ERISA liens are becoming more and more commonplace in personal injury cases, where clients' medical bills are paid through an employee health plan that is governed by the Employee Retirement Income Security Act of 1974 (ERISA).
For personal injury attorneys, these ERISA liens are particularly challenging, because many of the policies governing these plans purport to have a right of first recovery on your client's settlement funds, and waive all equitable defenses.
It goes without saying that such draconian language could cause you real difficulty if you need to deal with an ERISA lien after settling the underlying personal injury suit. If the amount of the ERISA lien is more than the settlement amount, or even more than your client will net after attorney fees and costs, and the ERISA plan language says that they will not reduce for anything, no way and no how, you are going to have issues.
The U.S. Supreme Court has just made the job significantly more difficult with the opinion it issued in US Airways, Inc. v. McCutchen, which answered a previous question left open by the Court, and held that in a section 502(a)(3) reimbursement action under ERISA based on an equitable lien by agreement, the ERISA plan's terms govern, and equitable principle will not override the language of the contract.
Sereboff Leaves Issue Open
To understand what this means, and how the Court got to the holding in US Airways, it is important to go back and understand the Court's holding in Sereboff v. Mid Atlantic Medical Services, Inc., (2006) 547 U.S. 356, which the US Airways opinion discusses in detail.
In Sereboff, the US Supreme Court affirmed that a self-funded ERISA plan could enforce ERISA reimbursement provisions under federal law and that an action for the same was equitable in nature and could therefore proceed under section 502(a)(3)(B) against the person holding the funds.
Section 503(a)(3) authorizes health-plan administrators to bring a civil action to obtain appropriate equitable relief to enforce the terms of the plan.
The Sereboff court left open an important issue: whether relief sought was "appropriate equitable relief" under 502(a)(3) when the language in the plan did not allow for reductions pursuant to the "make whole" doctrine. See, Id, at 369, fn. 2.
Circuits Split on Whether Equitable Defenses Apply to Self-funded ERISA Liens When Plan Waives Them
The Circuit Courts of Appeal have been divided on this issue of the applicability of equitable defenses (such as comparative fault, make whole, common fund) to self-funded ERISA plans, where the plan purports to waive said defenses.
The Fifth, Seventh, Eighth and Eleventh Circuits, had held that the language of the plan governed. See, Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232, 1238 (11th Cir.2010); Admin. Comm. of Wal-Mart Stores, Inc. Associates' Health & Welfare Plan v. Shank, 500 F.3d 834, 839 (8th Cir.2007); Administrative Committee of Wal-Mart Stores, Inc. Assocs.' Health & Welfare Plan v. Varco, 338 F.3d 680, 691-92 (7th Cir.2003); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348, 361 (5th Cir. 2003); Wal-Mart Stores, Inc. Assocs.' Health and Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir.2000).
However, the Third and Ninth Circuits had found that that claims for "appropriate equitable relief" under section 502(a)(3) of the Employee Retirement Income Security Act of 1974 are subject to traditional equitable defenses regardless of plan language to the contrary. See, U.S. Airways, Inc. v. McCutchen, 663 F. 3d 671 (3rd Cir. 2011) and CGI Technologies and Solutions v. Rose 683 F.3d 1113 (9th Cir. 2012).
US Airways v. McCutchen Holds That the Plan Language Governs
The U.S. Supreme Court took up this issue in U.S. Airways, Inc. v. McCutchen, 569 U.S. ____ (2013).
The issue question presented by US Airways was:
"Whether the Third Circuit correctly held--in conflict with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits--that ERISA Section 502(a)(3) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan's terms give it an absolute right to full reimbursement."
On April 16, 2013, the U.S. Supreme Court reversed the Third Circuit and held that in a section 502(a)(3) action based on an equitable lien by agreement, the ERISA plan's terms govern. "Neither general unjust enrichment principles nor specific doctrines reflecting those principles--such as the double-recovery or common-fund rules invoked by McCutchen--can override the applicable contract."
Common Fund Doctrine Serves As the Default Rule
Importantly, the Court did not stop there. Writing for the majority, Justice Kagan concluded that although "equitable rules cannot trump a reimbursement provision, they may aid in properly construing it. US Airways' plan is silent on the allocation of attorney's fees, and the common-fund doctrine provides the appropriate default rule to fill that gap."
Justice Kagan explained that the plan's terms fail to select between two alternatives: "whether the recovery to which US Airways has first claim is every cent the third party paid or, instead, the money the beneficiary took away." And in failing to so specify, the common-fund rule is the default rule.
"This Court has 'recognized consistently' that someone 'who recovers a common fund for the benefit of persons other than himself' is due 'a reasonable attorney's fee from the fund as whole.'"
Moreover, the Court acknowledged that the majority of states use the common fund doctrine to allocate the costs of third party recoveries between insurers and beneficiaries. Justice Kagan further noted that this approach was in line with what the parties' expectations would be and with the very rationale of the doctrine:
"Third-party recoveries do not often come free: To get one, an insured must incur lawyer's fees and expenses. Without cost sharing, the insurer free rides on its beneficiary's efforts--taking the fruits while contributing nothing to the labor. Odder still, in some cases--indeed, in this case--the beneficiary is made worse off by pursuing a third party. Recall that McCutchen spent $44,000 (representing a 40% contingency fee) to get $110,000, leaving him with a real recovery of $66,000. But US Airways claimed $66,866 in medical expenses. That would put McCutchen $866 in the hole; in effect, he would pay for the privilege of serving as US Airways' collection agent. We think McCutchen would not have foreseen that result when he signed on to the plan."
Thus, although US Airways' plan asserted a first claim on the recovery, its formula applies to only the true recovery, after the costs of obtaining it are deducted.
This holding, which provides something for both ERISA plans and tort plaintiffs, will no doubt greatly affect how ERISA insurers draft the language of their plans in the future. It will not be surprising if ERISA plans now include language that specifies how to pay for the costs of recovery. Until then, scour the plan language and if it is not in there, the common fund doctrine applies, and reduce that ERISA lien for attorney's fees.
What is yet to come from ERISA plans makes it all the more important that attorneys deal with liens early on in their cases, to ensure that plans are willing to accept a reduced recovery before finalizing the third party settlement.
The case is US Airways v. McCutchen, Case No. 11-1285.
Note: This is just one of many issues involved in ERISA liens and liens in general.
For further discussion on liens, please see:
1. The FindLaw Guide to Negotiating Liens in Personal Injury Cases
2. Negotiating Tips for Hospital Liens in Personal Injury Cases
3. Negotiating Tips for "Med Pay" Claims for Reimbursement
4. Tips for Negotiating ERISA Liens in Personal Injury Cases
5. 7 Steps to Approaching Lien Claims in Personal Injury Cases
6. How to Deal with Medicare Liens in Personal Injury Cases
7. Negotiating Tips for Health Insurance Liens in Personal Injury Cases
8. State Medicaid Liens Limited by US Supreme Court in Wos v. E.M.A.