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SUPREME COURT DOCKET REPORT
OCTOBER TERM 2012
DECISION ALERT


October Term, 2012

April 16, 2013

DECISION ALERT
Today the Supreme Court issued two decisions, described below, of interest to the business community.


Fair Labor Standards Act—Effect of Offer of Judgment Before Conditional Certification

Genesis Healthcare Corp. v. Symczyk, No. 11-1059 (previously discussed in the June 26, 2012, Docket Report)

The Fair Labor Standards Act of 1938 (“FLSA”) permits an employee to file a “collective action” for damages against an employer individually and on behalf of other “similarly situated” employees who later choose to join the lawsuit. 29 U.S.C. § 216(b). In Genesis Healthcare Corp. v. Symczyk, before any other employee had opted to join the suit, the defendant made an offer of judgment to the named plaintiff for the full relief sought by her individual claims. Today, the Supreme Court held—by a 5-4 vote—that the district court had properly dismissed the FLSA collective action for lack of standing. Writing for the majority, Justice Thomas explained that once the offer of judgment had mooted the named plaintiff’s individual claims: “A straightforward application of well-settled mootness principles compels” the conclusion that the entire action “became moot, because she lacked any personal stake in representing” other employees, and thus there no longer was any “case or controversy” for decision, as required by Article III of the U.S. Constitution.

The court of appeals had reversed the dismissal, reasoning that to allow the defendant to “pick off” the named plaintiff with an offer of judgment before the collective action could be certified would “frustrate” the goals of FLSA collective-action provisions. In the Supreme Court, the majority rejected this argument because it rested on distinguishable cases involving class actions. In those cases, the majority explained, either it would be impossible for any other class member to pursue claims for injunctive relief if the class action were dismissed (because of the claims’ transitory nature) or the putative class already had acquired “independent legal status” before the offer of judgment was made. Neither is true of an FLSA collective action for damages that no other employee had yet joined.

The plaintiff also had relied on a statement in Deposit Guaranty National Bank v. Roper, 445 U.S. 326 (1980), criticizing the use of offers of judgment to “pick off” the named plaintiff in a class action before class certification. But the majority explained that Roper’s holding turned on the fact that the plaintiff in that case had a continuing interest in trying to reduce his share of attorneys’ fees by splitting them among an entire certified class. By contrast, in this case, the offer of judgment included the named plaintiff’s attorneys’ fees and thus “provided complete relief on [the plaintiff’s] individual claims.” Moreover, the majority suggested that Roper may have been abrogated by a later decision holding that an interest in seeking attorneys’ fees is insufficient to confer standing.

Justice Kagan, joined by Justices Ginsburg, Breyer and Sotomayor, dissented, taking issue with the majority’s reliance on what they saw as the lower courts’ “mistake” that the plaintiff’s claim was mooted by the unaccepted offer of judgment. The dissenters noted that the Court had simply assumed that the named plaintiff’s individual claims were moot because she had conceded that fact in the litigation. But because plaintiffs in future cases will not make the same concession, the dissenters contended that the Court’s holding was a “one-off” result involving a situation “that should never arise again.”

Symczyk is of substantial importance to any business that faces collective or class actions of any stripe. Despite the dissent’s assertion that the Court’s holding is limited to this case only, the logic of the Court’s decision applies to all FLSA collective actions—and potentially to class actions in general. Symczyk thus promises to give businesses a powerful method of settling named plaintiffs’ claims in the context of meritless collective and class actions. If a business is willing to pay the named plaintiff’s demand in full at the very outset of the case, the Supreme Court’s decision suggests that a plaintiff may be barred from pursuing a collective or class action and subjecting the business to the enormous costs of class-wide discovery in an effort to coerce a settlement.

Any questions about this case should be directed to Archis Parasharami (+1 202 263 3328) or Kevin Ranlett (+1 202 263 3217) in our Washington, DC office or Marcia Goodman in (+1 312 701 7953) in our Chicago office.


Employee Retirement Income Security Act—Reimbursement of Benefits Paid out of Funds Recovered from Third Parties

US Airways, Inc. v. McCutchen, No. 11-1285 (previously discussed in the June 26, 2012, Docket Report)

Section 502(a)(3) of the Employee Retirement Income Security Act (“ERISA”) authorizes a plan fiduciary to enforce the plan against beneficiaries by seeking an injunction or “other appropriate equitable relief.” 29 U.S.C. § 1132(a)(3). Thus, when a beneficiary obtains benefits under the plan for injuries caused by the negligent or willful acts of a third party, the fiduciary may enforce a right to subrogation established in the plan by imposing an equitable lien or constructive trust on any funds the beneficiary subsequently recovers from the responsible party. Today, in US Airways, Inc. v. McCutchen, No. 11-1285, the Supreme Court held that Section’s 502(a)(3)’s reference to “appropriate” equitable relief merely denotes the type of relief that was traditionally available in equity—including, for example, an equitable lien. Under the Court’s decision, the statute’s reference to “appropriate” equitable relief does not mean that a plan administrator is foreclosed from enforcing a reimbursement provision in an ERISA plan according to its express terms whenever an equitable defense to reimbursement (such as unjust enrichment) would otherwise apply.

Respondent James McCutchen, a defendant below, was injured in a car accident. Petitioner US Airways, the plaintiff below, paid approximately $67,000 for McCutchen’s medical expenses in its capacity as administrator of McCutchen’s ERISA benefits plan (“the Plan”). McCutchen later engaged the services of a law firm, also a defendant below, and brought suit against the other driver, ultimately recovering a total of approximately $110,000 from a settlement with the driver and under McCutchen’s automotive insurance policy. This recovery was subject to a 40% contingency fee that McCutchen paid his counsel, leaving him with a net benefit of just under $66,000.

Petitioner sued both McCutchen and the law firm—which held a portion of McCutchen’s recovery in trust—for reimbursement of the full $67,000 in benefits under a provision of the Plan requiring McCutchen “to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party.” Slip op. 3 (alterations made by Court). The district court granted summary judgment to petitioner and ordered respondents to reimburse the Plan according to its express terms. The Third Circuit vacated the district court’s judgment, reasoning that, “in a suit for appropriate equitable relief under § 502(a)(3), a court must apply any equitable doctrines and defenses that traditionally limited the relief requested.” Id. at 4.

In a 5-4 opinion by Justice Kagan, the Supreme Court vacated the Third Circuit’s judgment. Its decision “has two parts, one favoring US Airways, the other McCutchen.” Slip op. 16.

The Court first held that Section 502(a)(3)’s reference to “appropriate” equitable relief simply makes clear that the “provision . . . authorizes the kinds of relief ‘typically available in equity’ in the days ‘of the divided bench,’ before law and equity merged.” Slip op. 5. Where an equitable remedy is properly sought under Section 502(a)(3) to enforce the express terms of an ERISA plan, the Court explained, courts must “declin[e] to apply rules—even if they would be ‘equitable’ in a contract’s absence—at odds with the parties’ expressed commitments.” Id. at 8. “Those [equitable] principles . . . are beside the point,” the Court said, “when parties demand what they bargained for in a valid agreement.” Id. at 9. Accordingly, McCutchen could be compelled under the express terms of the Plan to reimburse all of the benefits that he had received, if the express terms required it, notwithstanding any equitable defenses to reimbursement that might otherwise apply.

The Court then held that, while “equitable rules . . . cannot trump a reimbursement provision, they still might aid in properly construing it.” Slip op. 13. Here, because the Plan “sa[id] nothing specific” about which party would bear the costs of attorney’s fees expended in connection with obtaining McCutchen’s settlement awards, the Court found it appropriate to apply an equitable principle known as the “common-fund doctrine,” under which McCutchen’s attorney’s fees would be reasonably apportioned between McCutchen and the fund administrator. Id. at 14. Thus, although the Court vacated the Third Circuit’s judgment, it remanded the case for further proceedings, in which the district court could limit petitioner’s right to reimbursement by some fraction of McCutchen’s legal expenses under the common-fund doctrine.

Justice Scalia filed a dissenting opinion, in which Chief Justice Roberts and Justices Thomas and Alito joined. The dissent agreed with the majority’s interpretation of Section 502(a)(3) but disagreed with its decision “to apply the ‘common-fund’ doctrine” to fill a perceived “‘contractual gap’” in the Plan language at issue. Slip op. 1 (dissenting opinion). In the dissent’s view, the parties had conceded that the terms of the Plan were unambiguous in all material respects, and any issues related to the potential application of the common-fund doctrine had been neither preserved nor fairly included with the question presented.

The Court’s decision in McCutchen establishes that contractual provisions requiring reimbursement of benefits paid according to an ERISA plan will be enforced according to their unambiguous terms. The ruling will thus be of interest to all businesses that offer such plans to their employees or administer them on behalf of other entities. At the same time, the Court’s decision highlights the need to draft reimbursement provisions in ERISA plan documents that are as clear and comprehensive as possible. Doing so will minimize (although likely not eliminate) the potential for courts to apply equitable rules as “gap fillers” when the plan language is silent or ambiguous.

Any questions about the case should be directed to Marcia Goodman in (+1 312 701 7953) in our Chicago office or Maureen Gorman (+1 212 506 2679) in our New York office.

 


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