(AP Photo/J. Scott Applewhite)

The U.S. Supreme Court today considered questions about when a federal appeals court can focus on fairness, rather than the written language in a contract, in efforts to resolve a group health plan case.

Lawyers for the parties in U.S. Airways Inc. vs. McCutchen (11-1285) argued about whether they were talking about a subrogation agreement or a reimbursement agreement, and whether the court could apply the same rules to a reimbursement agreement that it could apply to a subrogation agreement.

The justices talked about how far they ought to go when trying to understand the case.

“You want us to decide a case without looking at the plan?” Justice Anthony Kennedy asked Neal Kumar Katyal, the lawyer who represented the plan, according to a transcript of the oral arguments. Kennedy later suggested that something that seemed to be a subrogation provision was not. “This plan is rather confusingly drafted,” he said

Justice Antonin Scalia questioned whether the Supreme Court should get that deeply into plan details.

“I didn’t think we took this case to review plan,” Scalia said. “Is that what the Supreme Court took the case for, to say what this particular individual plan said?

Several justices suggested that there might be a conflict between what the summary plan document (SPD) appears to say and what the plan contract itself said.

James McCutchen, the plaintiff in the case,  was badly hurt in an automobile collision caused by another motorist. A group health plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) covered $66,866 in medical expenses. The plan had a provision permitting it to seek reimbursement for any amounts paid for claims resulting from the actions of a third party. The plan also said in the contract that the “plan will be subrogated to all your rights to recovery,” according to court documents.

McCutchen received $10,000 through a settlement with the other driver and $100,000 in underinsured motorist coverage. He paid a 40 percent contingency fee and ended up with $66,000 in cash.

The employer plan first asked for reimbursement of the $66,866 that it had paid. When McCutchen’s lawyers objected, the plan then sued in federal court to seek “appropriate equitable relief.”

The plan said appropriate equitable relief included the $66,000 in cash that McCutchen had received, $41,500 that McCutchen’s lawyers had put in a trust, and $25,366 in cash from McCutchen.

In “equitable” actions, courts are supposed to try to focus more on what they believe to be fair than on the letter of the law or the letter of a contract.

A three-judge panel at the 3rd U.S. Circuit Court of Appeals ruled in November 2011 that it agreed with McCutchen that awarding the health plan more cash than McCutchen himself had received would lead to “unjust enrichment” of the health plan.

“Because the amount of the judgment exceeds the net amount of McCutchen’s third-party recovery, it leaves him with less than full payment for his emergency medical bills, thus undermining the entire purpose of the plan,” Julio Fuentes, a 3rd Circuit judge, wrote in an opinion for the court.

The 3rd Circuit was disagreeing with the 5th, 7th, 8th, 11th and District of Columbia circuits.

The Supreme Court ruled on group health plan efforts to seek reimbursement from enrollees in a 2006 case, Sereboff vs. Mid Atlantic.

In the U.S. Airways case,  the court has said the  key question is whether the 3rd Circuit correctly held that Section 502(a)(3) of ERISA “authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan’s terms give it an absolute right to full reimbursement.

The Blue Cross and Blue Shield Association has argued in a brief posted on the American Bar Association website that letting courts vary unambiguous plan terms in equitable relief actions would increase plan costs and undermine the purposes of subrogation.

Neal Kumar Katyal, the lawyer who spoke for the plan in court, said letting a court hearing an equitable relief case rewrite the terms of a plan governed by the Employee Retirement Income Security Act (ERISA) would be dangerous.

“For 38 years, this court has never embraced an idea that federal common law allows rewriting plan terms,” Katyal said.

Matthew Wessler, who represented McCutchen, said the equity rules governing insurance cases are unusual.

“These insurance reimbursement cases arose in a very different context from most other equitable lien by agreement cases,” Wessler said. “And the core difference … between these cases and all 22 or more of the cases that the petitioner cites is that they involve a third party who has caused the loss both to the insurer and the insured. And that third party, the tortfeasor, in these reimbursement cases is not the defendant.”

In three-party cases, the defendant is a beneficiary, not the wrongdoer who triggered the loss, and the “courts developed in equity a different set of rules to measure the relief available under the claim,” Wessler said.

The courts held that, in equity, if the funds available are not sufficient to cover all losses suffered by all parties, then all parties must share the loss, Wessler said.

In a legal case, the parties could structure the responsibility in a different way, but, under the rules of equity, the parties could not defeat the rules that typically applied, Wessler said.

Howard Shapiro, an ERISA litigation specialist at Proskauer Rose, said in a comment on the case that “what’s good for a company’s benefit plan tends to generally be what’s best for the greater good of all of the employees involved.”

If the Supreme Court found that equitable principles could override unambiguous plan provisions, “the ruling might lead to a lack of standards and problems for other benefit plans and fiduciaries,” Shapiro said.

Shapiro said employers and benefits plan administrators should consider this kind of issue ahead of time and make sure the plan documents clearly state that the plan has the ability to assert full reimbursement.

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