This is one in a series of reports on recent changes in the law, provided as a service by Mooney, Green, Baker & Saindon, P.C.

In Great-West, the wife of a Plan participant was severely injured in an automobile accident. Prior to paying benefits, the Plan had the participant execute a subrogation agreement requiring the participant to repay the Plan for any benefits it expended relating to the accident out of any moneys the participant or his wife might recover. The Plan then paid over $400,000 in benefits related to the accident.

The participant and his wife sued the car manufacturer, among others, in California state court. The parties to that state court action agreed to settle the case for $650,000, and the Plan was notified of the proposed settlement. Under the terms of the proposed settlement, approximately $250,000 would be allocated to a “Special Needs Trust,” which would provide for the wife’s future medical care; approximately $375,000 (including over $160,000 in costs advanced by the attorneys) would be paid to the family’s attorneys; $5,000 would go to the California Medicaid program, which had paid some of the wife’s expenses; and a total of $13,828.70 would go toward reimbursing the Plan for its payment of past medical expenses. On the day before the hearing on the approval of the proposed settlement, the Plan filed a notice in U.S. District Court to remove the state case to federal court. The district court, concluding that the Plan was not a defendant in the state action, remanded the case back to state court, where the settlement was approved.

The Court of Appeals for the 9^th Circuit affirmed the decision of the district court in a one-page unpublished opinion, but on different grounds. That Court concluded that ERISA did not authorize a suit by a Plan for money damages under these circumstances, and that the Court therefore lacked jurisdiction to decide the case. Notwithstanding the lack of jurisdiction, the Court upheld the award of attorneys fees against the Plan. The Plan then filed a petition for a writ of certiorari with the Supreme Court, which agreed to hear the case.

In a sharply-worded 5 to 4 decision, with Justice Scalia writing for the majority, the Court upheld the decision of the Court of Appeals that the federal courts had no jurisdiction over the matter. The action had been brought under ERISA Section 502(a)(3) which authorizes a civil action:

by a participant, beneficiary , or fiduciary (A) to enjoin any act or practice which violates . . . the terms of the plan, or (B) to obtain other appropriate equitable relief (I) to redress such violations or (ii) to enforce any provisions of . . . the terms of the plan.

Based upon this language, the Court reasoned that this provision only authorizes federal court jurisdiction if the plaintiff seeks an injunction or other “equitable relief.”

The Court then examined the facts of the case before it, where the Plan’s claim had primarily been against the participant for money damages in the amount of the subrogation claim. The majority rejected the Plan’s argument that the claim was to enforce the terms of the Plan document or to seek “equitable restitution.” Rather, the Court concluded that the Plan sought nothing more than contractual damages under the terms of the Plan, and that a claim for damages is legal by its nature and could therefore not be brought under Section 502(a)(3) of ERISA. The Court left open the question of how the case would have turned out had the settlement money been paid directly to the participant and his wife, or whether the Plan could have maintained an equitable action against either the “Special Needs Trust” or the participant’s attorneys for return of the specific proceeds of the settlement.

The distinction between an action at "law" and an action at "equity" is an historical artifact of the dual court systems in England dating back to the early middle ages. At that time, certain actions, including suits for money damages stemming from contracts and wrongful acts, were heard at "common law" in the King’s Courts. Other actions, including actions involving trusts, divorce, and orders to perform or not perform certain acts (i.e., injunctions) were heard in the courts of equity, including the Chancery Courts and the Ecclesiastical Courts. Despite the elimination of the multiple court system over the centuries that followed, certain distinctions between law and equity were long maintained. Indeed, it was not until 1938 that the Federal Government abolished the distinction between courts of equity and courts of law, requiring a single, uniform court system, and a single, uniform set of procedures regardless of whether an action was at law or equity. Notwithstanding the abolition of the equity/law distinction in the courts, certain vestiges of the old dual system survives. For example, in a federal action at law, a litigant has the right to a jury trial. No such right exists, however, in an action in equity. Thus, in a suit for money damages, the parties can demand a jury trial. On the other hand, if the only remedy sought is an injunction, there is no right to a jury trial.

The dissenting opinions point out that the majority has revived legalistic and historical distinctions that were plainly not intended by Congress. The dissent notes that the majority has created a situation where ERISA has established substantive rights, but those rights are not enforceable in the federal courts. Moreover, as the result of ERISA’s broad preemption provision and additional statutory language vesting exclusive jurisdiction over most ERISA actions in federal court, the state courts also have no authority to hear those cases. Thus, notes the dissent, federal law will have created specific rights, but those rights are no longer enforceable in any court. Indeed, the majority acknowledges that its decision will produce anomalous results, but responds that Congress had the power to adopt whatever enforcement scheme it chooses, no matter how bizarre and irrational. The dissent responds, in turn, that the majority’s decision effectuates neither the language of the statute nor the intent of Congress.

In the wake of Great-West, it is unclear under what, if any, circumstances a plan can seek to enforce a subrogation agreement in federal court. Moreover, the majority specifically does not answer the question whether the state courts have jurisdiction to hear such cases, or whether such matters are preempted and plans have no remedy in the courts whatsoever. The case has broader implications as well. For example, if a plan overpays a participant, or if it pays benefits to someone not entitled to those benefits, whether by accident or by fraud, is the plan barred from seeking recovery of those moneys in court? Conversely, if an employer overpays a plan, is it entitled to seek recovery of those overpayments, or have the courts now been deprived of jurisdiction to hear such actions?

These and many more questions remain unanswered. Although it is possible that Congress may step forward to clean up the mess left by the Supreme Court, unless and until that happens, plans will have to carefully consider the implications of this decision.

When ERISA was originally enacted, it included a provision requiring employee benefit plans to file their Summary Plan Descriptions and Summaries of Material Modification with the Department of Labor (DOL). In an attempt to reduce the flow of paper into Washington, in 1997, Congress eliminated this requirement. In its place, Congress imposed a new requirement that a plan must, upon request, furnish to the Department of Labor “any documents relating to the employee benefit plan . . . .” Failure to comply with such a request within 30 days could subject the plan’s fiduciaries to “a civil penalty . . . of up to $100 a day . . . ([up to] $1,000 per request).” On January 7, 2002, the DOL issued regulations defining, and sharply limiting, the scope of this required disclosure. These regulations become effective March 8, 2002.

Under the regulations, if a plan fails to provide the requested documents in a timely manner, the DOL will issue a Notice of Intent to Assess a Penalty. If the plan can show that the “failure or refusal to furnish a document . . . requested by the [DOL] was the result of matters reasonably beyond the administrator’s control,” the fine can be waived in whole or in part.

Through its regulation, the DOL has sharply reduced the breadth of materials that could potentially have been subject to this new statutory requirement. Nevertheless, it is a requirement that must be taken seriously. Moreover, all plan personnel must bear in mind that if a fine is imposed, DOL has taken the clear position in the past that paying the fine out of plan assets is a criminal offense.