On June 25, 2012, the U.S. Supreme Court agreed to review the decision of the Third Circuit Court of Appeals in U.S. Airways v. McCutchen. The case concerns the U.S. Airways ERISA welfare benefit plan’s efforts to enforce the plan’s reimbursement provisions, which require plan participants or beneficiaries to reimburse the plan for benefits the plan pays due to injuries caused by third parties out of any settlement fund recovered from a third party or other insurance.
Plan participant McCutchen was injured in an automobile accident, and the plan paid his medical expenses. When McCutchen recovered a settlement from the other motorist and a third-party underinsured motorist carrier, the plan, citing the reimbursement language, requested that McCutchen reimburse the plan out of the settlement; McCutchen and his lawyers refused. The employer then brought suit under section 502(a)(3) of ERISA, which permits plan fiduciaries to bring an action in federal court for “appropriate equitable relief . . . to enforce plan terms.” The Supreme Court previously ruled, in Sereboff v. Mid-Atlantic Medical Services, 547 U.S. 356 (2006), that a lawsuit of this nature was “appropriate equitable relief” under ERISA because plan terms like the one in the U.S. Airways plan create an “equitable lien by agreement” – a form of relief “typically available in equity.” In other words, ERISA plan reimbursement terms, if properly drafted, give the plan an equitable right to a share of a future settlement fund, before the fund even exists. The district court agreed and granted summary judgment in favor of the employer, enforcing the plan reimbursement provisions, finding them to be unambiguous and enforceable as written under section 502(a)(3). The district court rejected the defendant’s arguments that enforcing the plan terms as written would be unfair because the employee was not made whole by his settlement, and that the reimbursement amount should be reduced to require the plan to pay a portion of the attorneys’ fees he incurred in obtaining the settlement.
Third Circuit Create a Split
The Third Circuit Court of Appeals reversed on November 16, 2011. Even though the court found that the plan terms unambiguously required full reimbursement in the amount of benefits paid—out of the settlement the employee received—it refused to enforce those plan terms. Instead, it found that the statutory reference to “appropriate equitable relief” meant that courts should utilize a case-by-case approach to ask whether the relief sought was “appropriate” in a given case, in light of equitable principles. Specifically, the Third Circuit found that the word “appropriate” in the phrase “appropriate equitable relief” meant that “traditional equitable principles and defenses” applied, and “remedies that peculiarly belong to traditional categories of equitable relief would typically have been defeated by equitable principles and defenses.” It then applied principles of “unjust enrichment” and concluded that full reimbursement would be inequitable and unjust because the employer did not contribute to the cost of the employee’s receipt of the settlement, thus recovery would be a “windfall” to the plan. It also cited to the amount of the employee’s recovery, relative to the amount of reimbursement the plan sought, in finding that it would be “inequitable” and “unjust” to enforce the plan as written.
The court disavowed its own prior case law, which had previously held that unambiguous ERISA plan reimbursement language was to be enforced as written. It also openly acknowledged that its decision ran contrary to other courts of appeal that had construed ERISA section 502(a)(3) in the opposite manner. In particular, the courts of appeal for the 5th, 7th, 8th, and 11th Circuits had rejected arguments similar to those the Third Circuit embraced, with each circuit holding that the enforcement of ERISA plan reimbursement terms as written was “appropriate” within the meaning of section 502(a)(3) of ERISA, notwithstanding similar arguments to those raised by the employee. The Third Circuit opined that those cases analyzed the issue improperly and “departed from the text of ERISA.”
The Circuit Split Deepens, and the Supreme Court Grants Certiorari
The employer petitioned for Supreme Court review, arguing that the Court’s intervention was required to resolve the circuit split the Third Circuit’s ruling created. It posed the issue as: “[w]hether the Third Circuit correctly held — in conflict with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits — that Section 502(a)(3) of the Employee Retirement Income Security Act (ERISA) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan’s terms give it an absolute right to full reimbursement.”
Shortly before the Court granted certiorari in McCutchen, the circuit split deepened further in CGI Technologies and Solutions, Inc. v. Rose, in which the Ninth Circuit Court of Appeals acknowledged the circuit split McCutchen had created and elected to side with McCutchen. In Rose, the court refused to enforce clear and unambiguous ERISA plan language requiring reimbursement for benefits the plan paid, out of a third party settlement. In particular, the Ninth Circuit suggested that explicit ERISA plan language that disclaimed “equitable defenses” such as the “made whole doctrine” (prohibiting reimbursement until the injured participant is “made whole”) and “common fund doctrine” (requiring payment to the attorney who created the settlement fund) was not enforceable under section 502(a)(3). The court embraced the McCutchen “case-by-case” approach to weigh the “equities” of full reimbursement, while holding out the possibility that 100% reimbursement according to plan terms might be “appropriate” in a given case. Like the court in McCutchen, the Ninth Circuit provided little direction to the district court on what parameters to use in fashioning “appropriate” equitable relief.
In light of the Supreme Court’s grant of certiorari, ERISA plans can hope that the Court provides clear guidance on plans’ rights in this area, which had appeared fairly well-settled after Sereboffup until the rulings of the Third and Ninth Circuits.