On April 16, 2013, the United States Supreme Court clarified how equitable principles interact with the plan language of self-funded ERISA health plans. The question presented to the Court was: Should the principles of “common fund,” often referred to as a reduction for attorney fees, and “made whole,” the principle requiring full compensation to the injured party before subrogating parties are allowed to recover, overcome express plan language abrogating those principles? Sadly, the Court has ruled that they should not. This ruling effectively turns back the clock on the rights of the ERISA plans to their status from 2006 (Sereboff v. Mid Atlantic Medical Services, Inc., 126 S. Ct. 1869 (2006) until 2011 (US Airways v. McCutchen, 663 F.3d 671 (3rdCir. 2011). With clear, express plan language, the ERISA plan can demand a full repayment for medical benefits it has paid on behalf of the injured plaintiff. (U.S. Airways v. McCutchen, 569 U. S. (2013); See, Zurich American Insurance Co. v. O’Hara 604 F .3d 1232 (11th Cir. 2010), Admin. Comm. of Wal–Mart Stores, Inc. Associates’ Health & Welfare Plan v. Shank, 500 F.3d 834 (8th Cir.2007); Administrative Committee of Wal–Mart Stores, Inc. Assocs.’ Health & Welfare Plan v. Varco, 338 F.3d 680 (7th Cir.2003); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348 (5th Cir.2003)).
The ruling in this case unifies the Circuits and will likely empower recovery vendors to press for larger recoveries and many may cease to reduce their demands even in the most inequitable circumstance. This ruling makes addressing and resolving self-funded ERISA liens a significant issue for the plaintiff’s bar. The argument raised by Mr. McCutchen, and the circumstance in which he found himself are ones which many plaintiff’s attorney have experienced.
“In January 2007, McCutchen suffered serious injuries when another driver lost control of her car and collided with McCutchen’s…McCutchen retained attorneys, in exchange for a 40% contingency fee, to seek recovery of all his accident-related damages, estimated to exceed $1 million. The attorneys sued the driver responsible for the crash, but settled for only $10,000 because she had limited insurance coverage and the accident had killed or seriously injured three other people. Counsel also secured a payment from McCutchen’s own automobile insurer of $100,000, the maximum amount available under his policy. McCutchen thus received $110,000—and after deducting $44,000 for the lawyer’s fee, $66,000.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 2).
“[] US Airways paid $66,866 in medical expenses for injuries suffered by [] McCutchen … The plan entitled US Airways to reimbursement if McCutchen later recovered money from the third party [including his own insurance] … US Air-ways demanded reimbursement of the full $66,866 it had paid. When McCutchen did not comply, US Airways filed suit under ERISA [requesting the $41,500 being held in an escrow account and $25,366 more in McCutchen’s possession].”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., syllabus).
Counsel for McCutchen raised the arguments that every plaintiff attorney raises with logic and equity on their side.
“McCutchen rais[ed] two defenses… First, he maintained that US Airways could not receive the relief it sought because he had recovered only a small portion of his total damages; absent over-recovery on his part, US Airways’ right to reimbursement did not kick in [read as “made whole” doctrine]. Second, he contended that US Airways at least had to contribute its fair share to the costs he incurred to get his recovery; any reimbursement therefore had to be marked down by 40%, to cover the promised contingency fee [read as “common fund doctrine].”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 4).
Though it is not addressed by the court, I think most plaintiff’s attorneys would note the extra sting of repayment in this case where 90% of the settlement funds come from the plaintiff’s own first party insurance.
The Court ruled that the terms of the plan control since the contract for health benefits between an ERISA plan and its participants is a “bargained for exchanged” and equitable principles will not trump express plan language.
“McCutchen [] cannot rely on theories of unjust enrichment to defeat US Airways [] plan’s clear terms. Those principles, as we said in Sereboff, are ‘beside the point’ when parties demand what they bargained for in a valid agreement.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 9).
“The agreement itself becomes the measure of the parties’ equities; so if a contract abrogates the common-fund doctrine, the insurer is not unjustly enriched by claiming the benefit of its bargain.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 11).
“[If] [t]he express contract term … contradicts the background equitable rule … the agreement must govern.
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 14).
These are dire words for the plaintiff’s attorney as the insurance industry has spent the years since Sereboff drafting plan language to address just these specific equitable principles. However, there is a glimmer of hope in that the court has made it clear that the language abrogating these doctrines must be clear and express.
“[If] the plan is silent on the allocation of attorney’s fees, []in those circumstances, the common-fund doctrine provides the appropriate default. In other words, if US Airways wished to depart from the well-established common-fund rule, it had to draft its contract to say so …”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 12).
“The words of a plan may speak clearly, but they may also leave gaps. And so a court must often “look outside the plan’s written language” to decide what an agreement means. CIGNA Corp. v. Amara, 563 U. S. , (slip op., at 13); see Curtiss-Wright, 514 U. S., at 80–81.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 13).
“To be sure, the plan’s allocation formula—first claim on the recovery goes to US Airways—might operate on every dollar received from a third party … [b]ut alternatively that formula could apply to only the true recovery, after the costs of obtaining it are deducted.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 14).
The Court significantly bolsters the argument that absent plan language the “common fund” doctrine applies.
“A party would not typically expect or intend a plan saying nothing about attorney’s fees to abrogate so strong and uniform a back ground rule. And that means a court should be loath to read such a plan in that way”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 15).
“The rationale for the common-fund rule reinforces [the] conclusion [that] [t]hird-party recoveries do not often come free: To get one, an insured must incur lawyer’s fees and expenses. Without cost sharing, the insurer free rides on its beneficiary’s efforts—taking the fruits while contributing nothing to the labor.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 16).
Yet despite their clear support and understanding of the need for the equitable principle of the “common fund” doctrine, they impose a Draconian result on Mr. McCutchen and all plaintiffs who are participating in self-funded ERISA plans. The result is so self-evident that the Court acknowledges it themselves.
“[I]n some cases—indeed, in this case—the beneficiary is made worse off by pursuing a third party. Recall that McCutchen spent $44,000 (rep resenting a 40% contingency fee) to get $110,000, leaving him with a real recovery of $66,000. But US Airways claimed $66,866 in medical expenses. That would put McCutchen $866 in the hole; in effect, he would pay for the privilege of serving as US Airways’ collection agent.”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 16).
The lesson for the wise plaintiff’s lawyer is to address resolution of your client’s self-funded ERISA plan early on in the case. It would be an unhappy client who spent years in litigation, depositions, hearings, mediations, and even trials to learn that it had all been for the benefit of the “health insurance company” they had been paying “premiums” to for potentially years prior and during the litigation. The plaintiff’s attorney must now evaluate accepting cases at all that have large self-funded ERISA liens and limited recovery potential.
“When the next McCutchen comes along, he is not likely to relieve US Airways of the costs of recovery. See Blackburn v. Sundstrand Corp., 115 F. 3d 493, 496 (CA7 1997) (Easterbrook, J.) (“[I]f . . . injured persons could not charge legal costs against recoveries, people like [McCutchen] would in the future have every reason” to make different judgments about bringing suit, “throwing on plans the burden and expense of collection”).”
U.S. Airways v. McCutchen, 569 U. S. (2013)(slip op., at 16).
The plaintiff’s bar is now thrust back to the future and must forego arguments of equity and return to the contract based arguments that were fashioned pre-McCutchen. Remember that the burden is on the ERISA plan to be clear in its plan language, the requirements of Sereboff still are enforceable, and the Plan Administrator must still comply with the demands of 29 U.S. 1024(b)(4). These and other statutory and contractual arguments remain for the plaintiff’s attorney who must confront a subrogation/reimbursement claim from a self-funded ERISA plan. However, the luxury of dealing with “lien issues” at the close of litigation is one that can no longer be enjoyed by the wise plaintiff’s attorney.
