May 22, 2014

The Decline and Fall of Equitable Defenses Under ERISA

James P. Baker

A relatively obscure exclusion contained in most employer-sponsored medical plans states that injuries caused by third parties are not a covered expense. Notwithstanding this exclusion, a group medical plan participant’s third-party injury expenses are typically paid on condition that he or she repay the medical plan when any recovery for the injury is obtained. Because the Employee Retirement Income Security Act (ERISA) is a “comprehensive and reticulated statute,” (Great-West v. Knudson, 534 U.S. 204, 209 (2002)), enforcing a medical plan’s reimbursement provision is complicated. 

Litigation surrounding medical plan reimbursement provisions (often called “subrogation” clauses), which are regulated by ERISA has, no doubt, launched the careers of a thousand lawyers. Personal injury lawyers are usually on one side of these disputes. It is no doubt fair to say they are, in general, reluctant to share the spoils of any third-party recovery. The resulting avalanche of lawsuits between ERISA plans and participants (often represented by these same personal injury lawyers) over these third-party “spoils” has triggered a series of U.S. Supreme Court decisions. Until just a few years ago, ERISA lawyers did not know whether any federal court would enforce a medical plan’s subrogation clause. The Supreme Court eventually ruled in Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356 (2006), that these group medical plan reimbursement provisions were enforceable under ERISA. On April 16, 2013, the Supreme Court faced yet another medical plan subrogation dispute. The question presented to the Court in U.S. Airways, Inc. v. McCutchen, Case No. 11-1285, ___ U.S. ___, 133 S. Ct. 1537 (2013), was: can a plan participant injured by a third party, limit the ability of the medical plan to recover advanced medical expenses under the “common fund” or “make whole” equitable doctrines?  The common fund doctrine provides that a party that recovers monies to which others have a claim is entitled to recoup their fees and costs from the recovery. The make whole doctrine is the equitable principle that unless the parties contract otherwise, an insurer will not receive proceeds from a claim settlement unless settlement funds exceed full compensation for all loss. 

In U.S. Airways v. McCutchen, the Supreme Court resolved a circuit split about whether a federal court’s notions of fairness (equitable defenses) can override an ERISA medical plan’s reimbursement provision. In McCutchen, the plaintiff, Mr. McCutchen, was unhappy with the medical plan’s stingy subrogation clause. The plan mandated that if Mr. McCutchen recovered monies from a third party, the plan must be reimbursed for related claims payments made on Mr. McCutchen’s behalf. Mr. McCutchen asked the Supreme Court to use equity to rewrite the medical plan’s “unfair” repayment clause. The Supreme Court took a two-part approach to resolving the issue presented. Its first ruling was that ERISA’s written plan document rule prevented McCutchen from rewriting the terms of the repayment clause. The Court then found that this same repayment clause was hopelessly ambiguous. Using that opening, the Court stated the equitable “make whole” doctrine could be used to protect a significant share of Mr. McCutchen’s recovery. 

The Evolution of “Appropriate Equitable Relief” From 1993 to the Present

ERISA has limited civil enforcement mechanisms. A party seeking to bring a claim under ERISA is limited to bringing a claim for: (1) benefits under Section 502(a)(1)(B); (2) breach of fiduciary duty under Section 502(a)(2); or (3) equitable relief under Section 502(a)(3). Section 502(a)(3) allows an ERISA plan participant, beneficiary, or fiduciary to bring a civil action to enjoin actions which violate ERISA or to obtain “other appropriate equitable relief.” Over the last 20 years, the Supreme Court has issued a number of decisions that have elaborated on what the phrase “appropriate equitable relief” means under ERISA §502(a)(3). Set forth below are descriptions of some of the major Supreme Court decisions dealing with this question. 

Great-West Life & Annuity Ins. v. Knudson, 534 U.S. 204 (2002)

In Knudson, Jannette Knudson became a quadriplegic as the result of a car accident. Her husband’s medical plan covered $411,157.11 of her medical expenses. In 1993, the Knudsons filed a lawsuit in California state court against the car manufacturer and others. The parties negotiated a $650,000 settlement that allocated $256,745.30 to a special needs trust, $373,426 to attorney fees and costs, $5,000 to reimburse the California Medicaid Program, and $13,828.70 to reimburse Great-West’s subrogation claim under the plan. 

Great-West never cashed the $13,828.70 check. Instead, Great-West filed an action in the Central District of California seeking injunctive and declaratory relief under ERISA § 502(a)(3), 29 U.S.C. § 1132(a)(3). The plan’s reimbursement provision gave Great-West a “first lien upon any recovery, whether by settlement, judgment or otherwise” that a beneficiary received from a third party. Great-West sought to enforce the plan’s subrogation provisions and require the Knudsons to pay the plan $411,157.11 of any proceeds recovered from third parties. 

Ultimately, Great-West did not prevail in the Supreme Court. It could not recover “restitution” in the form of money from the Knudsons personally because this would be tantamount to a suit for legal relief for breach of contract. The Supreme Court explained that a plaintiff could seek restitution in equity as a constructive trust or an equitable lien where “money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” The settlement funds were not in Knudson’s possession because they had been distributed to a special needs trust and to her attorney. Great-West sought to enforce its right to reimbursement by enforcing the medical plan’s contractual terms. The Supreme Court rejected Great-West’s contractual reimbursement claim because seeking money damages is not a form of “other appropriate equitable relief” under ERISA Section 502(a)(3). 


Prior to the Supreme Court decision in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), the federal courts of appeals were in complete disagreement as to whether a medical plan could enforce its repayment provisions. The Sereboffs were injured in an automobile accident. Their medical expenses were paid by the Mid Atlantic Plan. Later, the Sereboffs filed a lawsuit in state court against several third parties and eventually settled for $750,000. Mid Atlantic sent the Sereboffs’ attorney several letters asserting a $75,000 lien on the anticipated proceeds from the lawsuit with respect to the medical expenses paid by the Mid Atlantic Plan, but the Sereboffs’ attorney never responded. 

Mid Atlantic then filed suit in federal court in Maryland asserting an equitable lien under ERISA § 502(a)(3). Mid Atlantic sought $75,000 from the Sereboffs for medical expenses it had paid on their behalf. Since the Sereboffs’ attorney had already paid out the settlement proceeds to the Sereboffs, Mid Atlantic sought a temporary restraining order and preliminary injunction requiring the Sereboffs to retain and set aside at least $75,000 from the settlement proceeds. The district court approved the parties’ stipulation to “preserve $75,000” of the settlement funds in an investment account until the court ruled on the merits of the case and all appeals, if any, were exhausted. 

Both the district court and the Fourth Circuit Court of Appeals found in Mid Atlantic’s favor on the merits. The Sereboffs were ordered to pay Mid Atlantic $75,000 plus interest, with a deduction for Mid Atlantic’s share of the attorneys’ fees and court costs the Sereboffs had incurred in state court. 

In a numinous decision authored by Chief Justice Roberts, the Supreme Court ruled that enforcing a medical plan’s repayment agreement qualifies as “equitable” relief under ERISA.  Signaling the importance of ERISA plan language in any ERISA analysis, the Sereboff decision begins with the plan’s terms. For Chief Justice Roberts, the medical plan acted properly by enforcing its repayment provision because it “followed the money.” This holding indicates that because ERISA plans are in essence contracts, a court can apply equitable remedies to enforce their terms. To paraphrase the Supreme Court, an ERISA-regulated medical plan’s contractual agreement for repayment can be enforced through “equity” under ERISA § 502(a)(3) by filing an action for an equitable lien or for a constructive trust. 

Medical plans seeking to enforce subrogation provisions can only do so by bringing equitable claims under ERISA § 502(a)(3). In its Sereboff decision, the Court left an opening for future litigants to argue that the contract-based relief Mid Atlantic requested was “equitable” but not “appropriate” under ERISA § 502(a)(3), because it contravened equitable principles like the “make-whole doctrine.” The Court did not determine whether the term “appropriate” modifies the amount of relief available to an ERISA plan for an equitable claim of reimbursement. The Supreme Court would take up the meaning of the word "appropriate" seven years later in McCutchen

US Airways, Inc. v. McCutchen, 569 U.S. ___, 133 S. Ct. 1537 (2013)

In McCutchen, the Supreme Court unanimously rejected an attempt to use equitable defenses to circumvent the written terms of an ERISA-regulated medical plan. The Court explained: 


In January 2007, James McCutchen was seriously injured when another driver lost control of her car and collided with his car. McCutchen was a participant in US Airways self-funded medical plan. In the wake of the accident, the plan paid medical expenses on his behalf. McCutchen successfully sued third parties, recovering $110,000. Despite the fact that the plan contained a provision requiring participants to reimburse the plan “out of any monies recovered from a third party,” McCutchen refused to reimburse the plan for the money it spent on his medical expenses. 

The fiduciaries for the US Airways medical plan sued McCutchen, seeking to enforce this reimbursement provision. At the trial court, McCutchen argued that because the plan did not contribute any share of the costs that he incurred to obtain his recovery from the third parties, the plan’s reimbursement must be reduced by 40 percent to cover the contingency fee he paid his attorneys. The district court rejected McCutchen’s arguments and ruled in the plan’s favor. The Third Circuit reversed. It instructed the district court to determine what amount would qualify as appropriate equitable relief for McCutchen under ERISA. It viewed the reimbursement of the full $66,866 the medical plan had paid in medical expenses on McCutchen’s behalf as inequitable to McCutchen. 

The Supreme Court reversed. In a 5 to 4 decision, it ruled that the written terms of the medical plan prevail over any potential equitable defenses such as the “common fund” or “make whole” doctrines. The Supreme Court did not leave Mr. McCutchen empty-handed. It ruled there was a “contractual gap” in the plan because the plan’s reimbursement provision was silent as to how to allocate the costs of recovery. Inasmuch as the plan said nothing about the costs of recovery, the majority determined that the common-fund doctrine provided the best indication of the parties’ intent. The common-fund doctrine would require McCutchen’s attorneys’ fees to be paid before the medical plan was reimbursed. The four dissenters agreed with the majority that the written terms of the medical plan trump any potential equitable considerations or defenses. 

At the end of the day, all nine justices of the United States Supreme Court in McCutchen agreed that “equity cannot override the plain terms of [an ERISA] contract.” The Justices rejected a pair of equitable defenses involving a subrogation dispute arising under an ERISA-regulated medical plan (emphasis added): 

The result we reach, based on the historical analysis our prior cases prescribe, fits lock and key with ERISA’s focus on what a plan provides. The section under which this suit is brought “does not, after all, authorize ‘appropriate equitable relief’ at large,” Mertens, 508 U.S. at 253, 113 S. Ct. 2063, 124 L. Ed. 2d 161 (quoting §1132(a)(3)); rather, it countenances only such relief as will enforce “the terms of the plan” or the statute, §1132(a)(3) (emphasis added). That limitation reflects ERISA’s principal function: to “protect contractually defined benefits.” Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 148, 105 S. Ct. 3085, 87 L. Ed. 2d 96 (1985). The statutory scheme, we have often noted, “is built around reliance on the face of written plan documents.Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83, 115 S. Ct. 1223, 131 L. Ed. 2d 94 (1995). “Every employee benefit plan shall be established and maintained pursuant to a written instrument,” §1102(a)(1), and an administrator must act “in accordance with the documents and instruments governing the plan” insofar as they accord with the statute, §1104(a)(1)(D). The plan, in short, is at the center of ERISA. And precluding McCutchen’s equitable defenses from overriding plain contract terms helps it to remain there.

The rule adopted by the McCutchen decision is that the written terms of the ERISA medical plan prevail over any potential equitable defenses. Plan sponsors who want to avoid the potential application of the common fund doctrine should make sure that the plan contains express language overriding its application. 

Plan Sponsors Should Consider Self-Help

The take-home lesson of McCutchen is that equitable defenses cannot overcome the clear written terms of an ERISA-regulated plan. Group medical plan sponsors should first, heed the Supreme Court’s instruction in Sereboff – subrogation and/or reimbursement clauses must assert equitable claims such as a constructive trust or an equitable lien in order to be enforceable. Plan sponsors should also follow McCutchen’s teaching that subrogation clauses must “say what they mean.” If the medical plan’s subrogation provision is not intended to permit any offsets, under equity, common law or otherwise, it should say just that.



James P. Baker

James P. Baker is a partner at Baker & McKenzie LLP in San Francisco.