Equitable Defenses Cannot Override Express Plan Terms In ERISA Action For Equitable Relief, Supreme Court Rules

An ERISA plan’s express terms govern in an ERISA Sec. 502(a)(3) action for equitable relief, and equitable doctrines based on unjust enrichment principles cannot override the plan in such equitable-lien-by-agreement cases, the U.S. Supreme Court has ruled in US Airways v. McCutchen. Although neither the double-recovery rule nor common-fund doctrine can override the clear terms of an ERISA plan’s reimbursement provision, the common-fund rule might aid in construing such a provision where the plan is silent about allocating the costs of recovery, the Court also found.

Background. In January 2007, James McCutchen, an employee of US Airways and a participant in its self-funded health plan, was injured in a car accident. The plan paid $66,866 in medical expenses arising from the accident on McCutchen’s behalf. McCutchen retained attorneys, in exchange for a 40 percent contingency fee and eventually recovered $110,000 for his damages. After deducting $44,000 for attorneys’ fees, he received $66,000. Upon learning of McCutchen’s recovery, US Airways demanded reimbursement of the $66,866 it had paid in medical expenses. US Airways based its claim on a reimbursement provision in its summary plan description. McCutchen denied that US Airways was entitled to any reimbursement, and, thus, US Airways filed an action under ERISA Sec. 502(a)(3) seeking “appropriate equitable relief” to enforce the plan’s reimbursement provision.

Lower court proceedings. In the district court, McCutchen argued that US Airways could not receive the relief it sought because he had recovered only a small portion of his total damages. He also contended that US Airways at least had to contribute its fair share to the costs he incurred to get his recovery. Thus, any reimbursement had to be marked down by 40 percent to cover the promised contingency fee. The district court rejected both arguments, finding that the plan clearly provided for full reimbursement of the medical expenses paid. The Third Circuit U.S. Court of Appeals vacated the district court’s order. It found that in a suit for “appropriate equitable relief” under ERISA Sec. 502(a)(3), a court must apply any equitable doctrines and defenses that traditionally limited the relief requested. The Third Circuit instructed the district court to determine what amount would qualify as “appropriate equitable relief.”

Role of equitable defenses. The Supreme Court first reiterated that US Airways was allowed to bring suit under ERISA Sec. 502(a)(3) for “appropriate equitable relief” to enforce the terms of the plan. Like the reimbursement claim in Sereboff v. Mid-Atlantic Medical Services, US Airways’ claim was an action in equity to enforce a contract-based lien, which is called an “equitable lien by agreement.”

The Court then indicated that the question in this case concerned the role that equitable defenses alleging unjust enrichment might play in this type of lawsuit. McCutchen alleged that two specific equitable doctrines defeated the reimbursement provision. First, he contended that an insurer in US Airways’ position could recoup no more than an insured’s “double-recovery,” which is the amount the insured has received from a third party to compensate for the same loss the insurance covered. Second, he claimed that the common-fund doctrine would reduce any award to US Airways. That doctrine provides a reasonable attorney’s fee to a person who recovered a common fund for the benefit of someone other than himself or his client.

The Court rejected McCutchen’s attempt to apply these two equitable defenses in a suit involving an equitable lien by agreement. By its definition, an equitable lien by agreement “both arises from and serves to carry out a contract’s provisions.” Thus, “enforcing the lien means holding the parties to their mutual promises,” the Court wrote. The Court also said enforcing the lien means “declining to apply rules—even if they would be ‘equitable’ in a contract’s absence—at odds with the parties expressed commitments.” As such, the Court held that McCutchen could not rely on theories of unjust enrichment to defeat the plan’s clear terms.

The Court indicated that it did not find anything that contradicted this ruling in the historic practice of equity courts. In some of the cases McCutchen offered, the courts applied equitable doctrines in the absence of any relevant contract provision. In other cases, the courts found those rules to comport with the applicable contract term. Yet in none of these cases did an equity court apply the double-recovery or common-fund rule to override a plain contract term.

Further, this result supports “ERISA’s focus on what a plan provides,” according to the Court. ERISA Sec. 502(a)(3) does not authorize appropriate equitable relief at large, but rather, is limited to relief that will enforce the plan’s terms.

Defense might aid contract interpretation. The Court also concluded that the common-fund doctrine might aid in construing a reimbursement provision when, as in this case, the plan is silent on the allocation of attorney’s fees. Ordinary principles of contract interpretation allow courts to construe contracts, including ERISA plans, by looking to “other manifestations of the parties’ intent.” Where the words of a plan leave gaps, courts consider background legal rules to decide what an agreement means. These legal rules operate as default rules when the parties’ intent is not clear. As such, given the contractual gap regarding how to pay for the costs of a third-party recovery, the common-fund doctrine provides the best indication of the parties’ intent in this case.

On the other hand, when an express contract term contradicts a background legal rule, the contract governs. Here, the reimbursement provision gave US Airways first claim on the entire recovery from third parties; McCutchen would receive only whatever is left over. The double-recovery rule would give McCutchen the first claim on the portion of the recovery compensating for losses that the plan did not cover; US Airways’ claim would attach only to the share of the recovery for medical expenses. The plan’s allocation formula expressly contradicts the double-recovery rule. As such, the double-recovery rule cannot be considered in this case.

The Court vacated the judgment of the Third Circuit U.S. Court of Appeals and remanded the case for further proceedings.

Dissent. Four of the justices agreed with the Court’s opinion that equity doctrines cannot override the plain terms of a contract, but disagreed with the Court’s finding that the contract terms were not plain and that the common-fund doctrine should apply to fill the contractual gap. The dissent indicated that the Court granted certiorari “on a question that presumed the contract’s terms were unambiguous.” As such, the Court should not have addressed an issue that was not included in the question presented.

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