on anticipated proceeds pursuant to the terms of the plan. Sereboff refused to pay Mid Atlantic, and Mid Atlantic brought suit under § 502(a)(3). This time the Supreme Court held that a plan administrator's suit under § 502(a)(3) for equitable enforcement of a reimbursement provision – applicable to a particular share of specifically identifiable funds in the possession of the beneficiary – constituted an action to enforce an equitable lien by agreement. This type of action fit within the categories of equitable relief available under § 502(a)(3); as a result, the plan administrator properly sought equitable relief under that provision. However, in Sereboff, the Supreme Court did not address whether beneficiaries could assert equitable defenses in an action to enforce an equitable lien by agreement. The question naturally arose: if a plan can pursue reimbursement on an equitable theory under § 502(a)(3), shouldn't the beneficiary be able to raise equitable defenses? A Circuit split on this issue ensued.

The majority of Circuits held that equitable defenses were unavailable in § 502(a)(3) actions where those defenses would conflict with the written terms of the plan. See, e.g., Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232 (11th Cir. 2010) ("Because ERISA's primary purpose is to ensure the integrity of written, bargained-for benefit plans, the Plan must be enforced as written unless the Plan conflicts with the policies underlying ERISA or application of the common law is necessary to effectuate the purposes of ERISA.") (internal quotations and citations omitted). A minority of Circuits, including the Third Circuit (which decided the U.S. Airways case), held that by authorizing "appropriate equitable relief" under ERISA § 502(a)(3), Congress intended such relief to be limited by the equitable doctrines and defenses ordinarily applicable in those types of actions. See, e.g., CGI Technologies & Solutions, Inc. v. Rose, 683 F.3d 1113 (9th Cir. 2012) ("Absent an express indication that either Congress or the Supreme Court has limited a district court's powers to fashion 'appropriate equitable relief,' as contended by CGI, we decline to read such a contractual limitation into a statutory term."). Against this backdrop, the Supreme Court considered U.S. Airways v. McCutchen.

In this case, the beneficiary, James McCutchen, became totally disabled following a serious automobile accident. U.S. Airways, the ERISA plan administrator, paid $66,866 for his medical expenses. The beneficiary settled a lawsuit involving the automobile accident for $110,000. His net recovery after attorney's fees and costs was less than $66,000. U.S. Airways filed suit for "appropriate equitable relief" pursuant to § 502(a)(3). The District Court granted U.S. Airways' Motion for Summary Judgment and awarded it the full $66,866 reimbursement. The Third Circuit overturned the District Court and remanded the case for further consideration, ordering the lower court to consider the beneficiary's equitable defenses. U.S. Airways appealed the Third Circuit decision to the Supreme Court.

The beneficiary argued that when a plan brings an equitable action under § 502(a)(3) to enforce plan terms, certain equitable principles such as the "double-recovery rule" (permitting an insurer to recover only the share of the amount the insured received to compensate him or her for the same loss the insurer suffered) and the "common-fund rule" (providing that a litigant or lawyer who recovers a common fund for the benefit of other persons is entitled to reasonable attorney's fees from the fund as a whole) trump plan terms and prevent unjust enrichment. In contrast, the plan argued that equitable principles or defenses could not be employed to defeat the terms of the plan. The federal government, which filed an amicus brief in this case, argued that, although the plan, not equitable principles, provides the measure of relief due, courts have inherent authority to apportion litigation costs in accordance with equitable principles, even if this conflicts with the plan's terms.

Relying heavily on Sereboff, the Court held that the plan's suit really sought to enforce an equitable lien by agreement. Such an equitable action "arises from and serves to carry out a contract's provisions." U.S. Airways v. McCutchen, No. 11-1285, 569 U.S. __, slip op. at 8. Consequently, enforcing an equitable lien by agreement means holding the parties to their mutual promises. Here, that means applying the terms of the plan, and rejecting rules—such as the "double-recovery rule" or the "common-fund rule"—that are at odds with the parties' agreement. After all, § 502(a)(3) does not authorize equitable actions at large, but rather only equitable actions to enforce the terms of the plan. As the Court stated, "[t]hat limitation reflects ERISA's principal function: to 'protect contractually defined benefits.'" Id. at slip op. 11 (quoting Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 148 (1985)). In short, equitable defenses are not available in § 502(a)(3) actions based on equitable liens by agreement to the extent those defenses conflict with the terms of the plan.

The Court then held, however, that, where plan terms are silent or ambiguous on a particular issue, courts must look at the background of "common-sense understandings and legal principles that the parties may not have bothered to incorporate expressly but that operate as default rules to govern in the absence of a clear expression of the parties' [contrary] intent." Id. at slip op. 13 (quoting Wal-Mart Stores, Inc. Assoc. Health & Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir. 2000)). Here, the plan was silent on how to allocate attorney's fees. This was important because, absent the application of the common-fund rule, after attorney's fees (a 40% contingency fee) McCutchen would have been left with less money than the amount of medical expenses for which U.S. Airways was seeking reimbursement. The Court doubted that the parties had expected that the beneficiary "would pay for the privilege of serving as U.S. Airways' collection agent," and concluded that as a result "the common fund doctrine provides the appropriate default. . . . Only if U.S. Airways' plan expressly addressed the costs of recovery would it alter the common-fund doctrine." Id. at slip op. 12, 16. This portion of the opinion thus has the practical effect of saving McCutchen from potentially having to reimburse U.S. Airways in part out of his own pocket. In a partial dissent to this portion of the opinion, Justice Scalia (joined by Chief Justice Roberts and Justices Thomas and Alito) contended that the question on which the Court originally granted certiorari presumed the terms were unambiguous (and not subject even in part to a common-fund rule analysis).

Ultimately the Court remanded for further proceedings consistent with the opinion, and the specifics of McCutchen's dispute with U.S. Airways will continue to play themselves out in the lower courts. But the big picture takeaway for others facing similar issues is that equity cannot override the plain terms of an ERISA plan, so long as those terms are clear. Going forward, such a rule may make for hard results in specific individual circumstances but serves the greater good of developing a uniform landscape for consistent administration of benefit plans nationwide.