Anaylsis of USAirways v. McCutchen
Charles ("Chip") Becker, Esq., Kline & Specter, P.C., Philadelphia
PAJ filed an amicus curiae brief in the U.S. Supreme Court in this case. The plaintiff had been injured in a motor vehicle accident and recovered $110,000 in tort litigation. After deduction for counsel’s fee, the plaintiff received $66,000. (The counsel was Rosen Louik & Perry, Pittsburgh.) The plaintiff was a USAirways employee and the USAirways employee benefit plan had paid about $67,000 in medical expense resulting from the accident, more than the plaintiff himself received. The plan sought full reimbursement for its expenses from a settlement fund pursuant to the terms of the plan language.
Thus the following question arose: whether, under ERISA, the plaintiff was entitled to assert equitable defenses to the plan’s claim that it was entitled to full reimbursement under the plan language.
We filed an amicus brief to raise awareness about the practical implications of a “full reimbursement” rule on the willingness and ability of counsel to take meritorious cases and the effect that rule would have on litigation and settlement decisions. The main point was that it was fundamentally unfair to enforce plan language that would result in lawyers working for free; this would disincent lawyers from taking cases in the first place, to the detriment of both plaintiffs and plans.
On April 16, 2013 the Court issued a 5-4 decision that is at best a mixed bag. On one hand, all 9 members of the Court agreed that the plan language controls and that equitable principles do not override the plan language. The plaintiffs had argued principally that, under equity, the plan was allowed to recover only the portion of the settlement that the insured recovered from a third party to compensate for the loss that was covered by the plan. Under this approach, USAirways would have been allowed to recover only for the portion of the settlement apportioned to McCutchen’s medical expenses. There could be no recovery from the any portion of the settlement attributable to other injuries such as loss of future earnings or non-economic injury. Rejecting this argument, the Court found that the plan language governs and is not overridden by equity.
On the other hand, 5 members of the Court (the “liberal” block plus Justice Kennedy with Justice Kagan writing) wrote that while equity does not override plan language, equitable doctrines may play a role in construing the plan language. In particular, they acknowledged that tort recoveries do not happen for free and found that the common fund doctrine – a “strong and uniform” “background rule” – was applicable when considering apportionment of attorneys’ fees.
The majority also noted that the plan was silent on the allocation of attorneys’ fees. As such, the plan could be read either to give the airline priority “on every dollar received from a third party, even those covering the beneficiary’s litigation costs,” or to entitle the airline “to only the true recovery, after the costs of obtaining it are deducted.” Given the plan’s silence, the majority held that “the common-fund doctrine provides the best indication of the parties’ intent.” After discussing the doctrine’s historical roots, the Court concluded that “[a] party would not typically expect or intend a plan saying nothing about attorney’s 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.”
The majority found that applying the doctrine was especially important in cases like this one, where the “the beneficiary is made worse off by pursuing a third party” and ignoring the common fund doctrine would mean that McCutchen “in effect . . . [paid] for the privilege of serving as US Airways’ collection agent.” The majority found that “McCutchen would not have foreseen that result when he signed on to the plan.” Thus, the majority reasoned that the plan language did not specifically abrogate the common fund doctrine and found that the doctrine should be read into the plan language. They remanded the case so that the district court could consider the costs of recovery and the plan’s responsibility to pay its share of those costs under common fund principles.
The “conservative” block dissented on waiver grounds.
The decision is definitely a loss on the general application of equitable principles to limit ERISA plan recoveries. However, it also holds that ERISA plans must pay their fair share of attorneys’ fees and costs under common fund principles, unless the plan language specifically abrogates and disavows application of those principles.
Looking forward, plaintiffs’ attorneys will have to look closely at plan language and may have to negotiate with ERISA plans on enforcement of plan language, especially where the alternative is that a meritorious case would not be brought. It will be interesting to see whether employers revise their benefit plans to abrogate common benefit principles and disincent attorneys from taking meritorious cases. Justice Kagan openly wondered whether employers even would want that result.
As for the PAJ brief, the oral arguments and the Court’s opinion suggest that our core message was on the majority’s mind as it crafted its decision. PAJ did not advocate for the adoption of a specific rule of law. It argued simply that the Court should consider and accommodate the economic realities of tort litigation in construing ERISA in this context. The majority certainly did that in its holding on common benefit principles. While McCutchen is by no means a victory, we still can be proud that PAJ made a helpful contribution in the U.S. Supreme Court on an issue of national importance. Read the PAJ amicus curiae brief [PAJ Members only].