Tuesday, 21 May 2013 08:29
By Mary Leigh Pirtle
An employer’s Employee Retirement Income Security (ERISA) health plan required an employer to pay an employee’s medical expenses if medical expenses were incurred as a result of a third party’s negligence which damaged the employee. In this particular case, the employee was injured by a third party in an automobile accident, and in accordance with the health plan contract, the employer paid $66,866 in medical fees on behalf of the employee. However, under the terms of the ERISA plan, the employer was entitled to reimbursement of all $66,866 if the employee recovered any money from the third party in a successful lawsuit or otherwise.
The employee, on his own accord, sued the third party for his negligence and ultimately received $110,000 in settlement. After paying the 40% contingency fee to his attorney, the employee was left with $66,000. After learning of the employee’s $66,000 recovery, the employer demanded reimbursement of the $66,866 it previously paid to cover the employee’s medical expenses. When the employee refused to hand over the money, the employer sued under ERISA § 502(a)(3), seeking “appropriate equitable relief” in enforcement of the reimbursement provision.
But what if the contract isn’t fair?
In his defense, the employee raised two arguments concerning the fairness of the reimbursement provision. First, the employee argued that his total medical expenses, lost wages, and pain and suffering exceeded $1 million, and it would be unfair for the court to require him to reimburse his employer when he had not yet been made whole for his damages incurred by the third party. Second, the employee argued that if he was required to reimburse the employer, the employer should have to share the cost of the 40% contingency fee. The U, S. federal district court rejected both arguments and granted judgment to the employer on the ground that the ERISA plan unambiguously provided for full reimbursement to the employer. On appeal, the U.S. Court of Appeals for the Third Circuit did away with the district court’s ruling and instead held that the principles of unjust enrichment controlled the ERISA contract terms when they came into conflict, and instructed the district court to determine what amount less than the full $66,000 would qualify as “appropriate equitable relief” under ERISA.
Finally, the Supreme Court rejected the Third Circuit’s interpretation and, in turn, rejected the employee’s arguments that fairness principles should trump the terms of the ERISA contract, stating, “[i]f the agreement governs, the agreement governs.” Essentially, the Supreme Court held unjust enrichment and similar equitable claims are “beside the point” when a court faces the clear and unambiguous express terms of a contract. Thus, the employee was required to reimburse the employer up to the full amount paid to the employee under the ERISA plan.
Equitable Rules only apply for clearing up ambiguities
While the Court was clear that equitable (fairness) rules cannot trump a reimbursement provision, these rules may aid courts in properly construing additional gaps in a contract. Fortunately for the employee, the contract was silent as to the allocation of attorney’s fees. Under most jurisdictions, contracts silent as to allocation of attorney’s fees are interpreted under the “common fund” rule. This rule requires all parties to share in the cost of litigation (i.e. attorneys’ fees) under a principle of equity. Because the ERISA plan was silent in this area, the employer was required to share in the attorney’s contingency fee. The Court reasoned that if the employer had wished to depart from the well-established “common fund” rule, it could have drafted the contract to say so.
While the employee ended up with a more favorable result because of the gap in the attorney’s fee provision, the Supreme Court was clear that unfairness is no defense to a clear and concise ERISA plan contract.
Read the case here.