Retiree Health Care Litigation

By: Meg Troy and Ron Kramer

Seyfarth Synopsis: Disputes over lifetime retiree health benefits for union retirees may become a memory of the past. For the second time in three years, the Supreme Court confirms that collective bargaining agreements must interpreted based on ordinary principles of contract law and it is inappropriate to presume that an agreement allows lifetime vesting of retiree benefits.

On February 20, 2018, in CNH Industrial N.V. v. Reese, No. 17-515 (per curium), the Supreme Court rejected the Sixth Circuit’s attempt to revive the Yard-Man inference. In 2015, the Court in M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015), struck down the Sixth Circuit’s use of the Yard-Man inference, which courts used to infer that negotiated retiree benefits were intended to continue for the retirees’ lives. The Court found that when a contract is silent as to the duration of retiree benefits, “a court may not infer that the parties intended for those benefits to vest for life.” Rather, collective bargaining agreements must be interpreted based on ordinary principles of contract law. You can read about the Court’s decision in M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015), here.

In Reese, the Sixth Circuit basically decided that, if it could not use the Yard-Man inference to infer vested benefits, it could still use the inference to find collective bargaining agreements ambiguous regarding the vesting of retiree health such as to permit the introduction of extrinsic evidence of vesting. While the Sixth Circuit acknowledged it was basically applying Yard-Man to find an ambiguity, it reasoned that “[t]here is surely a difference between finding ambiguity from silence and finding vesting from silence.”

The Supreme Court once again said “no.” It rejected the Sixth Circuit’s way of handling these disputes, which the justices said was rooted in inferences and assumptions and not the text of the applicable collective bargaining agreements. The agreement at issue contained a general durational clause that applied to all benefits unless otherwise specified. As such, the Court held that the general durational clause meant the agreement unambiguously provided that CNH retirees were entitled to company-provided health benefits only until the agreement expired and not indefinitely. The Sixth Circuit’s decision to the contrary inappropriately used inferences inconsistent with Tackett. The Court reverse the Sixth Circuit’s judgment and remanded the case for further proceedings consistent with this opinion.

Thus, for the second time in three years, the Supreme Court has rejected Yard-Man and has definitively held that collective bargaining agreements are to be interpreted according to ordinary principles of contract law. Yard-Man is dead. The interference cannot even be used to find an ambiguity in a contract. Hopefully, this time the Sixth Circuit will listen.

By Ron Kramer and Chris Busey

The Supreme Court today put an end to the so-called Yard-Man inference that has plagued many employers with collective bargaining agreements that provide retiree health benefits to employees. Under the Yard-Man inference, a court would infer that negotiated retiree benefits were intended to continue for the retirees’ lives.

In M&G Polymers USA, LLC. v. Tackett, the Supreme Court rejected this inference and over three decades of Sixth Circuit precedent. In the matter before the Court, retirees and their former union brought suit against M&G Polymers for requiring retirees to begin contributing for their health benefits. Retirees claimed that an expired collective bargaining agreement entered into between M&G and their former union vested them with contribution-free retiree benefits for the lives of retirees, their spouses and their dependents. They pointed to a clause stating that certain retirees “will receive a full Company contribution toward the cost of [health care] benefits.” Retirees claimed that the modification of this vested benefit violated Section 301 of the Labor Management Relations Act of 1947 (“LMRA”) and Section 502(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (“ERISA”).

After the District Court dismissed the complaint for failure to state a claim, the Sixth Circuit Court of Appeals reversed. The appellate court relied on International Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983) in remanding the case. The District Court held a bench trial and interpreted the Sixth Circuit’s opinion in the original appeal as conclusively determining that the retirees’ health benefits had vested under the terms of the contract. On the second appeal, the Sixth Circuit stated that the District Court erred in finding their original opinion conclusive, but stated that the lower court was correct in “presum[ing]” that “in the absence of extrinsic evidence to the contrary, the agreements indicated an intent to vest lifetime contribution-free benefits.”

Justice Thomas delivered the opinion of the Court and dismantled the Yard-Man presumption. In Yard-Man, the Sixth Circuit professed to apply traditional rules for contract interpretation in finding that retiree medical benefits — under very similar circumstances as in Tackett — had vested. In Yard-Man, the Sixth Circuit first found that the bargaining agreement was ambiguous as to duration because the contract provided that the employer “will provide” benefits.  It then found an intent for retiree medical benefits  to vest because the contract contained termination provisions for terminating active employee benefits and a retiree’s spouse and dependent’s benefits under certain circumstances, but no termination provisions for the retiree health benefits at issue. From this the Sixth Circuit inferred an intent to vest retiree benefits. The Sixth Circuit also employed the “illusory promise” doctrine and stated that a reading of the contract terminating retiree benefits with the expiration of the contract would prove illusory for a subset of employees. The Sixth Circuit then turned to “the context of labor negotiations,” reasoning that, since benefits of employees who already retired are a permissive subject of collective bargaining, “it is unlikely that such benefits . . . would be left to the contingencies of future negotiations.” Last but not least, the Sixth Circuit rejected the applicability of the general contractual durational clause, concluding that the contextual clues outweighed any contrary implications derived from a routine durational clause.

The Supreme Court found that the Yard-Man inference violates ordinary contract principles “by placing a thumb on the scale in favor of vested retiree benefits in all collective bargaining agreements.” Instead, as in traditional contract interpretation, ascertaining the intention of the parties should be paramount. The Court noted that the Sixth Circuit’s post-Yard-Man opinions have only expanded on this faulty reasoning, noting that the appellate court’s requirement that a contract contain a specific durational clause for retiree health care benefits to prevent vesting “distort[s] the text of the agreement and conflict[s] with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties.”

In rejecting Yard-Man, the Court claimed the Sixth Circuit’s assessment of the likely behavior of the bargaining parties was not based on any record evidence, but instead from the court’s suppositions about the intentions of the parties. The Court found that “too speculative and too far removed from the context of any particular contract to be useful in discerning the parties’ intention.” While a court may use custom and usages in an industry to determine the meaning of a contract, those customs and usages must be proven, and are limited to the industry in which they are proven.

The Court also noted the Sixth Circuit’s misapplication of the “illusory promise” doctrine, which it used to invalidate provisions that may not ever affect certain employees. While a promise that is “partly” illusory may not benefit all employees covered by a bargaining agreement, those that it does benefit still provides consideration and makes the contract enforceable.

Lastly, the Court found that the Sixth Circuit failed to consider the traditional principle that courts should not construe ambiguous writings to create lifetime promises, and that contract obligations will cease in the ordinary course, upon termination of the bargaining agreement. The Court found that when a contract is silent as to the duration of retiree benefits, “a court may not infer that the parties intended for those benefits to vest for life.” The Court remanded the case to the Sixth Circuit to decide under ordinary contract principles.

In a concurrence written by Justice Ginsberg and joined by Justices Breyer, Sotomayor, and Kagan, Justice Ginsberg rejected M&G Polymers’ assertion in its brief that “clear and express” language was necessary to vest retiree health benefits. Justice Ginsberg noted that post contract obligations may not only be derived from express contract terms, but implied terms as well.  Justice Ginsberg urged the Sixth Circuit on remand to examine the entire agreement to determine whether benefits vested. In particular, she urged the Sixth Circuit to consider two clauses that she believed relevant as to the parties’ intent to vest retiree medical benefits. She pointed to the clause that purportedly ties health care to lifetime pension benefits and to the structure of the survivor clause, which provides benefits to spouses beyond the death of the retiree.

The death of Yard-Man is welcome news for employers who have collective bargaining agreements with retiree medical benefit provisions. But the decision leaves open many questions as to whether and when contracts will be found to be ambiguous as to the duration of retiree benefits. Nor did the Court address tests applied by other Circuit Courts of Appeal. For example, the Seventh Circuit has a presumption that retiree health benefits expire along with the labor agreement granting those benefits unless the contract unambiguously vests retiree benefits or the contract is genuinely ambiguous. Bidlack v. Wheelabrator, 993 F.2d 603, 606-07 (7th Cir. 1993) (en banc). There may be a lot more litigation over whether contracts are ambiguous and, if so, when retiree benefits vest under ordinary principles of contract law before the full impact of Tackett is known.

Regardless, the Sixth Circuit has long been the least employer friendly when it comes to determining whether retiree medical benefits have vested. With the end of Yard-Man, employers with operations in the Sixth Circuit — and those who have no operations within the Circuit yet made decisions based on the possibility of a retiree nonetheless bringing suit there — should revisit their collective bargaining agreements and analyze them anew in light of this decision.

By: Amanda Sonneborn and Chris Busey

Instead of following the proverb promise little and do much, in , the Sixth Circuit Court of Appeals determined that M&G Polymers had done the opposite — promised a lot and done little.

Plaintiffs, retirees of M&G Polymers, who had been represented by a local union, brought suit alleging violations of LMRA § 301, ERISA §§ 502(a)(1)(B) and 502(a)(3). Their allegations stemmed from M&G’s 2006 announcement that it would require retirees to make health care contributions. M&G also made a number of other changes to the plan, including increasing deductibles, co-pays, and participants’ maximum out of pocket expenses. Plaintiffs saw this as M&G breaching a promise made through collective bargaining to provide retiree health benefits without employee contributions. After a bench trial, the Southern District of Ohio found for the plaintiffs on the remaining claims and granted a permanent injunction reinstating plaintiffs to their lifetime contribution-free health care benefits under the post-2007 version of the plan, including the additional participant costs.. 

Defendants appealed the district court ruling on the grounds that (1) certain “cap” letters that required employee contributions were part of the parties’ labor agreement; and (2) the district court erred in finding that plaintiffs’ right to lifetime healthcare vested at retirement under the terms of the plan. Plaintiffs cross-appealed, arguing that they should be entitled to benefits under the pre-2007 version of the plan.

Judge R. Guy Cole, Jr., writing for the court, first held that it was not clear error for the district court to find that “cap” letters did not apply to the retirees’ local union. M&G (and predecessor employers) had negotiated various collective bargaining agreements with the plaintiffs’ union. It also negotiated “cap” letters that placed a cap on M&G’s health care contributions. It was not erroneous to find that these cap letters did not apply to plaintiffs’ union, even though they may have been part of some master agreements with other locals. The ratification of the cap letters presented a factual question that the district court resolved in the plaintiffs’ favor.

Having concluded that the cap letters did not apply, the court then turned to the contracts themselves. Using standard contract interpretation principles, Judge Cole affirmed the lower court’s finding that the parties intended for plaintiffs’ retiree health benefits to vest under the various agreements. These vested benefits could not be bargained away without the retiree’s permission.

Finally, the court denied plaintiffs’ cross-appeal. Although the benefits under the post-2007 plan were less generous than under earlier plans, the reductions “were not unreasonable.”

The takeaways from this case should be familiar to employers with unionized workforces. Make your intentions clear in negotiations and document those negotiations meticulously in clear and unambiguous contract language.

In Plambeck v. The Kroger Co., et al., No. CIV. 11-5054-JLV (D.S.D. Mar. 11, 2013), Plaintiff underwent back surgery that she believed to be covered by her health insurance plan — a fact she claimed was confirmed by an insurance plan representative.  Yet, after the procedure, the plan denied her claim because the plan’s terms excluded surgical procedures that were not medically necessary, and it determined the back surgery was not medically necessary.

Plaintiff then sued for equitable relief under ERISA § 502(a)(3), claiming the insurance company represented to her that her surgery was covered and that she relied on this representation.  She pleaded the theory of equitable estoppel and argued defendants were prevented from asserting the surgery was not a covered medical expense under the plan.  Under the theories of surcharge or unjust enrichment, she alleged she was entitled to be “made whole” and to be put in the same position she would have been in had the representations been true.  She alleged that reimbursement for the surgical procedure constituted “other appropriate equitable relief” within the meaning of § 502(a)(3).

Denying plaintiff’s claim, the court found that plaintiff inappropriately attempted to impose personal liability on defendants for the loss to her own pocketbook.  The court found that this liability is a classic form of legal relief which the Eighth Circuit has determined is not available under § 502(a)(3).  Despite Plaintiff’s claim that the Supreme Court’s discussion in Amara relating to equitable relief under § 502(a)(3) supplants Eighth Circuit case law, the court concluded that the Eighth Circuit continues to rely on prior, binding Supreme Court precedent limiting relief sought under § 502(a)(3) to equitable, not legal, relief.  Under Eighth Circuit precedent, permissible monetary claims under § 502(a)(3) are limited to those seeking a specifically identifiable fund.  As Plaintiff sought something more, her claim was impermissible.

 By: Ronald Kramer, Justin T. Curley, and Barbara Borowski,

 Employers may unwittingly create implied vested contractual rights to retirement and healthcare benefits for their employees in perpetuity.

 In Sonoma County Ass’n of Retired Employees v. Sonoma County, No. 10-17873 (February 26, 2013), the Ninth Circuit vacated a district court’s dismissal of a lawsuit brought by a group of retired non-union county workers seeking to enforce an alleged agreement by the county’s board of supervisors to provide them lifetime healthcare benefits.  The retirees contended that the board broke its word to pay for “all or substantially all” of the retirees’ healthcare benefits in perpetuity when it cut the county’s healthcare benefit contributions to $500 a month for retirees in 2008, a change that was aimed at reining in the county’s ever-rising health care costs.  The retirees asserted state law breach of contract and promissory estoppel claims, as well as claims under the Contract Clauses and Due Process Clauses of the California and U.S. Constitutions.

 In 2010, the district court dismissed the suit with leave to amend, ruling that the county never expressly promised to continue retiree healthcare benefits in perpetuity, and that extrinsic evidence of such a promise could not bind the county.  The retirees filed an amended complaint, this time adding more facts and attaching evidence of an alleged express agreement with implied terms providing for healthcare benefits in perpetuity, including board resolutions, memoranda of understanding, and ordinances.  The district court remained unpersuaded on the retirees’ second try, and dismissed the complaint without leave to amend.

 The retirees appealed.  While the appeal was pending, the California Supreme Court held in 2011 in Retired Employees Ass’n of Orange County, Inc. v. County of Orange that a vested right to healthcare benefits for retired county employees can be implied under certain circumstances from an express contract created by county ordinance or resolution.  We previously reported on this decision here.

 On appeal, the Ninth Circuit, relying on Retired Employees Ass’n of Orange County, found that plaintiffs had plausibly alleged in their amended complaint that the county had entered into an express contract, which included implied terms providing healthcare benefits to retirees that vested for perpetuity.  But the Ninth Circuit determined that the retirees had not plausibly pointed to a county ordinance or resolution that created that alleged express contract with the implied terms.  It nonetheless held that the plaintiffs should be permitted another shot at amending their complaint to state a claim for an implied right to lifetime healthcare benefits based on an express contract created by county ordinance or resolution.

 Notably, the Ninth Circuit did observe that the retirees faced a “heavy burden” of establishing that the county intended to create a compensation contract with them by ordinance or resolution, and demonstrating that implied terms in that contract provided for vested healthcare benefits in perpetuity.  It cautioned that any court considering such a claim must “identify ‘a clear basis in the contract or convincing extrinsic evidence’ establishing that a contract exists and clearly delineating the contractual obligation at issue.”

 This case is significant to public employers because it lends additional heft to retirees seeking to rely on extrinsic evidence to assert implied vested contractual rights to lifetime retirement and healthcare benefits.  While private employers are generally governed by ERISA, courts may look to the relevant state law in determining whether a contractual claim could be stated under ERISA common law.  Meeting the financial obligations created by such implied rights would add substantial cost burdens to employers who never intended to assume such obligations in perpetuity.  Employers may be able to avoid creating implied vested contractual rights by carefully describing the limits of a retiree benefit, and by expressly stating that neither a benefit nor a method of calculating that benefit is vested, but instead can change from year to year. 





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.


By: Ron Kramer and Jim Goodfellow

Recently, the Sixth Circuit, in Witmer v. Acument Global Technologies, Inc.,Case No. No. 11-1793, concluded that the specific reservation of rights clause preserving the employer’s right to terminate the plan that was found in the Appendix to the collective bargaining agreement that provided retiree medical benefits enabled Acument to reduce and then terminate retirees’ health care benefits.

The dispute, although not the outcome, is one that may be familiar to many employers in the Sixth Circuit who provide retiree health care benefits by way of a collective bargaining agreement.  The CBA Appendix, entitled “Pension Plan.” an appendix first written solely for pension benefits but then later amended decades ago as retiree health insurance and life insurance were added, provided that retirees would receive “continuous health insurance…during the life of the retiree” at retirement.  In 2008, as a result of the economic downturn, Acument modified and then terminated the retiree health benefits. 

The Plaintiffs filed a class action suit alleging that Acument had breached the terms of the CBA in violation of ERISA and the Labor Management Relations Act.   They argued that the above referenced language found in the CBA Appendix constituted a promise to provide them with unalterable lifetime vested benefits.

Acument argued that the reservation of rights clause giving it the right to “amend, modify, suspend or terminate the Plan,” which appeared in the very same Appendix, demonstrated that (1) there was no such promise for lifetime benefits and (2) it had discretion to modify or terminate the retirees’ benefits.  This reservation language appeared at the beginning of the Appendix, addressing revisions to the pension plan, before the Appendix addressed the so-called “principal provisions” of the pension plan, which included retiree medical coverage and life insurance.

The district court granted Acument’s motion for summary judgment and the Sixth Circuit affirmed.  The Court emphasized that plaintiffs’ claim for lifetime benefits depended entirely on the language found in Appendix E (“continuous health insurance”), which also contained Acument’s clear reservation of rights.  Said the Court: “[plaintiffs’ claim for benefits gets nowhere without Appendix E, and yet Appendix E broadly reserves the company’s right to change the Plan benefits, using language that is incompatible with a promise to create vested, unchangeable benefits.”  The Court went on to conclude that the reservation of rights language clearly applied to the retirees’ healthcare benefits.

The Court also rejected plaintiffs’ arguments that the formal pension plan did not originally cover retiree health insurance, and that the “plan” durational language in the Appendix should be interpreted to only apply to the traditional pension plan portions of the Appendix.    In reaching this conclusion, the court recognized that the Appendix addressed the pension plan, which here included retiree health insurance, and that plaintiffs could not rely on the Appendix to provide benefits they want yet ignore the reservation language.  The Appendix defined the scope of the plan documents — here both the traditional pension plan documents and the health insurance documents —  and how they can be modified.  The Court stated that the purpose of the phrase “continuous health insurance” was to show that benefits did not automatically terminate upon expiration of the CBA, not to vest the retirees with lifetime coverage that could never be modified.  Put simply, the Court found that a “company can promise ‘continuous health insurance’ and reserve the right to modify or end that coverage if it becomes unaffordable.”

One judge on the panel dissented.  He concluded that the language cited by the parties created an ambiguity given the language referenced “Plan” in the initial paragraphs that included the reservation language, yet utilized the generic “pension plan” regarding the principal provisions, and retiree medical insurance for the description of that benefit.  The dissent called for the case to be remanded for consideration of extrinsic evidence to determine the intent of the parties.

This is an unusual decision for the Sixth Circuit, under its Yard-Man (UAW v. Yard-Man, Inc. , 716 F.2d 1476  (6th Cir. 1983)) approach for collectively bargaining retiree insurance benefits, almost always can find a way to declare the benefits vested.  Notably the Court never even cited Yard-Man by name.  The key here was that there was a strong plan reservation of rights provision actually negotiated into the contract in the same Appendix providing for the retiree insurance benefit.  Few contracts contain reservation language.  Nevertheless, this case demonstrates that under the right circumstances employers can find success in retiree insurance cases in the Sixth Circuit.  Does it signal a change, however, in the Court’s basic Yardman approach in retiree medical cases?  Do not bet the company on it.

As everyone waits for the Supreme Court to rule on the constitutional and statutory challenges to healthcare reform, stay tuned to Seyfarth Shaw. Seyfarth March 29, 2012 webinar).

A decision in the case is expected during the last week of June or the first week of July. Seyfarth Shaw Employee Benefits and ERISA Litigation attorneys will host a webinar the next business day following the decision as well as issuing a written summary of the key rulings. Information about the webinar will be posted here if you are not on Seyfarth’s mailing lists.

In addition, in the weeks following the decision the firm’s Employee Benefits attorneys will host a further webinar to discuss the practical implications of the decision — what does it mean for health plan sponsors and administrators?

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.

By: Ward Kallstrom and Jonathan Braunstein

A medical plan’s board of trustees may proceed with its restitution claim against health care providers to collect expenses the plan paid for the treatment of plan members that were later determined to have been either excessive or excluded as not medically necessary, the U.S. District Court for the Northern District of California ruled on September 12, 2011. (International Longshore & Warehouse Union-Pacific Maritime Ass’n Welfare Plan Board of Trustees v. South Gate Ambulatory Surgery Center, No. 11-01215-WHA (N.D. Cal. 9/12/11).

In South Gate, ERISA plan trustees sued an outpatient surgery center, a doctor, and an anesthesiologist for appropriate equitable relief, including restitution and agreed or implied equitable liens, seeking to recover millions of dollars in prior reimbursements that the trustees claimed had been paid for services that were excluded because they were not medically necessary or had been overpaid.

Neither the Plan nor the trustees had any contractual relationship with the providers, but the trustees alleged that the providers submitted invoices directly to the plan based on contractual assignments by plan members.  The trustees did not — at least for now — specifically allege that the providers engaged in fraud.

The providers moved to dismiss, arguing that the Plan trustees failed to state claims for appropriate equitable relief under ERISA Section 502(a)(3) because the trustees had not pled fraud and erroneous payments could not be “traced” to assets currently in the providers’ position.

Rejecting and denying the providers’ motion to dismiss, Judge William Alsup held that the trustees pled sufficient facts to show the providers became subject to plan provisions for restitution of benefit overpayments when they accepted payment from the plan through contractual assignments from plan members.  The Court held that it was plausible that by submitting assigned claims, the providers agreed to the Plan’s language requiring providers to refund erroneous payments and overpayments. 

The court further found that the restitution sought by the trustees was equitable relief under ERISA.   Prior cases had held that a plan administrator could sue for restitution under ERISA if the plan had an express contractual relationship with the provider, the provider had obtained benefits through fraud, or the plan assets could be traced to specific assets in the provider’s possession.  South Gate extended the right to restitution to situations where the only contractual relationship was between the provider and plan members, even absent fraud or traceability. 

The case is important given that fraudulent health care claims for benefits from private U.S. medical plans have been estimated to total $200 to $300 billion per year.  Most of this fraud is believed to be perpetrated by health care providers.  One of the problems faced by plan administrators in ferreting out and remedying provider fraud is that before litigation discovery, plans generally are not able to plead fraud with the specificity required by Federal Rule 9(b).  Although state law pleading requirements are generally less restrictive than Rule 9(b), the federal rules may apply to plan administrators’ claims against health care providers because those claims may arise only under section 502(a)(3) of ERISA, a federal statute.  Judge Alsup’s ruling is significant because it provides plan fiduciaries with a day in court before they do the discovery that is necessary to establish fraud.  Fiduciaries can now proceed in court on allegations that the plan has overpaid benefits to health care providers — or is entitled to refunds of payments the plan has made for services that the plan administrator has now determined to have not been medically necessary or to have been otherwise excluded — even in the absence of fraud allegations.