The U.S. Supreme Court today decided 5-4 that a federal court can use equitable law principles when a group health plan contract governed by the Employee Retirement Income Security Act (ERISA) is silent about a legal issue.
James McCutchen, the plan enrollee in the case, U.S. Airways Inc. vs. McCutchen (11-1285), was badly hurt in an automobile collision caused by another motorist. He was working for US Airways, and his employer's plan paid $66,866 in medical expenses.
A lawyer helped McCutchen file a suit and recover $110,000. The lawyer deducted a 40 percent contingency fee from the award, then gave McCutchen $66,000.
US Airways demanded reimbursement for the full $66,866 it had paid, noting that a plan provision entitled it to reimbursement if an enrollee recovered damages from a third party.
McCutchen said that US Airways had no right to get more cash from him than he had received, and that US Airways had a responsibility to pay its fair share of the contingency fee.
A U.S. District Court judge ruled in favor of US Airways.
A three-judge panel at the 3rd U.S. Circuit Court of Appeals later threw out the District Court ruling, finding that US Airways could not get a windfall and leave McCutchen with less than full payment for his medical bills.
When the Supreme Court took up the US Airways case, it said the key question was whether the 3rd Circuit had correctly held that Section 502(a)(3) of 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."
The Supreme Court majority held in the ruling issued today that the plan sponsor, US Airways Inc., should have to pay its fair share of the contingency fee.
Even though the plan documents said US Airways had the right to recover reimbursement for medical expenses if an injured enrollee won a lawsuit and recovered damages, the plan documents said nothing about how the plan would handle the cost of recovering the damages, Justice Elena Kagan wrote in an opinion for the majority.
Normally, federal courts are not supposed to use "equitable law" doctrines — efforts to use traditional standards of fairness to do what seems right, rather than sticking rigidly to the letter of a law or document — when dealing with ERISA plan matters, Kagan said.
Kagan said equity cannot override the plain terms of an ERISA plan contract.
But, because the plan documents involved in the US Airways case say nothing about reimbursement for attorney's fees, the court can use the equitable law "common-fund" doctrine to handle the topic of allocation of responsibility for attorney's fees, Kagan said.
Under the common-fund doctrine, "a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund as a whole," Kagan said.
In US Airways, "without cost sharing, the insurer free rides on its beneficiary's efforts—taking the fruits while contributing nothing to the labor," Kagan wrote.
In that case, a beneficiary who won reimbursement would be worse than a beneficiary who did nothing, Kagan observed.
If a plan is going to impose a provision that produces such a strange outcome, it must specifically provide for that in the contract, Kagan said.
Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Anthony Kennedy joined in Kagan's opinion.
Justice Antonin Scalia wrote a dissenting opinion on behalf of himself, Chief Justice John Roberts, and justices Samuel Alito and Clarence Thomas.
Scalia said the majority had addressed an issue that was not in the question presented to the court, and that the court had agreed to consider a situation in which the ERISA plan contract's terms unambiguously entitled the plan an absolute right to full reimbursement.
In briefs, "full reimbursement" from monies recovered from a third party was defined to exclude "any contribution to attorney's fees and expenses," Scalia said.
Representatives for the parties involved were not immediately available to comment on the ruling.
In 2012, when the Supreme Court was considering the case, the Blue Cross and Blue Shield Association argued in a brief that letting courts vary unambiguous plan terms in equitable relief actions would increase plan costs and undermine the purposes of subrogation.
Howard Shapiro, an ERISA litigation specialist at Proskauer Rose, agreed with the Blues in a comment on the case that, if the Supreme Court held that equitable principles could override unambiguous plan provisions, "the ruling might lead to a lack of standards and problems for other benefit plans and fiduciaries."