Paying for the Privilege of Making Collections

WASHINGTON (CN) - Citing a legal doctrine "designed to prevent freeloading," the U.S. Supreme Court gave a mixed bag Tuesday to US Airways and the worker whose medical bills it covered.

James McCutchen, a 51-year-old US Airways employee, had been in a January 2007 car crash that left one person dead and two others with severe brain injuries. Though McCutchen survived after emergency surgery, he spent several months in physical therapy and ultimately underwent a complete hip replacement.

Since the accident, McCutchen has undergone a series of back surgeries, suffers from chronic pain, and has, by his own description, been rendered functionally disabled.

US Airways paid $66,866 under its health plan to cover McCutchen's medical expenses.

McCutchen then sued the young driver who had caused the accident. Though his lawyers managed to settle the case for only $10,000, they also got McCutchen's automobile insurer to kick in $100,000. Deducting 40 percent of that for his lawyers, McCutchen's net recovery was $66,000.

US Airways claimed that it was entitled to that entire amount as reimbursement, but McCutchen argued that this right did not activate unless he over-recovered on his total damages.

After the airline sued under Section 502(a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), a federal judge in Pittsburgh granted it summary judgment, ordering McCutchen to sign over the $41,500 that his lawyers put in trust, plus $25,366 from his own funds.

The 3rd Circuit concluded, however, that equitable defenses limit the reimbursement provision of the airline's health plan.

After taking up the case in June 2012, the U.S. Supreme Court reversed Tuesday.

McCutchen failed to show that US Airways could attach "double recovery," an amount meant to compensate the same loss that the insurance covered, according to the ruling.

He likewise cannot use the common-fund doctrine to pass on his share of lawyers' fees to US Airways, the court found.

A five-justice majority concluded, however, that the common-fund doctrine, "which is designed to prevent freeloading," may help the court construe the plan's reimbursement provision.

"The plan is silent on the allocation of attorney's fees, and in those circumstances, the common-fund doctrine provides the appropriate default," Justice Elena Kagan wrote for the majority.

"To be sure, the plan's allocation formula - first claim on the recovery goes to US Airways - might operate on every dollar received from a third party, even those covering the beneficiary's litigation costs," Kagan added (emphasis in original). "But alternatively, that formula could apply to only the true recovery, after the costs of obtaining it are deducted. ... The plan's terms fail to select between these two alternatives: whether the recovery to which US Airways has first claim is every cent the third party paid or, instead, the money the beneficiary took away.

"Given that contractual gap, the common-fund doctrine provides the best indication of the parties' intent. No one can doubt that the common-fund rule would govern here in the absence of a contrary agreement."

Kagan added that "a party would not typically expect or intend a plan saying nothing about attorney's fees to abrogate so strong and uniform a background rule. And that means a court should be loath to read such a plan in that way."

"The rationale for the common-fund rule reinforces that conclusion," she continued. "Third-party recoveries do not often come free: To get one, an insured must incur lawyer's fees and expenses. Without cost sharing, the insurer free rides on its beneficiary's efforts - taking the fruits while contributing nothing to the labor. Odder still, in some cases - indeed, in this case - the beneficiary is made worse off by pursuing a third party. Recall that McCutchen spent $44,000 (representing a 40% contingency fee) to get $110,000, leaving him with a real recovery of $66,000. But US Airways claimed $66,866 in medical expenses. That would put McCutchen $866 in the hole; in effect, he would pay for the privilege of serving as US Airways' collection agent. We think McCutchen would not have foreseen that result when he signed on to the plan. And we doubt if even US Airways should want it. When the next McCutchen comes along, he is not likely to relieve US Airways of the costs of recovery."

Summing up, Kagan said that the court's resolution partly favors US Airways and McCutchen.

"First, in an action brought under §502(a)(3) based on an equitable lien by agreement, the terms of the ERISA plan govern," she wrote. "Neither general principles of unjust enrichment nor specific doctrines reflecting those principles - such as the double-recovery or common-fund rules - can override the applicable contract. We therefore reject the Third Circuit's decision. But second, the common-fund rule informs interpretation of US Airways' reimbursement provision. Because that term does not advert to the costs of recovery, it is properly read to retain the common-fund doctrine. We therefore also disagree with the District Court's decision. In light of these rulings, we vacate the judgment below and remand the case for further proceedings consistent with this opinion."

The dissenting justices said McCutcheon has no claim to the common-fund doctrine.

"The problem with this is that we granted certiorari on a question that presumed the contract's terms were unambiguous - namely, 'where the plan's terms give it an absolute right to full reimbursement,'" Justice Antonin Scalia wrote, joined by Chief Justice John Roberts and Justices Clarence Thomas and Antonin Scalia.

"Re­spondents interpreted 'full reimbursement' to mean what it plainly says - reimbursement of all the funds the plan had expended. In their brief in opposition to the petition they conceded that, under the contract, '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, without any contribution to attorney's fees and expenses,'" he continued, emphasizing text from the McCutchens' opposition brief. "All the parties, as well as the solicitor general, have treated that concession as valid. The court thus has no business deploying against petitioner an argument that was neither pre­served, nor fairly included within the question presented."

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