By: Ian Morrison, Alexis Hawley and Sam Schwartz-Fenwick

A recent Third Circuit ruling, US Airways, Inc. v. McCutchen, No. 10-3836, 2011 WL 5557411 (3d Cir. Nov. 16, 2011), allowed a defendant to assert equitable defenses against a claim for relief under § 502(a)(3) of ERISA.

The defendant in McCutchen was a participant in the US Airways medical plan.  Due to a serious car accident, McCutchen incurred $66,866 in medical expenses, which were paid by the US Airways plan.  In litigation over the accident, McCutchen recovered less than $66,000 (after attorneys’ fees and costs).  US Airways, pursuant to an express provision within the plan that required reimbursement following third-party recovery, contacted McCutchen and demanded that he repay the plan for his medical treatment. McCutchen refused, and US Airways sued him under ERISA § 502(a)(3) seeking “appropriate equitable relief.”  Defendant asserted the equitable defense of unjust enrichment and argued that US Airways would unfairly benefit from his efforts should he be required to reimburse the Plan for the entire cost of his care.  The district court rejected this argument and ordered him to pay the full $66,866 to the plan.

On appeal, the Third Circuit held that the modifier “appropriate” meant that equitable relief available under § 502(a)(3) was also subject to traditional equitable defenses.  In so ruling, the Third Circuit relied heavily on Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), in which the Supreme Court clarified the meaning of “appropriate equitable relief.”  In examining § 502(a)(3), the Knudson Court construed “equitable relief” as meaning “something less than all relief.”  Thus, the Third Circuit reasoned that “appropriate equitable relief” must indicate “something less than all equitable relief.”  Again citing Knudson, the Third Circuit further opined that a statutory reference to an equitable remedy must be construed “to contain the limitations upon its availability that equity typically imposes.”  The Third Circuit noted that many other courts have declined to limit a plan’s right to seek reimbursement based on express plan provisions.  The court, however, found that such plan language could not trump the express language of the statute and Supreme Court precedent, both of which implied the existence of limitations on equitable relief.  As such, the Third Circuit applied the principal of unjust enrichment and overturned the judgment of the district court, noting that the judgment inequitably denied McCutchen full payment for his medical expenses while simultaneously giving US Airways a windfall because it had contributed nothing to the cost of the third-party recovery.

Since the Knudson decision, plans have faced increasing barriers to their attempts to enforce reimbursement provisions or pursue subrogation claims.  The McCutchen decision is another potential setback for plans, although it appears that its impact is limited to situations where a plan attempts to recover more than the net recovery obtained from a third-party tortfeasor.  Plans seeking to enforce reimbursement provisions may wish to adjust their litigation strategy in light of the Third Circuit’s ruling.