by RICH CASSIDY on NOVEMBER 30, 2011
A new case from the United States Court of Appeals for the Third Circuit, US Airways, Inc. v. McCutchen, ___ F.3d ___, 2011 WL 5557411(3d Cir. Nov. 16, 2011), represents a bright spot on the otherwise rather bleak horizon for injured plaintiffs trying to negotiate medical liens asserted by ERISA welfare benefit health plans.
During the more than 30 years that I’ve been handling personal injury cases, I’ve seen them become an increasingly complex practice area. It’s no longer just a matter of investigating the facts, applying a few familiar negligence principles, valuing the claim, and negotiating a settlement. One reason for that has been the growing keenness of those who pay medical bills for injured plaintiffs to recover their costs from third party tortfeasors.
Of course, by attempting to recover those costs from tortfeasors, the payers of claimants’ medical expenses end up competing with injured plaintiffs for limited settlement dollars.
That means that counsel needs to be attentive to these interests lest a successful client end up with a far smaller recovery than expected or, even, with no recovery at all. Failing to pay attention can end up creating another kind of claim altogether: legal malpractice.
Health insurers have long asserted subrogation interests and experienced plaintiffs’ counsel have often been successful in reducing and sometimes eliminating health insurers’ claims. Two familiar weapons against health insurers have been the “common fund” doctrine and the “make-whole” doctrine. As applied in this context, the common fund doctrine is the idea that if an insurer benefits from a fund created as a result of the efforts of the injured party to recover damages from a tortfeasor, the insurer should also share in the costs incurred in creating that fund, typically attorneys’ fees and expenses. The “make-whole” doctrine is the idea that the injured party should be made “whole,” that is, reimbursed for all losses, including pain and suffering and lost income, as well as costs, including attorney fees, before the insurer can recover for the costs of its medical insurance by way of subrogation.
But with the adoption of ERISA (the Employee Retirement Security Act of 1974), a new kind of “super” lien began to evolve. ERISA applies to claimants whose medical bills are covered by employer-sponsored self-insured medical plans.
Over the years, plan sponsors have structured increasingly sophisticated plan documents providing that where a tortfeasor is responsible for the plan participant’s injuries, the plan will recover all of its resulting expenses first, even if the amount recovered from the tortfeasor or the claimant’s own insurance is small enough so that recovering “second” means getting nothing at all.
This has led to litigation between ERISA welfare benefit plans and injured participants. While there have been occasional bright spots, the overall course of this litigation has been discouraging for injured plan participants and their lawyers. The trend has been for courts to allow the plans to recover for medical expenses in accordance with the literal language of the plan document and without reference to common fund and make-whole concepts.
US Airways, Inc. v. McCutchen may well represent an important turn in a more favorable direction for claimants. In that case, the injured plaintiff settled with the tortfeasor, recovering less than the total amount of his attorney’s fees plus the Health Plan’s subrogation claim. Plaintiff’s counsel put two-thirds of the Plan’s claim into its trust account, “reasoning that any lien found to be valid would have to be reduced by a proportional amount of legal costs.” Id. at ___, *1.
The US Airways Plan sued under § 502(a)(3) of ERISA, “seeking ‘appropriate equitable relief’ in the form of a constructive trust or an equitable lien on the [amount] held in trust and the remaining [balance] personally from McCutchen.” The United States District Court for the Western District of Pennsylvania agreed, relying on plan language allowing the plan’s subrogation interest to reach “any monies recovered,” and granted summary judgment for the Plan. Id. at___,*1.
The Third Circuit, in an opinion by Circuit Judge Fuentes, reversed. It noted that under ERISA, plan participants can enforce their rights against a plan’s fiduciaries under the plain language of the plan document. Id at ___,*2. Plan fiduciaries, on the other hand, are limited in their rights to recover to injunctive relief or “other appropriate equitable relief.” Id., citing, 29 U.S.C. § 1132(a)(3); Knudson, 534 U.S. at 221; Sereboff v. Mid Atlantic Medical Servs., Inc., 547 U.S. 356, 361 (2006). Citing Knudson and Mertens, the court repeated that “’equitable relief’ must mean something less than all relief.” Id. at ___.*4. It noted that in construing §502, the Supreme Court has stated the word “appropriate” is not superfluous. Id.at ___, *3, citing, Mertens v. Hewitt Assocs., 508 U.S. 248, 257-58 (1993).
The opinion went on to interpret § 502(a)(3) to incorporate not just equitable claims, but also traditional equitable defenses, such as unjust enrichment. Id. at___,*4, citing Cigna Corp. v. Amara, 131 S. Ct. 1866, 1880 (2011), (citing Restatement (Third) of Trusts § 95, and Comment a (Tent. Draft No. 5, Mar. 2, 2009)); see also 4 Palmer, Law of Restitution § 23.18 at 472-74 (‘[T]he principle of unjust enrichment . . . . should serve to limit the effectiveness of contract provisions which in terms provide for reimbursement out of the insured’s tort recovery without regard to whether or the extent to which, that recovery includes medical expense.’)).
The decision allows the common fund doctrine to be considered to determine whether a plan is unjustly enriched by gaining the benefit of an injured party’s effort to recover from a tortfeasor without sharing in the costs of such a recovery.
In the District Court, McCutchen had also argued for application of the “make-whole” doctrine.
The Third Circuit did not decide whether the make-whole doctrine would also be taken into account to mitigate against the literal application of the plain language of plan documents in §502 equitable subrogation claims, as McCutchen did not argue that issue on appeal. But on its face, that same logic suggests that the equitable doctrine of unjust enrichment could permit consideration of the make-whole doctrine as well.
It is by no means clear that McCutchen will stand the test of time. The insurance/third-party administrators’ industry is up in arms about it, and one adjuster to whom I’ve argued the case claims that the decision will be subject to a motion for reargument, en banc.
In fact, McCutchen’s counsel at Public Justice advises that the time within which reargument can be sought has been extended to December 14. A petition for certiorari seeking U.S. Supreme Court review seems likely. Meanwhile, in the Ninth Circuit, in CGI Technologies & Solutions, Inc. v. Rhonda Rose and Nelson Langer Engle PLLC, Docket Nos. 11-35127 and 11-35128, the same issue, together with the hot question of lawyer liability, has been briefed. Oral argument has not yet been scheduled.
At least for now, McCutchen puts an important weapon in the hands of plaintiffs’ counsel seeking to resolve ERISA subrogation claims. As a practical matter, if McCutchen is upheld, it will reduce ERISA plans to virtually even footing with fully insured plans.
For counsel in personal injury cases on either side of the “v,” this is a development worth watching.
Rich