Each month, lawyers at Mayer Brown LLP, which has the nation’s largest and oldest Supreme Court & Appellate practice, are pleased to offer the readers of InsideCounsel their insights on the most compelling developments in the United States Supreme Court that are relevant to in-house counsel. Today, we look at two current cases, Vance v. Ball State University and U.S. Airways Inc. v. McCutchen, which were argued on November 26, 2012. They address critical questions relating to workplace harassment and ERISA litigation.

Employer’s vicarious liability for hostile work environment. Under Title VII, an employer may be vicariously liable for creating a hostile work environment, without any showing of negligence, if a supervisor commits actionable harassment. In Vance v. Ball State University, the Supreme Court granted review to resolve a circuit split regarding who qualifies as a supervisor for purposes of imposing vicarious liability. Several circuits, including the 7th Circuit, have held that only individuals possessing “the power to hire, fire, demote, promote, transfer, or discipline” the plaintiff-employee are supervisors. Other circuits, and the EEOC, have adopted a broader definition that embraces individuals who exercise control over the plaintiff’s daily work activities.

In Vance, the 7th Circuit affirmed the district court’s grant of summary judgment to defendant Ball State after concluding that Vance’s alleged harasser was not a supervisor because she lacked the power to hire, fire, demote, promote, transfer or discipline. In the Supreme Court, Vance argued that this bright-line definition was too narrow. Defendant Ball State agreed. It argued that individuals should also be deemed supervisors if they were “authorized to control an employee’s daily work activities in a way that materially enables the harassment,” but contended that Vance’s alleged harasser was not a supervisor under that standard. Appearing as amicus curiae, the U.S. advocated adoption of the EEOC’s similar standard. Several other amicus briefs supported the 7th Circuit’s bright-line rule.

During the oral argument, no party defended the 7th Circuit’s test. Chief Justice Roberts and Justice Alito, however, noted the bright-line rule’s clarity and suggested that a standard focused on control of daily work activities would involve courts in innumerable case-by-case determinations. Justice Scalia observed that three circuits had adopted the bright-line test, while Justice Kennedy suggested that such a rule could be coupled with a heightened duty of care to prevent harassment. Justices Kagan, Sotomayor, Breyer, and Ginsburg appeared ready to reject the 7th Circuit’s bright-line rule. Their questions probed whether the case should be remanded with instructions to apply the proper standard, or whether the holding should be affirmed because the record did not support liability even under a broader definition of supervisor. Whether or not the court affirms the 7th Circuit’s bright-line test, a clear and predictable standard for vicarious liability is necessary so that courts may continue to resolve this issue on summary judgment in appropriate cases.

Equitable limitations on ERISA subrogation. In US Airways, Inc. v. McCutchen, the Supreme Court granted certiorari to resolve a circuit split regarding whether courts may equitably limit recovery by a plan of previously paid medical benefits from a participant who subsequently recovers from a third party. Previous Supreme Court decisions have left open whether such equitable limitations on reimbursement obligations are permissible.

After McCutchen was injured in an accident, US Airways’ self-insured medical plan paid approximately $66,866 in medical benefits. McCutchen obtained a settlement of $110,000 from the third party responsible for the accident, of which $44,000 was allegedly paid to McCutchen’s attorney. US Airways sued under the Employee Retirement Income Security Act (ERISA) § 502(a)(3), seeking to enforce the plan provision requiring McCutcheon “to reimburse the plan for amounts paid for claims out of any monies recovered from a third party…as a result of judgment, settlement or otherwise.” Strict enforcement of this provision would have required McCutchen to repay the plan more than he received from the settlement after attorneys’ fees and legal costs were subtracted. The 3rd Circuit held that a court may use equitable principles, specifically unjust enrichment, to revise the plan language and limit the participant’s reimbursement obligation to take account of attorneys’ fees. The 5th, 7th, 8th, and 11th Circuits have strictly enforced similar plan terms. The 9th Circuit has followed the 3rd Circuit.

At oral argument, the justices focused on historical equitable principles, struggling to determine whether they would have permitted McCutchen’s defense. While the parties acknowledged that similar matters are most often resolved by negotiation, the Supreme Court’s decision will surely influence those negotiations. If the Supreme Court permits equitable modification of plans, then plans concerned about cost control will surely attempt to draft medical benefit reimbursement provisions that give greater predictability, or even exclude such benefits from coverage. Permitting a court to rewrite plan provisions even where the sponsor has not engaged in fraud or misrepresentation could also have impact far beyond the medical benefit subrogation scenario. Courts have previously regarded the “words of the plan” as the touchstone of any ERISA decision. As Justice Sotomayor intimated in oral argument, if typical plan language imposes undue burdens on participants for reimbursement, a legislative solution may be appropriate, but the Supreme Court should not authorize courts to look beyond the words of the plan.

Decisions in Vance and McCutchen are expected by June of 2013.