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Supreme Court Issues Decision in US Airways v. McCutcheon

In 2013, the U. S. Supreme Court issued an opinion in US Airways, Inc. v. McCutcheon that resolved a conflict among the federal circuit courts over whether principles of fairness, or “equity,” can override an express reimbursement clause in a health plan under ERISA.

In a 5-4 decision, the majority of the Court held that equity could not trump a plan reimbursement provision because an action for reimbursement under section 502(a)(3) of ERISA is based on contract (specifically, an equitable lien by agreement), and thus, the terms of the plan control.

The Court also held that if the plan reimbursement provision is silent with respect to the allocation of attorneys’ fees, the equitable common fund doctrine could be applied to force a plan to share attorney’s fees thereby reducing the plan’s recovery.

Specifically, U.S. Airways self-insured health plan provided medical benefits (approximately $67,000) to McCutchen, a plan participant, who was seriously injured in a car accident. When McCutchen settled his claim against a third-party for about $110,000, U.S. Airways exercised its rights under the plan's reimbursement provision to recover the amount it had already paid to McCutchen. Full reimbursement under the plan provision would have left McCutchen with nothing because he owed a 40% contingency fee to his attorneys. McCutchen argued that such a result would be unjust enrichment based both on a double recovery argument and the common fund doctrine (a common law rule that provides that when a claimant recovers a common fund for the benefit of persons other than himself, he is entitled to a reasonable attorney’s fee from the fund as a whole).

The majority opinion, while rejecting the double recovery argument, found that because the plan provision was silent as to attorney’s fees, it was proper to read the provision as retaining the common fund doctrine which could be applied to require U.S. Airways to absorb its share of McCutchen's attorney fees. Justice Kagan explained the majority rationale starkly:

“Without cost sharing, the insurer free rides on its beneficiary’s efforts - taking the fruits while contributing nothing to the labor.”

Should plan sponsors now rush off to tighten their plan reimbursement clauses to expressly disavow the common fund doctrine and/or to proclaim no responsibility for attorneys’ fees? Not necessarily. Justice Kagan pointedly noted: “When the next McCutchen comes along, he is not likely to relieve US Airways of the costs of recovery.” Id. at 16. In other words, a plan participant, who faces little or no upside to a third party action, might simply stick with his plan reimbursement and decide against the hassle of a third-party lawsuit. As a practical matter, plan sponsors may want to explore the possibility of adjusting their reimbursement provisions to maximize the Plan’s recovery without creating a disincentive to participants to pursue claims against third parties.

Perhaps the larger message of McCutchen is the Court’s deliberate and unequivocal endorsement of the concept that the plan document controls, which is a continuing theme the recent ERISA decisions of the Supreme Court.

For more information, please contact us:

Boutwell Fay LLP

1 Park Plaza, Suite 600 Irvine,

California 92614

(949) 660-0481

This information does not constitute legal or tax advice. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Anyone reading this information should not act upon this information without seeking professional counsel. The information contained herein is valid as of the date of this post, and should not be relied upon after that date.

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