Equitable principles, ERISA plans at issue in case

The U.S. Supreme Court is being asked to decide who should foot the attorney’s bill when an accident victim’s medical expenses are covered by an ERISA plan, and the victim goes on to win a tort suit for his injuries.

The issue arose during oral arguments in U.S. Airways v. McCutchen, a case that pits plain-language contractual interpretation against the equitable principle of unjust enrichment.

The plaintiff, James McCutchen, suffered severe injuries in a car accident that left him permanently disabled and in chronic pain. An employee of U.S. Airways, McCutchen was covered by the company’s ERISA plan, which contained a subrogation and reimbursement clause that read in part: “You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party. … In addition, you will be required to assist the administrator of the Plan in enforcing these rights and may not negotiate agreements with a third party that would undermine the subrogation rights of the Plan.”

McCutchen pursued a tort claim based on the accident, and his attorney ultimately settled for $110,000, $44,000 of which was attorneys’ fees. A few months later, the plan’s subrogation agent put a $100,000 lien on the settlement for reimbursement of medical expenses paid, which would have left McCutchen without compensation for future earning or pain and suffering, and also with a debt to his attorney.

McCutchen went to federal court seeking to declare the lien invalid. The court ruled in favor of the plan, rejecting McCutchen’s argument that common law principles of equity should override the subrogation language in the plan in order to prevent the plan from being unjustly enriched by McCutchen’s lawsuit.

But the 3rd Circuit reversed, holding that equitable principles should apply to ERISA claims to prevent plans from being unjustly enriched. The plan’s reimbursement should be reduced by the amount of the plaintiff’s attorneys’ fees, the court held, creating a circuit split.

In June, the Supreme Court agreed to hear the case.

‘No incentive to pursue this litigation’

During arguments that were uncharacteristically spirited for an ERISA matter, Neal K. Katyal, a partner in the Washington office of Hogan Lovells, argued on the plan’s behalf that common law unjust enrichment claims do not apply in cases involving ERISA plans. The plan itself, Katyal argued, was an agreement to abide by the equitable principle that the plan has the right to assert a lien if there is recovery by the beneficiary.

Justice Sonia M. Sotomayor wondered if that was fair when it came to the attorneys’ fees.

“You have someone do the work for you and you don’t pay them?” Sotomayor asked.

“Our position is that the rules of equity bind equitable liens by agreement just as they bind anything else,” Katyal said.

Justice Samuel A. Alito Jr. asked if such a ruling would give ERISA plans money that someone else earned.

“Are you in effect asking for a windfall because Mr. McCutchen and his attorneys didn’t understand what ERISA means in this context?”

Katyal said attorneys should know “the long established rule” of reimbursement in an ERISA context.

“Well, perhaps they should have realized it, but if they realized it they have no incentive to pursue this litigation or to pursue the tort decision,” Alito said.

‘Why’s it so unfair?’

Matthew W. H. Wessler, an attorney at Public Justice in Washington who argued on behalf of McCutchen, urged the court to embrace the equitable notion of unfair enrichment, reading from “Pomeroy’s Equity Jurisprudence and Equitable Remedies: A Treatise on Equitable Remedies” — which the court has cited in past opinions — to help make his point.

“‘The same principle of unjust enrichment controls claims for reimbursement arising out of an express agreement,’ and I’m quoting here,” Wessler said.

Chief Justice John G. Roberts Jr. was familiar with the passage.

“Is this the part where he says: ‘Unfortunately, the courts don’t agree with that’?” Roberts asked, drawing laughs from the audience and other justices.

“You are correct,” Wessler said. “He identifies two decisions, which did something contrary to that rule. But, in his view, that is the rule that governs these claims.”

Justice Stephen G. Breyer asked why it would be unfair if the plaintiff agreed to a plan that essentially provides: “We’re first, then comes your lawyer, and anything left over goes to you.”

“If this were a legal case, and that were a legal claim, there’s nothing unfair about that,” Wessler said. “[B]ut the fact is that we are talking about the rules that equity applied in these situations.”

A decision from the court is expected this term.