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ERISA, the Common Fund Doctrine and Federal Common Law




by:
William G. Beatty
Johnson & Bell, Ltd. - Chicago Office

 
July 3, 2013

Previously published on June 2013

The interaction of ERISA, the common fund doctrine and federal common law was recently demonstrated in the United States Supreme Court’s decision in the case of US Airways, Inc. v. McCutchen, --- U.S. ---, 133 S. Ct. 1537, 185 L.Ed.2d 654 (decided April 16, 2013).

Before discussing the ruling in that case, however, some prefatory definitions may be in order:

ERISA has been variously described by the United States Supreme Court as a “comprehensive and reticulated statute,” with its principal function being to “protect contractually defined benefits” in employer-sponsored group welfare and pension plans, “built around reliance on the face of written plan documents”, and providing a “panoply of remedial devices” for a denial of benefits or deprivation of rights under the terms of the plan. See, in order of quotations, Nachman v. Pension Benefit Guaranty Corp., 446 U.S. 359 at 361, 100 S. Ct. 1723 at 1726, 64 L.Ed.2d 354 at 359 (1980); Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 at 148, 105 S. Ct. 3085 at 3093, 87 L.Ed.2d 96 at 107 (1985); Curtis-Wright Corp. v. Schoonejongen, 514 U.S. 73, 83, 115 S. Ct. 1223, 131 L.Ed.2d 94 (1995); and Russell, supra, 473 U.S. at 146; accord, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 108, 109 S. Ct. 948, 103 L.Ed.2d 80 (1989).

Secondly, the common fund doctrine “permits a party who creates, preserves, or increases the value of a fund in which others have an ownership interest to be reimbursed from that fund for litigation expenses incurred” in generating that fund, including recovery of attorneys’ fees for the efforts expended in creating, preserving or increasing the value of the fund. See Scholtens v. Schneider, 173 Ill.2d 375, 671 N.Ed.2d 657 (1996).

The common fund doctrine can operate as a common law rule of general application, or its provisions can be incorporated into statute, such as the reduction of a worker’s compensation lien by the 25% awarded as attorneys’ fees to counsel who generated the fund out of which the lien is satisfied.

The justification behind rewarding the attorney for the creation, preservation or increase in value of the common fund is to spread the costs of litigation to the beneficiaries of the fund who would otherwise be unjustly enriched by the attorney’s efforts. Ryan v. City of Chicago, 274 Ill.App.3d 913, 654 N.Ed.2d 483 (1995).

Lastly, federal common law, in the ERISA context, serves as a gap-filler for issues on which ERISA is silent. “When ERISA is silent on an issue, a federal court must fashion federal common law rules to govern ERISA suits.” See Fox Valley and Vicinity Const. Workers’ Pension Fund v. Brown, 897 F.2d 275, 281 (7th Cir. 1990) (en banc), (cert. denied, 498 U.S. 820, 111 S. Ct. 67, 112 L.Ed.2d 41 (1990)).

The federal courts, according to the Supreme Court’s holdings, and consistent with Congressional intent in the passage of ERISA, are to develop a body of “federal [substantive] common law of rights and obligations under ERISA-regulated plans,” including both welfare and pension plans. See Firestone, 489 U.S. at 110, quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 at 56, 107 S. Ct. 1549, 95 L.Ed.2d 39 (1987). See also, 120 Cong. Rec. 29933 at 29942 (1974) (remarks Sen. Javits).

US Airways, Inc. v. McCutchen, 2013 U.S. LEXIS 3154, 133 S. Ct. 1537, 185 L.Ed.2d 654, a 5 to 4 decision handed down on April 16, 2013, explored the interaction of the three aforementioned concepts, and described the circumstances under which the common fund doctrine could be applied as a part of the federal common law of ERISA.

James McCutchen, an employee of US Airways and a participant in the company’s group health plan, was involved in a non-work-related car accident in which he sustained serious personal injuries. His group health plan through US Airways obligated McCutchen’s employer to pay any medical expenses that he incurred as a result of a third party’s conduct, including the negligence of the driver that had struck McCutchen’s car. The US Airways plan contained a reimbursement provision allowing the employer to seek reimbursement on behalf of the plan from any money McCutchen later recovered from the other driver, the other driver’s insurance carrier, or other sources. Such reimbursement provisions in employer-sponsored group health plans are typically enforced under Section 502(a)(3) of ERISA, 29 U.S.C. § 1132(a)(3), which authorizes the plan sponsor to file a civil action “to obtain . . . appropriate equitable relief . . . to enforce the terms of the plan . . . ,” including the plan’s reimbursement provisions. See Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356, 126 S. Ct. 1869, 164 L.Ed.2d 612 (2006).

McCutchen opposed his employer’s claim for reimbursement on behalf of the plan, asserting certain equitable defenses against US Airways’ claim, arguing that since the amount of money that he had recovered from the culpable third party, as well as other sources, fell far short of fully compensating him for his injuries, US Airways should not be able to assert a reimbursement claim unless McCutchen had received sufficient funds from the other driver, along with those from his employer and other sources, so as to have obtained a “double recovery.” Then and only then, according to McCutchen’s argument, could US Airways assert a reimbursement claim against such “excess” funds.

McCutchen also argued that any reimbursement US Airways may otherwise claim under the provisions of the group health plan, was subject to reduction by the common fund doctrine, which would require US Airways to pay an appropriate share of the attorneys’ fees incurred in securing the settlement funds that McCutchen had obtained from the other driver, as well as from his own underinsured motorist coverage.

The District Court rejected both of McCutchen’s equitable defenses to the employer’s reimbursement claim, granting summary judgment in favor of the US Airways plan since the plan clearly and unambiguously provided for full reimbursement of the medical expenses previously paid to McCutchen by his group health plan. See 2010 U.S. Dist. LEXIS 89377 (W.D. Pa. 2010).

The Third Circuit Court of Appeals vacated the District Court’s summary judgment order and held that in US Airways lawsuit for “appropriate equitable relief” under ERISA, traditional equitable defenses should be able to be asserted against such a claim, since to prohibit same would lead to an “unjust enrichment” of the employer-sponsored plan, thereby providing US Airways with a “windfall” by recovering the full amount that the plan had paid to Mr. McCutchen without having had to “contribute to the cost of obtaining the third-party recovery.” See 663 F.3d 671 at 679.

The Supreme Court granted certiorari to resolve a split among the federal appellate courts on whether equitable defenses can override an ERISA plan’s reimbursement provisions.

Ultimately, the Supreme Court held that both the District Court and the Third Circuit decisions were incorrect. Since the plan was silent as to the allocation of attorneys’ fees under the common fund doctrine, it was error for the District Court to disallow the application of the doctrine so as to avoid unjust enrichment on the part of the employer-sponsored group health plan. Likewise, the Court of Appeals for the Third Circuit was incorrect in stating that the application of equitable defenses could trump the written terms of the plan, especially McCutchen’s defense of no reimbursement to the plan absent a double recovery on his part.

The bottom line of the Supreme Court’s ruling is that traditional equitable defenses to a plan’s claim for reimbursement will not be allowed to trump any contrary written provisions of the plan. When the plan language is silent on the issue of allocation of attorneys’ fees, however, the common fund doctrine can be asserted against the plan’s reimbursement claim as an aspect of the federal common law of ERISA, to prevent the plan from being unjustly enriched in asserting a claim for a full recovery when it has not paid an appropriate share of attorneys’ fees incurred in the generation of the fund out of which the plan’s reimbursement would be paid.

Thus, in the absence of plan language that precludes its operation, the common fund doctrine could become as operative in the federal common law of ERISA as the standard of review (see Firestone, supra), or rules of contract construction. (See Life Ins. Co. of North America v. Von Valtier, 116 F.3d 279 (7th Cir. 1997)).



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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