US Airways Wins Supreme Court Victory in ERISA Case

The U.S. Supreme Court held yesterday that US Airways could recover costs of medical treatment for an employee who settled his personal injury claim, based on the terms of its employee benefit plan – and that unjust enrichment principles could not override that language. The Supreme Court reversed the Third Circuit Court of Appeals 2011 ruling in US Airways v. McCutchen [1], which held that US Airways – as administrator of a self-funded ERISA plan for its employees – was not entitled to receive full reimbursement for medical expenses it paid on behalf of a worker, because full reimbursement was inequitable. Although, the Supreme Court did find that the common fund doctrine (which addresses how to pay for the costs of a third-party recovery) applied to this case, it appears that this holding will be limited to plans that do not expressly address the issue.

The case stems from severe injuries a then-US Airways employee – James McCutchen – suffered in a car accident. US Airways sponsored McCutchen’s health insurance and paid $66,866 for medical treatment related to McCutchen’s injuries from the accident, which rendered him functionally disabled. McCutchen ultimately recovered a total settlement of $110,000 for his injuries in the accident, but after legal fees and costs were accounted for, he received less than $66,000.

US Airways then filed suit under ERISA, or the Employee Retirement Income Security Act of 1974, to recover the costs of McCutchen’s medical treatment, and a federal court in Pennsylvania held that McCutchen had to reimburse US Airways the entire amount the company paid for his treatment. [2] The federal court’s decision meant that McCutchen would be faced with paying the company more than $25,000 out of his own pocket – effectively negating his recovery from the underlying litigation. The District Court held that US Airways was entitled to fully recover the funds based on the language of its benefits plan summary description. [3]

US Airways had argued that it was entitled to the funds it spent on McCutchen’s care – regardless of the legal costs he incurred to obtain that money. Under ERISA, rights to enforce plan terms are limited to an injunction or “other appropriate equitable relief. ”[4] McCutchen argued that US Airways would receive a windfall, or be unjustly enriched, if it recovered the entire $66,866 the company’s health plan spent on his medical treatment, without any allocation for the costs he incurred to obtain that recovery. The Third Circuit held that the language of the ERISA statute meant that McCutchen should be able to raise the defense of unjust enrichment. Additionally, the Third Circuit held that requiring McCutchen to fully reimburse the airline would be inappropriate since that full amount exceeded his personal recovery.

The Supreme Court’s decision reverses the Third Circuit and instead holds that the terms of an ERISA plan govern in actions brought under that specific portion of the federal law, § 502(a)(3). The Court based its decision, in part, on the idea that subrogation and reimbursement provisions of self-funded ERISA plans are seeking to enforce rights that are based on the contract itself. [5] Relying on a previous decision, [6] the Court found that proper enforcement of this type of “equitable lien by agreement” is accomplished by holding the parties to their mutual promises as reflected in the plan contract. Accordingly, the Court rejected the application of general principles of equity (e.g., unjust enrichment) where a health plan’s terms contradict those rules.

Notably, the Court’s ruling also contained a second holding stating that equitable principles may apply where the plan language is silent on the terms at issue. Ultimately, in this case, the Court found the plan to be silent as to how to account for the costs of obtaining the third-party recovery. [7] Overall, yesterday’s decision sets plan language as the ultimate guide on ERISA health plan reimbursement but leaves room for the application of doctrines such as the common fund rule where the plan language is silent.

Yesterday’s decision marks an end to a recent trend in case law. Previously, both the Third Circuit, in the underlying case, and the Ninth Circuit [8], held that equitable principles could be applied to an ERISA plan’s claim for reimbursement, despite plan language to the contrary. This ruling indicates that plan language will ultimately control the scope of the reimbursement claim preventing equitable principles from overriding that language.

We recommend that plaintiff’s attorneys work to identify clients who may have received injury-related care from ERISA plans, and if clients have received such care, what repayment obligations could be triggered. We believe that in today’s settlement environment a procedure must be implemented – beginning with case intake – to pinpoint healthcare reimbursement obligations as early as possible. Furthermore, the importance of plan evaluation and pre-settlement discussions to resolve potential ERISA reimbursement obligations is now greater than ever.

Stay tuned for further updates on the impact of the Supreme Court’s decision. If you have any questions, please contact: Michael Russell at mrussell@garretsongroup.com or (704) 559-4300 or Charles Medlin at cmedlin@garretsongroup.com or (704) 559 4300.

[1] US Airways v. McCutchen, 663 F.3d 671 (3^rd Cir. 2011).