By:  Ian H. Morrison and Barbara H. Borowski

Yesterday, the Supreme Court of the United States heard oral argument in U.S. Airways, Inc. v. McCutchen, a case we previously wrote about on December 15, 2011 when we addressed the Third Circuit’s ruling and on June 25, 2012 when the Supreme Court granted certiorari.  McCutchen involved a claim by U.S. Airways for reimbursement of medical benefits it paid to a plan beneficiary injured in a motor vehicle accident from the beneficiary’s settlement in a related personal injury suit.  U.S. Airways sought full reimbursement and declined to offset the portion of the personal injury settlement that went to attorneys’ fees for the injured plan participant.  The Third Circuit deviated from decisions handed down by five of its sister circuits and concluded that these types of reimbursement claims (which are actions for “appropriate equitable relief” under ERISA Section 502(a)(3)) are subject to equitable defenses, such as unjust enrichment.  The court also held that those defenses could override express terms of the plan, which otherwise would require full reimbursement by beneficiaries.

The Supreme Court agreed to decide “[w]hether the Third Circuit correctly held — in conflict with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits — that Section 502(a)(3) of the Employee Retirement Income Security Act (ERISA) 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.”

The transcript of yesterday’s argument can be seen here.

At oral argument, U.S. Airways focused on the Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), in which the Court allowed claims to enforce equitable liens.  It further argued that equitable defenses — such as the common fund and unjust enrichment doctrines– are inapplicable because this case does not involve a freestanding action for equitable subrogation but rather it involves an action to enforce an agreement.  The equitable relief sought by the Plan (an equitable lien by agreement) requires the court to enforce the actual agreement of the parties, U.S. Airways argued, which allows full reimbursement, rather than rewriting the parties’ agreement.

McCutchen argued that in Sereboff the Court had not reached the issue of what equitable defenses apply to reimbursement claims based on an express agreement.  McCutchen conceded that, while the case involves a reimbursement claim for an equitable lien by agreement, the claim was based on an express subrogation clause in the agreement and therefore is subject to equitable principles of subrogation.  McCutchen argued that reimbursement claims based on express agreements are governed by the same principles of unjust enrichment that govern freestanding subrogation claims.  He argued that the equitable common fund rule requires that U.S. Airways pay its proportional share of the attorney fees and costs incurred in obtaining the damages recovery.

The Justices — especially Justice Kagan — focused on whether the plan established a reimbursement agreement or a merely a right to subrogation.  This issue is important because subrogation and reimbursement are distinct legal theories and the corresponding  relief is different.  Justices Kagan and Sotomayor pointed out that Sereboff notes that the affirmative defenses that apply in a normal subrogation context are “beside the point” where there is a subrogation by agreement.  Freestanding subrogation claims have one set of remedies or rights, and subrogation claims by agreement have another.  Justice Sotomayor found “unsettling” McCutchen’s suggestion that the rights and remedies would be the same for express and implied agreements.  Justice Ginsburg mentioned that Sereboff left open the issue of whether the make-whole and common fund doctrines apply where there is an equitable lien by agreement.

Several Justices — Justices Sotomayor and Breyer in particular — also were concerned with the perceived unfairness of the plan’s ability to seek reimbursement of the entire amount obtained from the third party without factoring in attorney’s fees.  U.S. Airways argued that McCutchen owes the plan 100% of his recovery from the third party because that is what the plan provides.  It explained that it was McCutchen that “double-promised his money” to U.S. Airways and to his attorney.  Justice Ginsburg appeared to acknowledge that there is no unjust enrichment because the plan is simply asking for what the agreement provides.

The argument also featured a heated exchange between the Justices over an issue that McCutchen did not raise on appeal — the distinction between the language in the summary plan description and the formal plan document.  Justices Ginsburg, Kennedy, and Sotomayor were concerned that the terms of the plan contained a subrogation clause but not a reimbursement clause, and it contained no language that clearly abrogated the common fund.  Only the summary plan description contained clear language that the plan could seek reimbursement.  Justice Kennedy suggested that this case cannot be decided without looking at the plan terms.  Justice Scalia, however, said that this issue was waived by McCutchen.  It thus is possible that the Court will revisit its Cigna Corp. v. Amara decision on the primacy of plan terms.

The Court’s decision is expected by June of next year.