On June 25, the Supreme Court granted the petition for a Writ of Certiorari submitted by US Airways, regarding the Third Circuit’s ruling in US Airways, Inc. v. McCutchen, 663 F.3d 671 (3d Cir. 2011). The Third Circuit held that a judgment requiring a plan participant to provide full reimbursement to the plan administrator for medical expenses which the administrator paid to the participant constituted “inappropriate and inequitable relief.”

James McCutchen, the plan participant, was involved in a serious car accident. Following the accident, a health benefit plan administered by US Airways paid $66,866 for McCutchen’s medical expenses.

The Summary Plan Description for the US Airways benefits plan covering McCutchen contained a provision regarding “Subrogation and Right of Reimbursement,” under which a beneficiary is required to reimburse the plan for any amounts it has paid out of any monies the beneficiary recovers from a third party.

McCutchen later recovered $110,000 from third parties, with the assistance of his attorneys. US Airways then demanded reimbursement of the $66,866 it had paid, without allowance for McCutchen’s legal costs (including a 40% contingency attorneys’ fees and expenses), which reduced his net recovery to less than the amount demanded by US Airways.

When McCutchen did not pay, US Airways, in its capacity as the administrator of the ERISA benefits plan in question, filed suit in the United States District Court for the Western District of Pennsylvania, under ERISA § 502(a)(3), seeking “appropriate equitable relief” in the form of a constructive trust or an equitable lien on the $41,500 held in trust by McCutchen’s attorneys and the remaining $25,366 personally from McCutchen. McCutchen argued that it would be unfair and inequitable to reimburse US Airways in full when he has not been fully compensated for his injuries, including his pain and suffering.

McCutcheon argued that US Airways would be unjustly enriched if it were now permitted to recover from him without any allowance for the attorneys’ fees and expenses that he incurred in pursuing the recovery from the third parties.

The District Court rejected McCutchen’s arguments and granted summary judgment in favor of US Airways. On appeal, the Third Circuit held that US Airways claim for reimbursement under ERISA § 502(a)(3) is subject to equitable limitations. In reaching this finding, the Third Circuit noted that the Supreme Court considered an ERISA plan administrator’s claim for reimbursement under the terms of a plan and ERISA § 502(a)(3) in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006). In Sereboff, the Supreme Court determined that a plan administrator could base a claim for reimbursement on an equitable lien by agreement and that such a claim could be “equitable relief” under ERISA § 502(a)(3).

However, the Supreme Court in Sereboff reserved a decision on whether the term “appropriate,” which modifies “equitable relief” in ERISA § 502(a)(3), would make equitable principles and defenses applicable to such a claim by a plan administrator.

The Third Circuit agreed with McCutchen’s argument that the phrase “appropriate equitable relief” means that courts must exercise their discretion to limit that relief to what is “appropriate” under traditional equitable principles.

In its Petition for a Writ of Certiorari submitted in April, US Airways framed the “Question Presented” for the Supreme Court as, “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.”

This case is certainly one worth following. Many plans contain “subrogation” or “reimbursement” provisions, and how the Supreme Court resolves the question of whether “equitable limitations” can curb a plan’s recovery under such a provision and ERISA § 502(a)(3) could have a far reaching impact on how (and how often) these provisions are utilized to attempt to recoup funds paid out by the plans.

Moreover, the Ninth Circuit recently joined the Third Circuit in holding that equitable principles could limit a plan’s reimbursement.

Elizabeth Wilson Vaughan is an associate in the ERISA Litigation Group of Alston & Bird LLP. She can be reached at 404-881-4965 or beth.vaughan@alston.com.