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Guest Article

Supreme Court Ruling Bars Federal Lawsuits to Achieve Third-Party Recoveries

Summary: The U.S. Supreme Court, in a 5-4 ruling, affirmed an appeals court's ruling that group health plans cannot sue in federal court to enforce its right to subrogation or reimbursement because it is a legal remedy that is not available to plans at the federal level.

A U.S. Supreme Court decision eliminates the ability of ERISA plans to sue in federal court to enforce provisions requiring plan participants to reimburse plans for their medical expenses from a third-party recovery. On Jan. 2, the Court ruled in a 5-4 decision that plans are prohibited from seeking such legal, as distinguished from equitable, remedies in federal court under ERISA. The case is Great-West Life & Annuity Insurance Co. v. Knudson, 2002 WL 15399 (S. Ct., Jan. 8, 2002).

Facts of the Case

Janette Knudson became quadriplegic in a car accident in 1992. She was covered under the self-insured group health plan of her husband's employer. The plan paid approximately $411,000 in medical expenses. Great-West Life & Annuity Insurance Co. provided stop-loss insurance and paid all but $75,000 of that amount to the plan sponsor. Under its stop-loss agreement, Great-West took assignment of the right to reimbursement and obtained a first lien on any proceeds of a settlement or judgment against a third-party tortfeasor.

Knudson sued Hyundai Motor Co. in a California state court for damages resulting from the accident and later agreed to settle her claim for $650,000.

Great-West sued Knudson in federal court to enforce its reimbursement right for the $411,000 paid by the plan. The federal court ruled in Knudson's favor, finding that the $14,000 paid to Great-West was appropriate. Great-West appealed, and the 9th U.S. Circuit Court of Appeals affirmed the district court's ruling on the ground that Great-West's action for reimbursement of the full $411,000 was not a claim for equitable relief, and thus not authorized under ERISA.

The Supreme Court's Rationale

The opinion for the Court, written by Justice Antonin Scalia, was based on the Court's earlier decision in Mertens v. Hewitt Associates, 508 U.S. 248 (1993) that "equitable relief must mean something less than all relief," and the term must refer "to those categories of relief that were typically available in equity ..." In conclusion, he stated that by seeking to impose personal liability for a contractual obligation, the lawsuit was essentially one for money damages, which was "of course, the classic form of legal relief," and thus a form of "relief that was not typically available in equity." (Emphases in the opinion.)

Therefore, to interpret Congress' intent in limiting actions by plan fiduciaries to equitable relief, the Court looked to the historical distinction between the jurisdictions of courts of law and equity, even though this distinction was eliminated in federal courts when the Rules of Federal Procedure were adopted, long before ERISA's adoption.

Great-West's suit in federal court sought to come within the provisions of ERISA Section 502(a)(3) by seeking injunctive relief, which is a typical form of equitable relief. However, the Court's opinion stated that neither an injunction to compel the payment of money based on a contract nor a request for specific performance of a monetary obligation were typically available in equity. The Court acknowledged that limited situations existed where such relief was available in equity, but those situations were not applicable to Great-West's claim.

The Court noted that the remedy of restitution was available at both law and equity. When an action sought restitution based on a defendant's personal liability to pay money, it was typically a law remedy. But when it was based on a constructive trust or equitable lien, it was typically an equity remedy. In this case, the settlement proceeds were not in Knudson's possession, so the remedy sought by Great-West was a classic law remedy -- not an equity remedy.

The Argument Between the Court and the Dissenting Opinions

The main dissenting opinion by Justice Ruth Bader Ginsburg argued that the majority's approach was inappropriate because it undermined the obvious overall intent of Congress to have ERISA "establish a uniform administrative scheme and to ensure that plan provisions would be enforced in federal court, free from the threat of conflicting or inconsistent state and local regulation." She argued that:

"The majority's construction frustrates those goals by ascribing to Congress the paradoxical intent to enact a specific provision, Section 502(a)(3), that thwarts the purposes of the general scheme of which it is a part. ... But when Congress' clearly stated purpose so starkly conflicts with questionable inferences drawn from a single word in the statute, it is the latter, and not the former, that must give way."

In response to this argument, the Court's opinion stated:

"It is easy to disparage the law-equity dichotomy as 'an ancient classification' and an 'obsolete distinction,' ... Like it or not, however, that classification and distinction has been specified by the statute, and there is no way to give the specification meaning -- indeed, there is no way to render the unmistakable limitation of the statute a limitation at all -- except by advertising the differences between law and equity to which the statute refers. The dissents greatly exaggerate, moreover, the difficulty of that task. Congress felt comfortable referring to equitable relief in this statute -- as it has in many others -- precisely because the basic contours of the term are well known." (Emphasis in the opinion.)

Impact of the Knudson Decision

Lawyers may find the argument of Justice Scalia, as well as two dissents by Justices Ginsburg and John Paul Stevens, fascinating and they will endlessly debate which argument is right, but such debate is of no practical value. It is now the law that ERISA plans may no longer seek reimbursement through the federal courts for their medical expenses, because such a remedy is simply no longer available under ERISA Section 502(a)(3).

This does not mean that plans cannot enforce their subrogation and reimbursement provisions. Rather, they just cannot do so by suing in federal courts.

In some respects, the Court's opinion is frustrating because it complicates recoveries by ERISA plans from third-party tort actions and forces plan fiduciaries and their attorneys to think up novel litigation strategies to recover benefits they paid from settlements or judgments in tort actions. Obviously, it would be simpler and, as indicated by Justice Ginsburg, more consistent with ERISA's general objective if plans could simply seek relief in federal courts.

However, such a feeling of frustration may obscure the practical implications of the Knudson decision. What would have been the practical result if Justice Ginsburg's opinion were the majority opinion and Justice Scalia's opinion was the dissent? Probably the same as it is now -- the plan would still be frustrated in its attempt to achieve recovery.

Why? Although the plan would have a judgment against Knudson, it would not be enforceable. Knudson cannot possibly have any assets. And if the plan proceeded against the attorney or the special needs trust -- both of which received most of the settlement proceeds -- it is highly unlikely that any court would find either of them liable to the plan.

In the real world, plans that seek subrogation and reimbursement must aggressively -- but very practically -- pursue recovery. Generally, this means working with the plan participant's attorney, sharing legal fees on a pro rata basis and agreeing to reasonable compromises when circumstances warrant.

Self-insured ERISA plans now have less ability to negotiate favorable settlements because they can no longer seek reimbursement in federal courts. In many (but probably not all) states, intervention in a state court lawsuit may be practical and effective. In addition, the Knudson decision may not necessarily limit a plan's right of subrogation (as distinguished from its right of reimbursement). It is possible that when a self-insured plan exercises its subrogation rights to intervene as a party in a state court tort action involving catastrophic expenses, it may be able to remove the action to federal court. Of course, not all states recognize the right to subrogation in such cases.

Excerpted from the January 2002 supplement to Coordination of Benefits Handbook,, ©Thompson Publishing Group, Inc., 2002. All rights reserved.

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