INTRODUCTION :: Imagine that you sustain brain injury when your car collides with another vehicle. You incur $ 1 million in medical expenses, which your employee welfare benefit plan, governed by the Employee Retirement Income Security Act of 1974 (ERISA), covers. You will never be able to work again and are likely to suffer from physical and emotional pain for the rest of your life. You sue the driver of the other vehicle in state court for negligence, seeking $ 6 million in damages-$ 3 million for the present net value of your future lost wages, $ 2 million for past and future physical and emotional pain and suffering, and $ 1 million for past medical expenses. You settle with the other driver for $ 1 million-the limit of liability under his automobile liability insurance-in large part because he has no unencumbered assets with which to satisfy any judgment.
As soon as you receive your settlement proceeds, the fiduciary of your ERISA plan sues you in federal court for reimbursement of the $ 1 million in medical benefits the plan paid on your behalf. The court orders you to pay the $ 1 million in settlement proceeds to your ERISA plan, even though you were not made whole as a result of your tort lawsuit. Moreover, the court rules that the ERISA plan is not required to pay one cent to your lawyer. You realize that you have gotten absolutely no net benefit from your ERISA plan, that you wasted substantial time pursuing the negligence case, and that you may still owe your lawyer a contingency fee that you will have to pay out of your own pocket.
This result hardly seems fair, particularly given that ERISA was enacted to protect the interests of plan participants and their beneficiaries and to assure the equitable nature of employee benefit plans. Yet, this result would be compelled by existing precedent in many federal courts. Had your claim been governed solely by state law, the common fund doctrine would likely have required the plan to pay its fair share of your attorneys’ fees and costs. In addition, state law may well have limited or prohibited the plan’s recovery either through an anti-subrogation statute or the common law “made- whole” rule.
In recent years, ERISA-governed employee welfare benefit plans have aggressively pursued recoupment in cases where an injured plan participant recovers medical expenses from a tortfeasor. Typically, plans include provisions entitling the plan to full reimbursement from any recovery the plan participant receives, irrespective of the amount actually received by the plan participant for medical expenses and irrespective of whether the plan participant is fully compensated for all injuries. Some plans also contain provisions requiring the plan participant to pay all attorneys’ fees incurred in the litigation against the third-party tortfeasor. Such provisions are intended to give the plan’s claim for recoupment full priority so that every dollar received by the plan participant from a third party will go to the plan until the plan has been fully reimbursed. While some commentators claim these aggressive recoupment attempts are necessary to contain the cost of employee welfare benefit plans, others argue that the cost savings from recoupment are negligible and further argue that such provisions fail to take into account the relative equities between the parties, thwart the civil justice system’s ability to compensate injuries, and render many tort cases against negligent third parties economically unfeasible.
The Supreme Court’s recent decision in Sereboff v. Mid Atlantic Medical Services, Inc. will likely encourage ERISA-governed plans to assert claims for reimbursement more aggressively. Prior to Sereboff, plans were often unsuccessful in recovering reimbursement, in large part because § 502(a)(3) of ERISA limits the relief available to a plan seeking reimbursement to “appropriate equitable relief” necessary to redress a violation of plan provisions requiring reimbursement or subrogation. In several cases, plans attempted to satisfy this requirement by arguing that, in attempting to recover reimbursement, they were essentially trying to impose a constructive trust on funds held by the plan participant. Many such claims failed, however, either because the plan participant no longer had the funds or because the plan was really seeking an award of money damages rather than equitable relief.