U.S. Airways v. McCutchen (11-1285)

Following a serious car accident, James McCutchen received $66,866 to pay for his medical expenses from a benefit plan administered by his employer, US Airways. The Plan included a provision requiring beneficiaries to reimburse US Airways for claims “out of any monies recovered from a third party.” After receiving the Plan benefits, McCutchen hired counsel and sued third parties who were involved in accident, recovering a $10,000 settlement from one of the drivers involved in the accident and $100,000 in underinsured motorist coverage. US Airways subsequently sued McCutchen to recover the money they initially paid him by seeking “appropriate equitable relief” under ERISA Section 502(a)(3). US Airways maintains that the term “appropriate” in Section 502(a)(3) refers to the requirement that the type of “equitable relief” a plaintiff seeks be suitable under the circumstances to enforce the terms of the benefit plan and does not allow courts to use equity to rewrite contractual terms. McCutchen argues that courts have the authority to determine what constitutes “appropriate equitable relief” within the meaning of ERISA Section 502(a)(3) and, thus, are not required to enforce express plan terms. Supporters of the lower court’s decision argue that allowing courts to provide equitable relief would increase fairness and encourage beneficiaries to seek recovery from third parties. Opponents counter that affirming the lower court’s decision will increase ERISA litigation and threaten the financial viability of employee health benefit plans. 

Questions as Framed for the Court by the Parties: 

Whether the Third Circuit correctly held—in conflict with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits—that ERISA Section 502(a)(3) 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. 

Issue

Does ERISA Section 502(a)(3) allow courts to apply equitable principles to refuse to order a participant to reimburse the plan for medical coverage where the contract provides the plan with an absolute right to full reimbursement?

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Facts

Early in 2007, a young driver lost control of her car and crashed into James McCutchen’s vehicle. US Airways, Inc. v. McCutchen, 663 F.3d 671, 673 (3d Cir. 2011); Brief for Respondent, James McCutchen, at 4. Following the initial impact, another truck slammed into McCutchen’s car from behind. McCutchen, 663 F.3d at 673. The accident resulted in one death and caused two others to  suffer severe brain injuries. Id. McCutchen suffered serious life-threatening injuries that required emergency surgery and later required additional hip replacement surgery and physical therapy in the months following the crash. Id. The accident left McCutchen functionally disabled as McCutchen, who has a history of back surgeries and pain, continues to suffer from chronic pain that he cannot relieve with medication. Id.

Before the accident, McCutchen entered into a Health Benefit Plan (the “Plan”) administered and self-financed by his employer, US Airways. McCutchen, 663 F.3d at 673. The Plan paid McCutchen $66,866 to cover the medical expenses incurred from the accident. Id. After receiving the Plan payout McCutchen, with the assistance of counsel, sued the driver who caused the crash. Id. Because the young driver was underinsured and the accident killed or seriously injured three other people, McCutchen only recovered a $10,000 settlement from the young driver. Id. McCutchen also subsequently recovered $100,000 in underinsured motorist coverage. Id. From his $110,000 net recovery, McCutchen paid his lawyers 40% in contingency fees and legal expenses and retained less than $66,000. Id. 

Subsequently, US Airways demanded full reimbursement for the $66,866 it paid to cover McCutchen’s medical expenses. McCutchen, 663 F.3d at 673. In response, assuming that attorney’s fees were deductible pro rata from the reimbursement amount, McCutchen’s lawyers placed $41,500 in a trust account to reimburse US Airways. Id. US Airways then filed suit for the $41,500 in trust as well as the remaining $25,366 from McCutchen personally. Id. 

US Airways based its suit on Section 502(a)(3) of the Employee Retirement Security Act of 1974 ("ERISA"), which allows plan fiduciaries to sue for "appropriate equitable relief." McCutchen, 663 F.3d at 673; see also Employment Retirement Security Act of 1974, 29 U.S.C. § 1133. Relying on a subrogation clause in the Plan, which required reimbursement for "any monies recovered from a third party," the trial court decided that US Airways was entitled to the entire $66,866, regardless of legal expenses.See McCutchen, 663 F.3d at 674.  On appeal, the Court of Appeals for the Third Circuit decided that Section 502(a)(3) requires courts to provide relief in a manner that is equitable to both parties. Id.. at 679–80.  The Third Circuit determined that requiring McCutchen to reimburse the Plan fully would be inequitable because it would leave McCutchen with less than full coverage for his medical expenses while unjustly enriching US Airways, which did not exercise its subrogation rights or contribute to the cost of obtaining third-party recovery. Id. Therefore, the court ruled that McCutchen need not reimburse US Airways for the entire amount of his medical expenses and US Airways has appealed to the Supreme Court of the United States to reverse the Third Circuit’s ruling. Brief for Petitioner, US Airways at 51.

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Discussion

On appeal, US Airways, argues that the language of Section 502(a)(3) of the Employment Retirement Security Act of 1974 ("ERISA") requires courts to enforce the exact terms of health benefit contracts, including terms guaranteeing full reimbursement. See Brief for Petitioner, US Airways, at 15–16. James McCutchen argues that the Third Circuit properly applied equitable doctrines to provide a remedy that is fair for both parties. See Brief for Respondent, James McCutchen, at 11–13. The two sides disagree on the impact allowing courts to use equitable principles in reimbursement actions will have on both ERISA litigation and on health plan management.

Effect on ERISA Litigation

The Blue Cross Blue Shield Association ("Blue Cross") contends that allowing courts to consider equitable doctrines will increase the burden of ERISA litigation. Brief of Amicus Curiae Blue Cross Blue Shield Association ("Blue Cross") in Support of Petitioner at 8–9. Blue Cross argues that equitable doctrines would require courts and health plan providers to investigate and answer numerous complicated factual questions, rather than purely relying on the contract terms. See id. at 9–11. Moreover, the Chamber of Commerce claims that applying equitable principles to ERISA litigation will encourage all beneficiaries to take disputes to court. See Brief of Amicus Curiae Chamber of Commerce of the United States in Support of Petitioner at 14–15. According to the Chamber of Commerce, participants will see litigation as a chance to "get lucky" and convince a court to reduce their reimbursement responsibilities. Id. at 15–16. Central States Funds argue that, rather than negotiate with plan administrators, participants will litigate disputes, hoping to avoid the plan terms. See Brief of Amicus Curiae Central States in Support of Petitioner at 21.

The Pennsylvania Association for Justice counters that ensuing cases involving reimbursement rights will define how courts apply equitable principles. Brief of Amicus Curiae Pennsylvania Association for Justice in Support of Respondent at 9–10.  Moreover, the Pennsylvania Association for Justice contends that an equitable approach will promote mutually beneficial negotiations and settlements. See id. 7–9. In addition, the Pennsylvania Association for Justice maintains that allowing plan administrators to recover 100% of their reimbursements will discourage participants from suing third parties if they expect the recovery will be the same or less than their medical expenses. See id. at 6–7. Further, The Pennsylvania Association for Justice maintains that an equitable approach will incentivize plan participants to file good claims against third parties because participants can expect to receive some portion of any recovery. See Brief of Amicus Curiae Pennsylvania Association for Justice in Support of Respondent at 3–5.

Implications for Health Benefit Plan Management

Next, Blue Cross contends that allowing courts to use equitable principles to change health plan terms will lead to rising costs for beneficiaries and overall reductions of health plan benefits. See, e.g., Brief of Amicus Curiae Blue Cross at 7.  Specifically, Blue Cross argues that plan administrators rely on specific contract terms to calculate their costs, and plan administrators will struggle to determine their likely reimbursement if courts decide plan terms on a case-by-case basis. See id. Moreover, Blue Cross asserts that changing plan terms would shrink the overall plan assets because administrators would recover less in reimbursement. Brief for Amicus Curiae Blue Cross at 11–13. The Chamber of Commerce argues that this loss of funds—plus the higher costs of litigation—would be unfair to other participants, forcing plan administrators to raise premiums or cut benefits, or may even make health benefit plans insolvent. See Brief of Amicus Curiae Chamber of Commerce of the United States at 13, 17–19.

United Policyholders counters that because state law historically limited reimbursement rights, plan administrators have no experience in calculating reimbursements.Brief of Amicus Curiae United Policy Holders in Support of Respondent at 26–27. Thus, United Policyholders contends that future reimbursements are too remote for courts to consider as a factor for setting plan rates. See id. at 23. United Policyholders also maintains that reimbursement funds would benefit the company administering the plan and not the plan participants or beneficiaries. Brief of Amicus Curiae United Policyholders at 13–14. Moreover, because reimbursement funds will not flow to a plan’s assets, United Policyholders argues that there is no evidence indicating that allowing courts to change plans terms will lead to higher premiums or insolvency. See id. at 23.  

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Analysis

McCutchen argues that courts have the authority to determine what constitutes “appropriate equitable relief” within the meaning of ERISA Section 502(a)(3) and are not required to enforce express insurance plan terms. Brief for Respondent, James McCutchen at 26. US Airways maintains that the term “appropriate” in ERISA Section 502(a)(3) refers to the requirement that the type of “equitable relief” a plaintiff seeks be suitable under the circumstances to enforce the benefit plan and, thus, does not grant courts unbridled discretion to rewrite contractual terms. Brief for Petitioner, US Airways at 20–21.

Consistency with Congressional Intent

McCutchen argues that Congress purposely limited courts to granting “appropriate equitable relief” in Section 502(a)(3) because the purpose of ERISA is not to enforce plan terms, but to protect plan administrators and beneficiaries. Brief for Respondent, James McCutchen at 1, 28–29. McCutchen supports this assertion by noting that ERISA Section 502(a)(1)(B) allows beneficiaries to sue to enforce plan terms, but specifically bars fiduciaries from recovering under the same provision. Id. at 26. Thus, McCutchen maintains that the plain language of Section 502(a)(3) overrides any policy requiring the strict enforcement of plan terms. Id. at 29, 36.

US Airways maintains that appropriate equitable relief should be used to enforce the express terms of  the health plan and cites to the Supreme Court’s decision in Curtiss-Wright Corp. v. Schoonejongen and 29 U.S.C. § 1132(a)(1). Brief for Petitioner, US Airways at 5, 17; see also Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83 (1995) (quoting 29 U.S.C. § 1102(a)(1)). In Curtiss-Wright, the Supreme Court held that ERISA’s statutory framework relies on written plan documents and was not intended to facilitate beneficiaries’ efforts to amend plan terms. Curtiss-Wright, 514 U.S. at 83–85. Moreover, 29 U.S.C. Section 1132(a)(1) authorizes plan administrators to file suit to enforce their rights under the terms of the plan. US Airways argues that the language of Section 1132(a)(1) indicates that Congress intended courts to grant Section 1132(a)(1) claims to enforce, rather than override, explicit contractual language.Brief for Petitioner at 5, 17.

Compliance with Supreme Court Precedent

McCutchen argues that the Third Circuit’s application of equitable principles reflects a proper reading of Supreme Court precedent because the term “appropriate” is a term of limitation that restrains the availability of relief based upon traditional equitable principles. Brief for Respondent, James McCutchen at 24. McCutchen cites to numerous Supreme Court opinions supporting the court’s discretion in applying equitable rules instead of legal rules in ERISA cases. See id. at 24–26.  For example, McCutchen cites to Varity Corp. v. Howe where the Supreme Court determined that the term “appropriate” allows courts to contemplate the policy considerations of allowing or excluding certain remedies available under Section 502(a)(3). 516 U.S. 489, 515 (1996). Finally, McCutchen relies heavily on the Supreme Court’s decision in CIGNA Corp. v. Amara that determined courts should exercise discretion to determine “appropriate” relief for 502(a)(3) claims.CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011).  The Third Circuit applied the CIGNA holding in this case to determine that plans may be subject to modification or equitable reformation under Section 502(a)(3). US Airways, Inc. v. McCutchen, 663 F.3d 671, 679 (3d Cir. 2011).

US Airways contends that the Third Circuit’s holding was based on a mistake of law because the court applied equitable principles pertaining to an equitable lien imposed to avoid unjust enrichment to US Airways’ equitable lien by agreement. Brief for Petitioner, US Airways at 29. In Sereboff v. Mid Atlantic Medical Servs., Inc., the Supreme Court distinguished an equitable lien from an equitable lien by agreement, which the parties establish when forming an agreement with the purpose of enforcing the agreement. Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356, 364–365 (2006). The Sereboff Court concluded that a reimbursement provision creates an enforceable equitable lien by agreement. Id.at 364. US Airways argues that, since the Plan’s subrogation provision creates an enforceable equitable lien by agreement, McCutchen must fully reimburse the Plan with his third-party recovery. Brief for Petitioner at 30–31; see also Sereboff, 547 U.S. at 364.

Courts’ Discretion to Determine Equitable Relief

McCutchen argues that the Third Circuit was correct in applying the principle of unjust enrichment to this case and in finding that any requirement to reimburse US Airways fully would be inequitable because McCutchen would be in a worse position than if he had not sought third-party recovery. See Brief for Respondent, James McCutchen at 8, 10; see also US Airways, Inc. v. McCutchen, 663 F.3d 671, 677, 679 (3d Cir. 2011). In Sereboff v. Mid Atlantic Medical Servs., Inc., the Supreme Court held that Section 502(a)(3) authorizes reimbursement claims that are “equitable,” but did not determine whether the term “appropriate” modifies the amount of relief available to an ERISA plan for an equitable claim of reimbursement. See Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356, 357, 368 n.2 (2006). The Supreme Court’s decision in Holland v. Florida acknowledged that courts of equity traditionally seek to relieve hardships arising from a strict adherence to legal rules. Holland v. Florida, 130 S.Ct. 2549, 2563 (2010). Moreover, in CIGNA Corp. v. Amara, the Supreme Court determined that the courts must limit the availability of relief to those “traditionally considered equitable remedies,” and look further to equitable treatises when fashioning “appropriate” relief. CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011). In addition, the CIGNA Court cited to treatises on equity to support that equity courts may prevent a defendant’s unjust enrichment. CIGNA, 131 S. Ct. at 1880.

US Airways maintains that Section 502(a)(3) does not empower courts to use “free-floating equitable principles” to rewrite benefit plans because the provision requires courts to enforce plan terms when equitable mechanisms are available to do so. Brief for Petitioner, US Airways at 4, 16.  In Mertens v. Hewitt Assocs., the Supreme Court held that Section 502(a)(3) only authorizes appropriate relief to redress violations or to enforce ERISA provisions. Mertens v. Hewitt Assocs., 508 U.S. 248, 253 (1993). Moreover, US Airways notes that the Supreme Court has repeatedly addressed the remedies available under the “other appropriate equitable relief” language of Section 502(a)(3). Brief for Petitioner at 7–8; see also Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204, 213 (2002); Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006). US Airways argues that the lower court’s interpretation of CIGNA is overbroad because in CIGNA, the Court considered the equitable remedies available in cases of fraud and misrepresentation.  Brief for Petitioner at 22; see also CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011). Thus, although the CIGNA Court recognized that equity courts have the power to reform contracts, US Airways maintains that the Court limited that power to cases in which the plan was not being enforced according to its express terms by one of the parties. Brief for Petitioner at 22–23; see also CIGNA, 131 S. Ct. at 1880. Thus, US Airways maintains that the term “appropriate” in Section 502(a)(3) requires that the type of “equitable relief” sought by a plaintiff be appropriate under the circumstances to enforce the agreed to plan. Brief for Petitioner at 20–21; see also 29 U.S.C. § 1132(a)(3)).

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Conclusion

In this case, the Supreme Court will consider the meaning of “appropriate equitable relief” within the meaning of ERISA Section 502(a)(3) to determine whether the Act authorizes courts to use equity to rewrite health-benefit plan contracts. McCutchen argues that the term “appropriate” grants courts the discretion to override the contractual provisions of health plans in situations where strictly enforcing a plan’s terms would be inequitable to one of the parties.  US Airways contends that the term “appropriate” relates only to whether or not a claim is appropriate to enforce the terms of the benefit plan and does not grant courts broad discretion to rewrite benefit plan terms. This case may have significant implications for both plan beneficiaries and plan administrators because it may affect the frequency of ERISA litigation, the financial viability of health benefit plans, and further define the legal rights of employers and employees participating in these plans. 

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Acknowledgments: 

The authors would like to thank Professor Emily Sherwin for her insights into this case.

Additional Resources: