Many health plans (both insured and self-funded) have vigorously pursued their subrogation and reimbursement rights. Those rights are generally written in broad and sweeping terms. The provisions may allow plans to recover from settlements with liable third parties the entire amount of the medical benefits paid on behalf of the participant, irrespective of whether the participant was made whole for injuries suffered or that a sizeable portion of any recovery was paid to the participant’s attorney as fees and expenses for prosecuting the case. State anti-subrogation laws may adversely impact a self-insured plan’s ability to enforce the policy’s subrogation and reimbursement provisions. But a self-funded plan is not subject to state insurance laws and thus courts had generally upheld the provisions as written under ERISA §502(a)(3).

This article describes (1) the development of the law by the Supreme Court regarding the remedies that may be available to plans to enforce their subrogation and reimbursement provisions; (2) the most recent reimbursement case in which the Supreme Court heard oral arguments and the anticipated outcome of that case; and (3) best practices for plans to protect their subrogation and reimbursement rights under ERISA.

Equitable Remedies Under ERISA

The first influential case that considered what equitable remedies are available under ERISA was Mertens v. Hewitt Associates, 508 U.S. at 248 (1993). The question presented to the court in Mertens was whether ERISA §502(a)(3) authorized suits for money damages against nonfiduciaries who knowingly participated in a fiduciary breach. The Supreme Court held that it did not.

Justice Antonin Scalia (who authored the opinion) noted that "appropriate equitable relief" in §502(a)(3) meant something less than all relief and did not include whatever relief a court of equity could have provided (which could have included legal relief in certain circumstances). Rather, the equitable relief under §502(a)(3) was found to be limited "to those categories of relief that were typically available in equity (such as injunction, mandamus and restitution, but not compensatory damages). The Supreme Court also rejected the argument that "appropriate equitable relief" under ERISA included all remedies available in the common law of trusts to beneficiaries for breach of trust (including money damages).

After Mertens, the Supreme Court, in Great-West Life & Annuity Insurance Company, 534 U.S. 204 (2002), reviewed the remedies available under ERISA §502(a)(3) to a plan that sought to enforce its reimbursement provision against a participant under ERISA §502(a)(3). A self-funded plan sought to recover more than $400,000 of medical expenses paid on behalf of a participant who incurred injuries as a result of a car accident. The participant negotiated a settlement of $650,000, with $256,745 deposited in a special needs trust and $373,426 going to pay for attorney fees and costs. Only $13,838 was allocated to the plan to pay for past medical expenses.

Scalia looked to the relief that the plan sought under ERISA §502(a)(3) and held that it was not appropriate equitable relief. First, the court found that an injunction to compel the payment of money, past due under a contract, was not typically available in equity. Second, the court held that restitution was not exclusively an equitable remedy. Equitable restitution was only available to the plan if the plan was seeking to assert title to particular property in the form of a constructive trust or an equitable lien, rather than seeking a personal judgment against the participant. In Great-West, the proceeds from the settlement were not in the participant’s possession and the plan was seeking to impose a personal judgment for monetary relief that constituted an action at law.

Four years later, the Supreme Court took another look at the available remedies under ERISA to enforce reimbursement and subrogation provisions. In Sereboff v. Mid Atlantic Medical Services, 574 U.S. 356 (2006), the self-funded plan filed suit to recover from the participant the medical expenses it paid on account of injuries sustained in an automobile accident. The participant settled with the liable third party for $750,000 and placed the amount the plan sought ($74,869) in an investment account until the court could resolve the issue of the plan’s entitlement to a portion of the recovery. The Supreme Court held that because the plan was seeking "specifically identifiable" funds that were in the participant’s possession and control, the restitutionary relief was available under ERISA §502(a)(3).

The court also found that the strict tracing rules were inapplicable because the equitable lien sought in this case was one "by agreement," as opposed to an equitable lien sought as a matter of restitution. Moreover, certain equitable defenses (e.g., the make-whole remedy) would only apply if the claim was for subrogation or an equitable lien sought as a matter of restitution. The court left open the question of whether the relief sought was appropriate equitable relief under §502(a)(3) because the participant did not raise the issue below.

Supreme Court’s Consideration of U.S. Airways

The Supreme Court granted certiorari and heard oral argument on November 27, 2012, in U.S. Airways v. McCutchen, Case No. 11-1285. The case involved an action by a self-funded plan against a participant to recover the entire amount ($66,866) it paid in medical expenses resulting from an automobile accident. The participant recovered $110,000 from third parties, $66,000 of which was paid to the attorney as fees and expenses. The attorney placed $41,500 into a trust account, believing that any plan lien would have been reduced to account for a proportional amount of legal costs. The plan sought relief under ERISA §502(a)(3), claiming appropriate equitable relief in the form of a constructive trust or an equitable lien on the $41,500 held in trust and $25,366 personally from the participant. The subrogation and reimbursement provision relied on by the plan was very broad. U.S. Airways claimed that the provisions allowed it to recover the full $66,866 that it paid out of the $110,000 recovered. The district court granted summary judgment in favor of U.S. Airways, requiring not only the money held in trust to be turned over to U.S. Airways, but also requiring the participant to pay $25,366 from his own funds.

The U.S. Court of Appeals for the Third Circuit reversed in U.S. Airways v. McCutchen, 663 F.3d 671 (3d Cir. 2011). The court found that even though the case fell within the purview of the Supreme Court’s holding in Sereboff, the Supreme Court left open the issue of whether the equitable relief sought was "appropriate" and whether equitable principles and defenses could be asserted by the participant. The court went on to hold that equitable relief under ERISA §502(a)(3) may be subject to the equitable principle and defense of unjust enrichment that was typically available in equity. Applying these principles, the court concluded that full reimbursement to U.S. Airways would be "inappropriate and inequitable relief," especially in light of the fact that the participant’s net recovery was less than the medical expenses paid by the plan. The court remanded the case to the district court to determine what would be appropriate equitable relief under §502(a)(3).

Anticipated Outcome of U.S. Airways

In reading a transcript of the oral arguments before the court, I hazard a guess that U.S. Airways will prevail based on the fact that the case is so similar to Sereboff. U.S. Airways’ claim was based on an "equitable lien by agreement" and the court in Sereboff indicated that equitable defenses and principles (e.g., make-whole doctrine and unjust enrichment) do not apply to claims of equitable lien by agreement.

However, many of the justices voiced concerns about the fact that the common-fund doctrine did not apply. It is uncertain if the majority of the justices will agree with the Department of Labor’s argument that the common-fund doctrine stands on a different footing than the other types of equitable doctrines and should be applied in this case. The DOL (and the participant) argued that the historical powers of the equity courts require parties who received a benefit from litigation to share in the fees and expenses attendant thereto.

One other issue that concerned many of the justices (and arose after the case was briefed) was that the plan document did not contain clear language regarding the rights of the plan to assert an equitable lien free and clear of the common-fund doctrine. Rather, the lower courts looked to the language in the summary plan description. It is unlikely, though, that this issue will affect the outcome of the case because the attorney for the participant waived this issue.

Best Practices to Ensure Enforcement of Provisions

Assuming the Supreme Court rules in U.S. Airways’ favor and decides that the plan may enforce its "equitable lien by agreement" without being subject to equitable principles and defenses, the following measures should be taken by a plan to enforce its reimbursement provisions:

(1) The plan document should contain both a subrogation provision and a reimbursement provision.

(2) The reimbursement provision should be included in the plan document and explicitly renounce the make-whole and common-fund doctrines and require first-dollar reimbursement from any recovery.

(3) The plan document should expressly exclude the benefits for which a third party may be liable.

(4) Reimbursement agreements should be signed by the participant and the attorney (if retained) prior to the payment of benefits and should acknowledge that the plan is paying for benefits to which the participant is otherwise not entitled.

(5) Plans should be proactive in working with the participant’s attorney to ensure that there is an incentive for attorneys to pursue civil actions. Plans may want to enter into an agreement with the attorney and participant to share in the attorney fees and expenses, even if not required to do so.

(6) If the plan seeks to recover substantial expenses, the plan may want to retain its own attorney to intervene in the case against the third party to ensure that its lien is recovered.

Terry Connerton counsels executives of businesses and tax-exempt entities on how to comply with tax and labor laws governing employee benefit plans and their fiduciaries. She also represents clients faced with Internal Revenue Service or Department of Labor audits and assists them in voluntarily correcting any tax deficiencies or fiduciary violations.