The Tale of Darr and Schrempf: A Method to Make ERISA Plans Pay Their Share?

I.              Introduction.

In 2013, the U.S Supreme Court handed down yet another decision in a long line of cases that cut against the purpose underlying the enactment of ERISA, to protect private sector employees from abuses and malfeasance being committed by their pension and welfare benefit plans. If you handle personal injury, medical malpractice, or workers’ compensation claims that involve medical expenses being paid via your injury-victim client’s employer-based health plan, you have probably run into the collection agents that fight tooth and nail to claw back the hard-earned settlement dollars that your injury-victim client so desperately needs.

Such entities include Rawlings (partially, Machinify), Optum (partially, Katch), The Phia Group, Conduent, Carelon, Intellivo and the list goes on and on. When faced with pushback or a stern legal stance at the analyst or even managerial level, these entities’ representatives will often hit you with the following line, “I can send over our McCutchen memo if that will make this easier.”

II.            McCutchen and the Current State of the ERISA Reimbursement Landscape.

The McCutchen such vendors are referring to is the pivotal U.S. Supreme Court decision, U.S. Airways v. McCutchen, 569 U.S. 88 (2013). McCutchen was yet another U.S. Supreme Court decision that missed the mark as it related to ERISA’s purpose of protecting private sector employees.

The water began flowing over the damn over thirty-six (36) years ago with FMC Corp. v. Holliday, 498 U.S. 52 (1990). A case in which the U.S. Supreme Court ruled that ERISA preempts state anti-subrogation statutes, such as Pennsylvania’s Motor Vehicle Financial Responsibility Law.

Then, over a decade later the jurisprudence and dicta handed down in Great West v. Knudson, 534 U.S. 204 (2002), alerted the vultures to sharpen their claws. As soon as the insurance industry realized it could use a preemption provision in a federal statute enacted in 1974, a time when subrogation/reimbursement in the personal injury context was prohibited across the nation, to pursue exorbitant amounts of money from injury-victims pursuing tort claims, it did just that.

Four years after Knudson, the insurance industry picked the right case and obtained cert from the U.S. Supreme Court in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006). Such case resulted in a 9-0 decision in favor of the insurance industry, allowing self-funded ERISA plans to pursue equitable relief via the concept of the equitable lien by agreement.

For the next seven years, plaintiff attorneys and ERISA plans battled over the pertinent laws and doctrines that would govern an ERISA plan’s ability to pursue reimbursement claims against their injury-victim plan participants. Certain federal circuits baulked at the concept of allowing ERISA plans to unilaterally abrogate equitable defenses such as the common fund or made whole doctrines (see the Third Circuit’s decision in McCutchen, 663 F.3d 671 (3^rd Cir. 2011)).

Other circuits stuck to the script of allowing the explicit terms of an ERISA plan document to govern, even if such terms resulted in horrendous outcomes for injury-victims against which such ERISA plans pursued full recovery their lien assertion.

Eventually, the issue became such a prevalent circuit split that the U.S. Supreme Court decided it needed to resolve the issue. It did just that via a decision handed down by Justice Kagan in April of 2013. The Court in McCutchen put the cherry on top for the insurance industry, holding, “[I]n a § 502(a)(3) action based on an equitable lien by agreement - like this one - the ERISA plan’s terms govern. Neither general unjust enrichment principles nor specific doctrines reflecting those principles – such as the double-recovery or common-fund rules invoked by McCutchen – can override the applicable contract.”

While the Court allowed equitable doctrines to operate in the presence of ambiguous language, or in the circumstance where the plan language did not speak to the abrogation of equitable doctrines such as made whole and common fund, it nevertheless gave the insurance industry ultimate power as it relates to subrogation/reimbursement claims in the self-funded ERISA arena.

To be clear, health plan “contracts” are inherently contracts of adhesion. Such “agreements” are characterized by non-negotiable terms, take-it-or-leave-it structures, and unequal bargaining power. Within the confines of a self-funded ERISA health plan, the plan sponsor is allowed to unilaterally set the terms, adopt the terms, implement the terms, amend the terms, and so on.

Further, within the ERISA context, the Supreme Court handed down a decision in Firestone Tire & Rubber Co v. Bruch, 489 U.S. 101 (1989), which essentially allowed health plans to delegate to themselves the unilateral discretion to interpret the terms of the plan. If an ERISA plan provides such a delegation clause within its operative plan document, then its decisions are reviewed on an arbitrary and capricious standard as opposed to a de novo standard of review. This reality contradicts the contractual rule of interpretation, contra proferentum, which asserts ambiguous contract terms should be construed against the drafter of the contract.

If you have not deciphered the picture yet, the relationship between ERISA plans and their participants/beneficiaries is not a fair one.

One might notice that the terms “contract” and “agreement” are in quotes two paragraphs above. The underlying foundation of the Court’s decision in Sereboff was grounded in the concept of the “equitable lien by agreement.” In essence, an ERISA plan document is a contract between an ERISA plan and its participants/beneficiaries. As such, the courts have decided the parties should stand by the explicit terms of the “plan document-contract” because those are what the “contracting” parties bargained for.

As the above differentiation of power and authority in the “bargaining” process demonstrates, ERISA plan documents, which are treated as “contracts,” should be viewed as such skeptically. Further, to provide a practical account of the American population, the percentage of individuals that are aware of the concept of subrogation is likely nominal, if that. Add a layer to that notion and ask, what percentage of Americans are aware their health insurance contract or plan document has a provision buried in its terms which, in essence, asserts, “if you are to be badly injured due to the fault of another, even if you are severely undercompensated for the damages you sustain, we want all of our money back?” That percentage is likely infinitely smaller.

Despite a simple reading of the above demonstrating an objectively unfair and predatorial industry, it is nevertheless the reality in which we live. This has led plaintiff attorneys across the nation to essentially “shrug” their shoulders and say, “it is what it is.”

While self-funded ERISA health plans and their ability to establish and pursue powerful subrogation/reimbursement rights is unquestionable, it would not follow that such plans’ ability to enforce such rights is outright invincible.

Given the dreary line of case law provided above that has been established at the U.S. Supreme court level, one might ask, how are these plans not invincible?

In comes the example of Darr and Schrempf to demonstrate the ERISA statute and its nuanced structure provide more breathing room than the majority of individuals think.

III.          Darr, Schrempf, and the Common Fund Doctrine.

Darr and Schrempf refer to the cases of Trs. of the Carpenters Health and Welfare Trust Fund of St. Louis v. Darr, 694 F.3d 803 (7^th Cir. 2012), and Schrempf v. The Carpenters’ Health and Welfare Trust Fund, 2015 IL App (5^th) 130413.

These cases are companions in kind and come at the foot of an Illinois law firm that was tired of self-funded ERISA health plans waiting in the wings to pursue a one-hundred percent (100%) lien recovery without contributing a single shred of effort or capital to pursuing and resolving the underlying tort claim.

In Schrempf, a standard personal injury claim played out in the state of Illinois. An individual was injured in a premises liability action which gave rise to potential third-party tort liability, and such individual retained the services of Schrempf, Kelly, Napp & Darr, Ltd., to pursue the personal injury action on his behalf. As a part of this litigation, the injury-victim, via his employment, was enrolled in the Carpenters’ Health and Welfare Trust Fund of St. Louis (the “Plan”). This plan was a self-funded, multi-employer welfare benefit plan subject to the provisions of ERISA.

At a certain point during the underlying litigation, the Plan became aware that the injury-victim was pursuing tort claims against a potentially liable third-party, and as such, the Plan put the injury-victim and his personal injury attorneys on notice of their lien assertion under the terms of the Plan.

The terms of the Plan’s operative document disclaimed the Plan’s responsibility to contribute to attorney fees and costs in the underlying litigation, as well as it attempted to abrogate the made whole doctrine, requiring a first-priority, one-hundred percent (100%) right of recovery.

Eventually, after the firm was required to file formal litigation, the injury-victim and his personal injury-attorneys were able to resolve the underlying tort claims for a gross settlement value of $500,000.00. Prior to the settlement, the Plan had advanced benefits under the terms of the Plan in the amount of $86,709.73.

Despite having some initial disputes, the individual’s attorneys elected to employ a clever procedural tactic purposed toward forcing the Plan to contribute to the firm’s fees and expenses in litigating the underlying personal injury action.

Such tactic went as follows: pursuant to the terms of the Plan, the injury-victim and his personal injury attorneys reimbursed the Plan in the full amount of $86,709.73, without any deduction for attorney fees and costs. Further, when calculating the law firm’s fees and expenses, it did not apply its one-third fee to the gross $500,000.00 settlement, but instead, it applied it to the net $413,290.27 that was left after the Plan had been reimbursed.

The attorneys then made a demand on the Plan for payment of their fees in the amount of $28,903.25, representing one-third of the Plan benefits ($86,709.73) the injury-victim had returned to the Plan as a result of the settlement. Due the Plan’s refusal to make such a payment, the law firm turned around and filed a separate state court action against the health plan based on the Illinois common fund doctrine.

Once the Plan was served with the law firm’s state law complaint, the Plan filed suit in the United States District Court for the Southern District of Illinois and sought an injunction to stay the law firm’s state court action for attorney fees and costs. The federal district court entered a temporary restraining order and made it permanent by way of an injunction pursuant to the Anti-Injunction Act (28 U.S.C. § 2283). As a result, the Illinois state court action was stayed pending the law firm’s appeal to the Seventh Circuit.

In reviewing the federal district court’s decision, the Seventh Circuit reversed, asserting the federal court had no authority to enter an injunction under the Anti-Injunction Act to prohibit the plaintiff from pursuing its claim in state court under the Illinois common fund doctrine. In doing so, the Seventh Circuit concluded that ERISA did not preempt the plaintiff’s lawsuit because the common fund doctrine claim was “merely tangential to those core federal interests preempted by ERISA. Thus, the state law claim was not a sufficient basis for an injunction ‘simply because the state law [might] trigger a liability the plan intended to place on beneficiaries.’” Darr, 694 F.3d at 810.

Therefore, the Seventh Circuit Court of Appeals disallowed the injunction from halting the state court action under the Illinois common fund doctrine. Eventually, due to the Plan’s refusal to contribute to the law firm’s attorney fees and costs, citing ERISA preemption as a defense to such action, the law firm filed a motion for summary judgment against the Plan. The Illinois trial court found that “ERISA does not pre-empt Illinois law where, as here, those seeking to apply the common fund doctrine are not parties to the plan.” As such, the Illinois trial court concluded that the common fund doctrine applied to the plaintiff’s claim and entered judgment for the plaintiff in the amount of $28,903.25.

The Plan then appealed the trial court’s order to the Illinois Fifth District Appellate Court. On appeal, Illinois Appellate Court affirmed the trial court’s finding, stating the following:

An action by an attorney under the common fund doctrine is an independent action invoking the attorney’s right to the payment of fees for services rendered and is wholly unrelated to the Plan itself. The Plan’s contractual provisions cannot govern the relationship between an independent entity, i.e., the attorney whose efforts created the common fund, and the Plan itself. Therefore, it is not preempted by ERISA. See Bishop v. Burgard, 198 Ill. 2d 495 (2002)…

Here, Miller [the injury-victim] was the Plan beneficiary who was bound by the contractual terms of the Plan. His lawyers were not parties to the contract and the contractual provisions did not govern the relationship between the Plan and the plaintiff, an independent entity. The fact that the Plan’s terms attempted to shift the payment of attorney fees to the beneficiary had no effect on the claim by the plaintiff. There is nothing in the record that would allow us to conclude that the plaintiff agreed to forego payment of its attorney fees and costs for conferring a benefit on the Plan.

Now, many will ask the following question, does Schrempf address the U.S. Supreme Court’s decision in McCutchen. The answer to that question is, yes. The Schrempf court had this to say about McCutchen:

Finally, the defendants have directed our attention to US Airways v. McCutchen, 569 U.S. 88 (2013), arguing that this 5-4 decision of the United States Supreme Court clearly holds “that the terms of the plan document [can]not be altered by equitable doctrines.” In our judgment, the defendants have exceeded the limits of the Supreme Court’s ultimate holding, as the issue in McCutchen is distinguishable from the case before us…

Unlike McCutchen, where the plan was silent on the payment of attorney fees, the plan in Bishop was quite clear: “The Plan does not pay for nor is responsible for the participant’s attorney’s fees. Attorney’s fees are to be paid solely by the participant.” Bishop, 198 Ill. 2d at 500. Despite the clear language of the plan in Bishop, our supreme court expressly stated that “the quasi-contractual right to payment of fees for services rendered belongs to the attorney who rendered the services and does not affect the contractual relationship between the plan participant and the plan.” Bishop, 198 Ill. 2d at 504. Unlike McCutchen, this case is an independent action filed by the [injury-victim’s] attorney against the Plan and its trustees. [Injury-victim] has already reimbursed the Plan 100% of the monies paid to [injury-victim]. Therefore, pursuant to Bishop, we conclude that the plaintiff is entitled to its one-third share of the monies recovered for the fund for payment its attorney fees and costs.

To summarize the above, the Illinois courts cemented the rather common sense basic legal notion that “contracts” are only enforceable against the parties to such contracts. While the great swath of ERISA reimbursement claimants will assert, “McCutchen states we do not have to reduce our reimbursement claim by attorney fees and costs,” Schrempf gets at a much more fundamental principle. That principle is this: your ERISA plan “contract” may be enforceable against your plan participant, but its terms cannot be enforced against a separate, third-party entity (such as an attorney) that works to create a benefit (or fund) from which your plan enjoys.

Such principle sits at the root of the rationale underlying the common fund doctrine, and perhaps Schrempf and Darr created a blueprint for plaintiffs and their attorneys to fight back against the “100% reimbursement is required” status quo that has existed in this nation for far too long.

IV.          Conclusion.

The tale of Darr and Schrempf should inspire plaintiff attorneys around the nation to review their pertinent state’s jurisprudence as it relates to the adherence to, and application of, the common fund doctrine.

In North Carolina, the common fund doctrine has been adhered to since Horner v. Chamber of Commerce, 236 N.C. 96 (1952). In South Carolina, the same has been true since First Union Nat’l Bank of S.C. v. Soden, 522 S.E.2d 372 (S.C. App. 1998). On the other side of the county, California recognizes the common fund doctrine pursuant to 21^st Century Ins. Co. v. Superior Court, 47 Cal.4^th 511 (2009), and the list goes on. Just about every state in the country has adopted the common fund doctrine due to its deep equitable roots.

As such, while Darr and Schrempf created strong case law in the Seventh Circuit and Illinois for plaintiff attorneys and injury-victims, the movement to push this precedent into alternative jurisdictions has not necessarily ensued. In a world where self-funded ERISA plans are perceived as the intimidating, invincible, giant in the room, perhaps more David’s should arm their metaphorical slingshots to chip away at the strength of these plans.

Darr and Schrempf exist because a plaintiff law firm was willing to take a risk to make sure an ERISA plan paid its share. As a result, injury-victims in the state of Illinois now reap the reward of a single law firm’s actions.

At this point, a blueprint has been laid, and perhaps it is time to bring this jurisprudence into other circuits around the country to ensure these self-funded ERISA plans pay their share nationwide.