In its September 9, 2013 opinion in Scarangella v. Group Health, the US Court of Appeals for the Second Circuit held that attorneys' fees under the Employee Retirement Income Security Act of 1974 (ERISA) may be recovered by a party whose conduct triggers judicial action that serves as a "catalyst" for a voluntary dismissal.

The plaintiff in this case, Nicholas Scarangella, sued Group Health Insurance (GHI) and Village Fuel under ERISA for wrongfully denying his wife benefits under the terms of his insured health plan. Village Fuel was the ERISA plan administrator for the health plan, while GHI insured the plan and paid plan benefits. The dispute arose after an eligibility audit by GHI indicated that Scarangella was ineligible for coverage under the plan, and the insurer sought to rescind coverage for Scarangella and his dependents. GHI and Village Fuel cross-claimed against each other, seeking among other things, restitution.

Eventually, GHI and Village Fuel moved for summary judgment. The district court dismissed GHI's claim for restitution, holding that money damages were not equitable remedies and therefore not permitted under ERISA. It also dismissed Village Fuel's restitution claim on the same grounds. The court, however, denied Village Fuel's summary judgment motion as to GHI's other claims, although it did express skepticism in its decision as to whether GHI's remaining claims were viable under ERISA.

Ultimately, GHI settled with Scarangella and voluntarily dismissed its remaining cross-claims against Village Fuel. Village Fuel then moved to recover its attorneys' fees from GHI. ERISA permits courts to award a reasonable attorney's fee and costs to either party. However, under Hardt v. Reliance Standard Life Ins. Co., a party who obtains "some degree of success on the merits" may be eligible for attorneys' fees in ERISA cases. GHI opposed this request, arguing that Village Fuel had lost its cross-claim on summary judgment and was not a party to the settlement between GHI and Scarangella.

The district court agreed with GHI and denied Village Fuel's fee request, holding that:

On appeal, the Second Circuit vacated the district court's decision, holding that:

The Second Circuit also addressed the status of the "catalyst" theory, under which a plaintiff prevails for purposes of fee-shifting provisions if the plaintiff's lawsuit:

According to the Second Circuit, the "catalyst theory" remains a viable means for demonstrating, in post-Hardt ERISA attorneys' fees applications, that judicial action in some manner led one party to provide relief to another party that could possible constitute success on the merits.

However, a question of fact existed regarding whether the district court's skepticism about GHI's remaining claims (as expressed in its decision denying summary judgment to Village Fuel) served as a "catalyst" for GHI to dismiss those claims against Village Fuel. Finding the district court to be in the best position to decide this factual issue of causation, the Second Circuit remanded the case to the district court.

Counsel should be creative when seeking attorneys' fees in litigation. Under the "American rule," each party to a lawsuit normally bears its own fees. Some statutes, however, permit parties to recoup litigation-related fees from their adversaries. For example, in an ERISA action by a participant, beneficiary or fiduciary the courts have discretion to award reasonable attorneys' fees and costs to either party. In Hardt, the Supreme Court clarified that a party seeking fees under ERISA need not qualify as a "prevailing party" to recover its fees. Achieving "some degree of success on the merits" will do.

The Scarangella decision addresses a question, left unresolved by the Supreme Court in Hardt, of what a party must achieve to demonstrate "some degree of success on the merits." In the Second Circuit, under Scarangella, a party can satisfy this standard even if it does not secure complete victory at trial or through dispositive motion practice. So long as its conduct results in judicial action that, in turn, serves as a "catalyst" for one party to provide another with relief, ERISA attorneys' fees may potentially be recovered.

Regarding GHI's decision to rescind plan coverage in this case, it should be noted that the Affordable Care Act (ACA) has narrowed the situations in which group health plans can rescind an individual's coverage once the individual is covered under the plan (see Practice Note, Preexisting Condition Exclusions and Rescissions under the ACA). Even under the ACA rules, however, it appears that GHI would have had a basis for rescinding coverage, because it took its action based on alleged fraudulent certifications as to whether Scarangella was an eligible employee under the plan.