On November 16, 2011, the US Court of Appeals for the Third Circuit issued its decision in US Airways v. McCutchen. The Third Circuit held that an ERISA plan could not receive full reimbursement from a participant for the cost of medical expenses it incurred on behalf of the participant when his recovery from a third party was less than his medical expenses, including legal costs. The Third Circuit answered a question left open in Sereboff v. Mid Atlantic Medical Services, Inc.: whether "appropriate equitable relief" under ERISA Section 502(a)(3) means that a plan's recovery from a participant is limited by the equitable defenses and principles, such as unjust enrichment, typically available in equity.

Plaintiff James McCutchen was in a car accident. US Airways, under its self-administered medical plan, paid $66,866 to cover McCutchen's medical expenses. McCutchen recovered $110,000 from third parties and was required to pay 40% of the award in legal fees. US Airways demanded full reimbursement of the $66,866, citing plan language which stated that "the Plan will be subrogated to all [participant's] rights of recovery" and requiring repayment "out of any monies recovered." McCutchen's lawyers put $41,500 of McCutchen's award in a trust account, expecting that any reimbursement to US Airways would be reduced to account for legal fees.

When McCutchen did not pay, US Airways sued for reimbursement under ERISA Section 502(a)(3), seeking "appropriate equitable relief" of a lien on the $41,500 held in trust and an additional $25,366 from McCutchen personally. McCutchen argued that it would be unfair and inequitable to reimburse the US Airways' plan in full when he had not been fully compensated for his injuries. He also argued that the plan would be unjustly enriched because the administrator could recover the full amount for the plan without contributing to McCutchen's legal costs. The District Court of Western Pennsylvania agreed with US Airways, awarding the plan full recovery from McCutchen.

McCutchen appealed to the Third Circuit.

The Third Circuit reversed, holding that an award of "appropriate equitable relief" under ERISA Section 502(a)(3) may be limited by equitable defenses and principles, including unjust enrichment. In doing so, the court followed previous US Supreme Court decisions in Sereboff and Great-West Life & Annuity Insurance Co. v. Knudson.

In Knudson, the Supreme Court held that Congress intended to limit the recovery available to ERISA plans by describing the relief available under Section 502(a)(3) as both appropriate and equitable. Though the Sereboff court permitted a plan's claim for reimbursement to be treated as an equitable lien under Section 502(a)(3), it declined to decide whether the term "appropriate" further limited a plan's potential equitable relief by making equitable principles and defenses applicable to that claim.

In this case, the Third Circuit followed the Knudson court's logic to find that Congress intended to limit the equitable relief under ERISA Section 502(a)(3) with the term "appropriate." The Third Circuit held that remedies traditionally available in equity are typically limited by equitable principles and defenses and reasoned that equitable relief under Section 502(a)(3) must also be limited in that way. The Third Circuit found further support for its reasoning in the recent Supreme Court decision CIGNA Corp. v. Amara, which allowed equitable reformation of plan language under Section 502(a)(3) as a remedy against a plan. For more on this decision, see Article, Expert Q&A on the Impact of CIGNA Corp. v. Amara.

Once the Third Circuit found that equitable defenses applied, it further found that US Airways would be unjustly enriched if it received full reimbursement for McCutchen's medical expenses. Because the district court's judgment for US Airways was more than McCutchen received after legal costs were paid, the Third Circuit found that the award was "inappropriate and inequitable." In essence, US Airways would be receiving a windfall because it received full reimbursement, but did not exercise its subrogation rights or contribute to McCutchen's legal costs.

The Third Circuit remanded to the district court to determine what would be "appropriate equitable relief" for US Airways, because a full fact finding is necessary for that analysis.

Employers and administrators of ERISA plans should be aware that under ERISA Section 502(a)(3), equitable principles may be applied to limit reimbursement by an employee benefit plan of expenses it incurs on behalf of a participant in the event the participant recovers from a third party, even where the plan terms require full repayment of expenses.