In U.S. Airways v. McCutchen, the United States Supreme Court addressed the applicability of the Common Fund doctrine in personal injury lawsuits that involve ERISA liens. The Supreme Court held that a plaintiff in a personal injury lawsuit may not assert the Common Fund doctrine if the health insurance plan language clearly and unambiguously bars its reliance. This article analyzes the McCutchen decision and provides an explanation of its practical consequences for practitioners confronted with an ERISA lien during the course of a personal injury lawsuit.
Introduction: The common fund doctrine is an equitable remedy asserted by a plaintiff’s attorney to reduce the amount of medical expenses that an injured plaintiff owes to her health insurer at the conclusion of a personal injury lawsuit. A plaintiff possessing health insurance may direct the health insurer to pay the medical providers before the case settles. The plaintiff’s insurance policy obligates her to reimburse the health insurer for the medical payments advanced while the case is pending because most personal injury settlements consist of compensation (in part) for medical expenses.
The health insurer will accept a reduced reimbursement amount to compensate the attorney for securing the settlement “fund” from which the insurer is repaid.1 The rationale for the common fund doctrine is the equitable principle of unjust enrichment providing that the insurer should not receive cost-free the benefit of the attorney’s services.2
The Employee Retirement Income Security Act (“ERISA”), a federal law enacted in 1974, regulates private businesses that provide employee benefits such as a pension or health insurance.3 ERISA regulates health insurance plans the employer self-funds.4 ERISA plans typically contain a reimbursement provision that permits the plan administrator to recoup medical payments it provided to an employee injured by third party negligence.5
In U.S. Airways v. McCutchen6 the Supreme Court considered the applicability of the common fund doctrine to a reimbursement provision included in an ERISA-regulated health insurance plan. Specifically, McCutchen considered whether the common fund doctrine applies in cases “where the plan’s terms give it an absolute right to full reimbursement.”7
Sereboff and the ERISA “Equitable” Lien: In Sereboff v. Mid Atlantic Medical Services,8 the United States Supreme Court resolved a lawsuit brought by personal injury plaintiffs contending that the federal court lacked jurisdiction to enforce the reimbursement provision in an ERISAregulated health insurance plan. The Sereboffs sustained personal injuries in an automobile collision and obtained a settlement from the third party tortfeasor. Mid Atlantic, the health insurance plan administrator, filed suit in federal court to recover from the Sereboffs $74,869.37 in medical expenses it paid on their behalf pursuant to a reimbursement provision in the policy for “all recoveries from a third party (whether by lawsuit, settlement or otherwise.)”9 The circuit court upheld the district court’s ruling against the Sereboffs and ordered them to reimburse Mid Atlantic the medical expenses but reduced a portion of the repayment amount to cover Mid Atlantic’s share of the attorneys’ fees and costs incurred to secure the settlement.10
The Supreme Court considered whether or not the order to reimburse Mid Atlantic constituted “appropriate equitable relief ” under the statute. Section 502(a)(3) of ERISA permits a plan administrator to file a federal lawsuit to “(A) enjoin any act or practice which violates any provision of this subchapter or terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.”11 The Supreme Court affirmed the circuit court’s judgment because Mid Atlantic “sought its recovery through a constructive trust or equitable lien on a specifically identified fund, not from the Sereboffs’ assets generally, as would be the case with a contract action at law.”12 The court classified Mid Atlantic’s ERISA claim as an “equitable lien established by agreement” between the parties and determined that any “equitable defenses the Sereborffs claim accompany any such action are beside the point.”13
The Court rejected the Sereboffs’ claim that the action brought by Mid Atlantic was for a breach of contract and not subject to equitable relief; it found that “ERISA provides for equitable relief to enforce plan terms, so the fact that the action involves a breach of contract can hardly be enough to prove relief I s not equitable.”14
The Court characterized Mid Atlantic’s claim as equitable because the claim “identified a particular fund…and a particular share of that fund to which [it] was entitled…impos[ing] on that portion a constructive trust or equitable lien.”15 Sereboff failed to address the district court’s order which reduced Mid Atlantic’s share pursuant to the common fund doctrine as it relates to an ERISA reimbursement provision; this failure produced a split in the federal circuit courts over the applicability of the common fund doctrine.16
U.S. Airways v. McCutchen: James McCutchen, a U.S. Airways employee, sustained personal injuries in a 2007 auto collision. The health plan administrator paid $68,866 on McCutchen’s behalf for related medical expenses.
The tortfeasor paid the maximum amount of $10,000.00 under that automobile policy. McCutchen received an additional $100,000, the maximum amount available, in compensation from his insurance carrier. McCutchen’s attorneys claimed contingent fees and costs amounting to $44,000.00 leaving a remaining portion of $66,000.00.17
The reimbursement provision in McCutchen’s plan obligated him to repay U.S. Airways “for amounts paid for clams out of any monies recovered from the [third] party, including, but not limited to, your own insurance company as the result of judgment, settlement or otherwise.”18 U.S. Airways sued McCutchen under section 502(a)(3) seeking “appropriate equitable relief ” to recover $68,866—the entire amount of its claimed lien.
McCutchen’s attorneys escrowed $41,500 representing the amount left after a reduction for attorneys’ fees pursuant to the common fund doctrine. McCutchen argued before the district court that U.S. Airways was not entitled to any recovery despite the reimbursement provision because “absent over-recovery on his part, U.S. Airways’ right to reimbursement did not kick in [and that] U.S. Airways had to contribute its fair share to the costs he incurred to get his recovery.”19 The district court found for U.S. Airways and ordered McCutchen to pay the entire amount claimed because the plan “clearly and unambiguously” provided for full reimbursement.20 The circuit court revered and held that “a court must apply any ‘equitable doctrines and defenses’ that traditionally limited the relief requested.”21 The circuit court reasoned that the doctrine of unjust enrichment should limit U.S. Airways’ claim to full reimbursement because McCutchen would receive “less than full payment for his medical bills [and] provide a ‘windfall’ to U.S. Airways given its failure to ‘contribute to the cost of obtaining the third-party recovery.’”22
The Supreme Court determined that McCutchen’s assertion of the common fund doctrine, based on principles of unjust enrichment, amounted to “improperly mixing and matching rules from different equitable boxes.”23 The Court held that when analyzing “an equitable lien by agreement, the terms of the ERISA plan govern.”24 The “equitable lien by agreement” asserted under ERISA “arises from and serves to carry out a contract’s provision.”25 Federal courts may not apply the common fund doctrine because “enforcing the lien referenced the precise plan language. Means holding the parties to their mutual promises.”26
McCutchen’s reliance on unjust enrichment and the common fund doctrine, were “’beside the point’ when parties demand what they bargained for in a valid agreement.”27 The court concluded that “[t]he [reimbursement] agreement 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.”28
The court then analyzed the substance of the actual reimbursement provision and concluded that while the common fund doctrine “cannot trump a reimbursement provision [it] might aid in properly construing it.”29
McCutchen’s care plan “is silent on the allocation of attorneys’ fees, and in those circumstances, the common-fund doctrine provides the appropriate default.”30
Only an explicit reimbursement provision will displace the common fund doctrine.31 The district court erred when it found that the plan “clearly repudiated the common-fund rule.”32 Lacking a clear repudiation of the common fund rule, the Court notes that “[n]o one can doubt that the common fund rule would govern here in the absence of a contrary agreement.”33
The court concluded that “[a] party would not typically expect or intend a plan saying nothing about attorneys’ fees to abrogate so strong and uniform a background rule [and] that means a court should be loath to read such a plan in that way.”34
The dissent rejected the court’s conclusion that “[b]ecause that term does not advert to the costs of recovery, it is properly read to retain the common-fund doctrine.”35 The dissent concluded that the court’s analysis of the reimbursement clause was unnecessary because it “granted certiorari on a question that presumed the contract’s terms were unambiguous…[and] has no business deploying against petitioner an argument that was neither preserved…nor fairly included within the question presented.”36
Handling ERISA Liens after McCutchen: During oral argument, the Justices raised the very real concern that some lawyers may not wish to devote a portion of their practice to pro bono collection work on behalf of a health insurer.37 The attorney for U.S. Air suggested that, before filing suit against the tortfeasor, lawyers attempt to reach an agreement with the insurer about reimbursement.38 Such an agreement may induce an attorney to prosecute a case she was otherwise hesitant to accept and would allow the insurer a cost-free method of recouping a portion of its medical expenses.
Given McCutchen’s limited rejection of the common fund doctrine, a plaintiff’s attorney should always verify if the client has coverage under an ERISA based health plan and proceed as follows: First, carefully assess the strength of the case and determine an approximate, realistic amount of potential recovery. Second, request immediately from the health plan administrator the specific reimbursement provision contained within the plan itself and do not rely on the summary plan description provided by your client or the insurer. As McCutchen makes clear, only a reimbursement provision that vitiates clearly the common fund doctrine will permit full recovery of paid medical expenses. Third, attempt to secure a written agreement with the health plan administrator that specifies the exact terms of reimbursement before filing suit.
This analysis does not explain why an insurer would agree preemptively to a reduced reimbursement amount when the Supreme Court has ruled explicitly that federal judges are powerless to order such a reduction in cases where the plan language clearly and unambiguously abrogates the common fund doctrine. McCutchen, therefore, represents a paradox to ERISA-based health insurers. As a result of their effort to maximize reimbursement from their most severely injured beneficiaries, health insurers may now no longer receive cost-free reimbursement from less valuable cases some that attorneys may deem not worth the effort. How the health insurance industry will respond to this Pyrrhic victory remains to be seen.
Conclusion: McCutchen addresses thoroughly the impact of an ERISA lien on the common fund doctrine in a personal injury lawsuit. This article provided background on this issue, an analysis of the holding in McCutchen and practical suggestions that will enable attorneys to manage an ERISA lien more effectively.
Given the significant number of ERISA beneficiaries, lawyers should ensure familiarity with this opinion and understand its requirements.39
1 The doctrine does not entitle the plaintiff’s attorney to any additional compensation beyond that specified in the retainer agreement and increases the plaintiff’s net recovery.
2 Boeing Co. v. Van Gemert, 444 U.S. 472 (1980).
3 Yeseta v. Baima, 837 F.2nd 380, 383 (9th Circuit 1988)(ERISA was intended to “protect participants in employee benefit plans by establishing standards of conduct, responsibility, and obligations for fiduciaries of employee benefits plans, and by providing for appropriate remedies.”)
4 Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 44 (1987)(“ERISA comprehensively regulates, among other things, employee welfare benefit plans that…provide medical, surgical, or hospital care.”)
5 Hotel Employees & Restaurant Employees International Union Welfare Fund v. Gentner, 50 F.3rd 719 (9th Circuit 1995).
6 U.S. Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013)
7 McCutchen 133 S.Ct. at 1551.
8 Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006)
9 Sereboff, 547 U.S. at 359.
10 Sereboff, 547 U.S. at 361.
11 29 U.S.C. § 1132(a)(3); emphasis added.
12 Sereboff, 547 U.S. at 363.
13 Sereboff, 547 U.S. at 368.
14 Sereboff, 547 U.S. at 363; emphasis in original.
15 Sereboff, 547 U.S. at 364.
16 CGI Technologies & Solutions, Inc. v. Rose, 683 F.3d 1113 (C.A.9 2012)(holding that the common fund doctrine applies to an ERISA lien) with Zurich Am. Ins. Co. v. O’Hara, 604 F.3d 1232 (C.A.11 2010)(holding that the common fund doctrine does not apply to an ERISA lien).
17 McCutchen, 133 S.Ct. at 1543.
18 McCutchen, 133 S.Ct. at 1543. This reimbursement provision at issue was contained in the summary plan description not in the plan itself and neither party
19 McCutchen, 133 S.Ct. at 1544.
20 McCutchen, 133 S.Ct. at 1544.
21 McCutchen, 133 S.Ct. at 1544.
22 McCutchen, 133 S.Ct. at 1544.
23 McCutchen, 133 S.Ct. at 1546.
24 McCutchen, 133 S.Ct. at 1551.
25 McCutchen, 133 S.Ct. at 1546.
26 McCutchen, 133 S.Ct. at 1546.
27 McCutchen, 133 S.Ct. at 1546.
28 McCutchen, 133 S.Ct. at 1548.
29 McCutchen, 133 S.Ct. at 1548.
30 McCutchen, 133 S.Ct. at 1548.
31 McCutchen, 133 S.Ct. at 1551.
32 McCutchen, 133 S.Ct. at 1549.
33 McCutchen, 133 S.Ct. at 1550.
34 McCutchen, 133 S.Ct. at 1550.
35 McCutchen, 133 S.Ct. at 1551.
36 McCutchen, 133 S.Ct. at 1551. Justice Scalia is correct that if the specific plan language itself was ambiguous the lower courts presumably would have resolved that issue—likely in McCutchen’s favor.
37 U.S. Airways v. McCutchen, Supreme Court Case No. 11-12852012, Oral Argument Page 21 (November 27, 2012).
39 The Department of Labor “oversees approximately 718,000 private sector plans covering more than 86 million active participants and holding over $4.7 trillion in assets.” U.S. Department of Labor Fact Sheet, October 2011.
Tom Kantas is a sole practitioner concentrating in civil and criminal litigation. He received his undergraduate degree from the University of Illinois, a graduate degree from the University of Chicago and his law degree from the Chicago-Kent College of Law.