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By Robert Renner and James Hazlehurst

The United States Supreme Court ruled today that absent an express provision to the contrary, the amount an ERISA plan can recover from a plan participant’s lawsuit against a third-party tortfeasor must be reduced proportionately by the amount of attorneys’ fees the participant incurred to obtain the recovery. 

In US Airways, Inc. v. McCutchen, an ERISA health plan paid $66,866 for James McCutchen’s medical expenses for injuries sustained in an automobile accident. McCutchen later hired counsel and recovered $110,000 from the other automobile driver and from his own automobile insurer. After paying his attorneys their 40% contingency fee, McCutchen was left with a net recovery of $66,000. Given McCutchen’s total recovery of $110,000 and based upon a reimbursement provision if McCutchen recovered money from a third party, the ERISA plan sought recovery of the $66,866 it paid on his behalf. 

The district court granted summary judgment in favor of the ERISA plan, holding that it could recover from McCutchen the full amount it paid. The Third Circuit vacated the district court’s judgment, noting that McCutchen would be left with less then full payment for his medical bills and the result would give a windfall to the plan. The Supreme Court reversed, holding that while the ERISA plan could recover the medical expenses paid, any recovery had to be reduced proportionately - pursuant to the common-fund doctrine - by the amount of attorneys’ fees incurred in the lawsuit against the third-party tortfeasor. 

In a 5-4 decision, the Supreme Court reasoned that the ERISA plan’s governing documents did not explicitly provide that the plan had first priority to reimbursement from third-party recoveries. 

Justice Elena Kagan wrote the majority opinion, noting that full reimbursement from McCutchen produced the odd outcome whereby McCutchen was in a worse position by pursuing and obtaining a third-party recovery:

Without cost sharing, the insurer free rides on its beneficiary’s efforts – taking the fruits while contributing nothing to the labor.” 

Instead of permitting the ERISA plan to recover up to the amount of McCutchen’s net recovery (i.e., $66,000), the Court held that where the plan does not specify rules for allocating a third-party recovery between the plan and the participant, the common-fund doctrine provides the default allocation rules. McCutchen was therefore entitled to retain 40% of his net recovery as his “attorney fee” for recovering a common fund for the benefit of another.      

The Court unanimously agreed that equitable principles cannot override the plain terms of an ERISA plan. However, the dissent, which was authored by Justice Antonin Scalia, would not have applied the common-fund doctrine because it disagreed that the plan’s terms were ambiguous. Justice Scalia stated that the Court granted certiorari based on an understanding that the plan’s terms unambiguously allowed for full reimbursement from third-party recoveries without any reduction for attorneys’ fees and costs.   

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The recent case of Greb v. Diamond International Corp. highlights the need for dissolved corporations and their insurers to consider the survival statute of their state of incorporation when defending against actions brought in California.

In Greb, the California Supreme Court held that California law does not preclude the application of a foreign jurisdiction’s survival statute. The defendant, a Delaware corporation, argued that Delaware’s three-year survival statute barred the action. Plaintiffs contended that California corporate law – which places no time limit on suits against dissolved corporations – governed their suit.

The trial court agreed with the defendant and sustained its demurrer with prejudice on the grounds that Delaware’s survival statute barred the action which was filed more than three years after defendant dissolved. The court of appeal affirmed.

The Supreme Court unanimously affirmed the appellate court’s judgment. The opinion, authored by Chief Justice Cantil-Sakauye, rejected plaintiffs’ arguments that foreign corporations that qualified to do business in California were thereby organized under the laws of California.

The court found “no evidence” that the legislature intended to accomplish that “dramatic result.” Furthermore, “such a scheme would require foreign corporations to ‘follow a litany of requirements regarding various corporate activities that their home state already regulates.’”

For more information on this matter, please contact the article authors: James Hazlehurst, Ed Oster or Robert Renner.

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The California Assembly’s Insurance Committee is scheduled to conduct its first hearing today on AB 1868, a bill outlawing clauses in insurance policies and other related documents that purport to vest the insurer with discretionary power to determine eligibility for benefits or to interpret the terms of the policy.

Under the proposed legislation introduced by Assemblyman Dave Jones (D-Sacramento), any provision in an insurance policy, contract, certificate or agreement providing or funding life insurance or disability insurance coverage that purports to reserve discretionary authority with the insurer would be void and unenforceable. The bill would also require that the Insurance Commissioner disapprove of any disability policy containing such a provision.

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In Scharff v. Raytheon Company Short Term Disability Plan, et al., ___ F.3d. ___, 2009 WL 2871229 (9th Cir. September 9, 2009), the Ninth Circuit Court of Appeals affirmed the district court’s dismissal of a lawsuit filed a mere twenty days after expiration of the ERISA plan provision requiring an action to be filed within one year following the denial of the appeal from an initial disability-claim denial, holding that the summary plan description’s placement and display of a that contractual limitations period met statutory and regulatory requirements. The court specifically rejected Donna Scharff’s arguments that the doctrine of reasonable expectations should be adopted in analyzing Raytheon’s SPD and that the placement and display violated her reasonable expectations: “We hold that even if the doctrine of ‘reasonable expectations’ applied here, the one-year statute of limitations met its requirements and also met the statutory and regulatory standards for disclosure.” The court also declined Scharff’s call for the importation into federal common law a California regulation requiring insurers to expressly inform claimants of statutes of limitations that may bar their claims. Noting that other circuits had expressly rejected a rule requiring plan administrators to inform participants of provisions already contained in the SPD, the court explained that Scharff’s position “would place the Ninth Circuit out of line with current federal common law and would inject a lack of uniformity into ERISA law.” In that latter regard, a lack of uniformity among the circuits would be detrimental, particularly to large multi-state employers who issue the same welfare benefit plan to cover all employees, regardless of their location.

Circuit Judge Susan P. Graber authored the majority opinion, joined by Judge Kim McLane Wardlaw. Judge Harry Pregerson dissented.

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