U.S. Supreme Court Rules that Offer of Judgment that Mooted Plaintiff’s FLSA Case Required that It Be Dismissed

May 31, 2013 | Appeals | Employment & Labor | Insurance Coverage

In 2009, Laura Symczyk, who had been employed by Genesis Healthcare Corporation as a registered nurse at its Pennypack Center in Philadelphia, Pennsylvania, filed a complaint on behalf of herself and “all other persons similarly situated” – known as a “collective action” – that alleged that Genesis had violated the federal Fair Labor Standards Act (FLSA) by automatically deducting 30 minutes of time worked per shift for meal breaks for certain employees, even when the employees performed compensable work during those breaks. The plaintiff sought statutory damages for the alleged violations.

When Genesis answered the complaint, it served the plaintiff with an offer of judgment under Federal Rule of Civil Procedure 68. The offer included $7,500 for alleged unpaid wages, in addition to “such reasonable attorneys’ fees, costs, and expenses . . . as the Court may determine.” Genesis stipulated that if the plaintiff did not accept the offer within 10 days after service, the offer would be deemed withdrawn.

After the plaintiff failed to respond in the allotted time period, Genesis filed a motion to dismiss. It argued that because it offered the plaintiff complete relief on her individual damages claim, she no longer possessed a personal stake in the outcome of the suit, rendering the action moot. The plaintiff objected, arguing that Genesis was inappropriately attempting to “pick off” the named plaintiff before the collective action process could unfold.

The trial court found that it was undisputed that no other individuals had joined the plaintiff’s suit and that the Rule 68 offer of judgment fully satisfied her individual claim. It concluded that the Rule 68 offer of judgment mooted the plaintiff’s suit, which it then dismissed.

The U.S. Court of Appeals for the Third Circuit reversed. The circuit court agreed that no other potential plaintiff had opted into the suit, that Genesis’ offer fully satisfied the plaintiff’s individual claim, and that, under its precedents, whether or not such an offer was accepted, the plaintiff’s claim was mooted. The circuit court, however, decided that the plaintiff’s collective action was not moot. It explained that calculated attempts by some defendants to “pick off” named plaintiffs with strategic Rule 68 offers before certification could short-circuit the process, and, thereby, frustrate the goals of collective actions. The circuit court determined that the case had to be remanded to allow the plaintiff to seek “conditional certification” in the district court. If the plaintiff were successful, the district court was to relate the certification motion back to the date on which the plaintiff filed her complaint.  The dispute reached the U.S. Supreme Court.

A sharply divided Supreme Court reversed the Third Circuit’s decision. The majority decision, by Justice Thomas, in which Chief Justice Roberts and Justices Scalia, Kennedy, and Alito joined, found that, in the absence of any claimant’s opting in, the plaintiff’s suit became moot when her individual claim became moot because she lacked any personal interest in representing others in the action. The Court added that although the FLSA authorized an aggrieved employee to bring an action on behalf of himself or herself and “other employees similarly situated,” the “mere presence” of collective action allegations in a complaint could not save the suit from mootness once the individual claim was satisfied. [Genesis Healthcare Corp. v. Symczyk, 2013 U.S. Lexis 3157 (S.Ct. Apr. 16, 2013).]

Comment: The majority decision assumed, without deciding, that the plaintiff’s individual claim actually had become moot following Genesis’ Rule 68 offer of judgment. The dissenting justices, in an opinion by Justice Kagan in which Justices Ginsburg, Breyer, and Sotoymayor joined, asserted that an unaccepted offer of judgment could not moot a case. In the dissent’s view, “[a]n unaccepted settlement offer – like any unaccepted contract offer – is a legal nullity, with no operative effect.”

The Court, in the majority decision, specifically did not decide whether an unaccepted offer of judgment can moot a case.  Therefore, lower court decisions on this subject remain the law in the jurisdictions in which they apply.  That is important because the federal circuit courts of appeals disagree whether an unaccepted offer of judgment pursuant to Rule 68 that fully satisfies a plaintiff’s claim is sufficient to render a claim moot even without the plaintiff’s consent. Cf., e.g., Weiss v. Regal Collections, 385 F. 3d 337 (3d Cir. 2004), with McCauley v. Trans Union, LLC, 402 F. 3d 340 (2d Cir. 2005). Thus, defendants in FLSA cases that are considering making a Rule 68 offer of judgment must consider the appropriate circuit’s law to determine whether such an offer might moot their case.

U.S. Supreme Court Rejects Equitable Defenses to Health Plan Administrator’s Reimbursement Suit, But Finds Attorney’s Fees May Be Allocated

James McCutchen suffered serious injuries when another driver lost control of her car and collided with his. At the time of the accident, McCutchen was an employee of U.S. Airways and a participant in its self-funded health plan. The plan paid $66,866 in medical expenses arising from the accident on McCutchen’s behalf.

McCutchen retained attorneys to seek recovery of all of his accident-related damages, which were estimated to exceed $1 million. The retainer agreement he signed provided for a 40 percent contingency fee. The attorneys sued the driver responsible for the crash, but settled for only $10,000 because she had limited insurance coverage and the accident had killed or seriously injured three other people. Counsel also secured a payment from McCutchen’s own automobile insurer of $100,000, the maximum amount available under his policy. McCutchen thus received $110,000; after deducting $44,000 for the attorney’s fee, he received $66,000.

After U.S. Airways learned of McCutchen’s recovery, it demanded reimbursement of the $66,866 it had paid in medical expenses. In support of that claim, U.S. Airways relied on the following statement in its summary plan description: 

If [U.S. Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, . . . [y]ou will be required to reimburse [U.S. Airways] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise.

McCutchen denied that U.S. Airways was entitled to any reimbursement, but his attorneys placed $41,500 in an escrow account pending resolution of the dispute. That amount represented U.S. Airways‘ full claim minus a proportionate share of the promised attorney’s fees.

U.S. Airways then filed a lawsuit against McCutchen under ERISA §502(a)(3), seeking “appropriate equitable relief” to enforce the plan’s reimbursement provision. The suit requested an equitable lien on $66,866—the $41,500 in the escrow account and the $25,366 in McCutchen’s possession.

McCutchen argued that U.S. Airways could not receive the relief it sought because he had recovered only a small portion of his total damages; he contended that absent “over-recovery” on his part, U.S. Airways had no right to reimbursement. He also contended that U.S. Airways at least had to contribute its fair share to the costs he had incurred to get his recovery and that any reimbursement therefore had to be marked down by 40 percent to cover the promised contingency fee to his attorneys.

The district court rejected both arguments, granting summary judgment to U.S. Airways on the ground that the plan “clear[ly] and unambiguous[ly]” provided for full reimbursement of the medical expenses paid. The U.S. Court of Appeals for the Third Circuit vacated the district court’s order. The Third Circuit reasoned that in a suit for “appropriate equitable relief” under ERISA §502(a)(3), a court must apply any “equitable doctrines and defenses” that traditionally limited the relief requested. The circuit court continued by declaring that the principle of “unjust enrichment” should serve to “limit the effectiveness” of the plan’s reimbursement provision. Full reimbursement, the Third Circuit thought, would “leav[e] [McCutchen] with less than full payment” for his medical bills; at the same time, it would provide a “windfall” to U.S. Airways given its failure to “contribute to the cost of obtaining the third-party recovery.” The Third Circuit then instructed the district court to determine what amount, less than the entire $66,866, would qualify as “appropriate equitable relief.”  The dispute reached the U.S. Supreme Court.

In a split decision, the Supreme Court vacated the Third Circuit’s ruling. It first explained that a health plan administrator such as U.S. Airways may bring suit under §502(a)(3) to recover the funds that a beneficiary such as McCutchen had agreed to turn over.

The Court then noted that “equitable defenses” cannot override the clear terms of an ERISA plan.  The Court first rejected McCutchen’s argument that an insurer in U.S. Airways‘ position could recoup no more than the amount he received from a third party to compensate for the same loss the insurance covered. The Court explained that the plan gave U.S. Airways “first claim” on the entire third party recovery.

The Court also rejected the argument that the “common fund” doctrine – which provides that a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney’s fee from the fund as a whole – should override the plain terms of the plan. As the Court stated, “The plan, in short, is at the center of ERISA. And precluding McCutchen’s equitable defenses from overriding plain contract terms helps it to remain there.”

The Court, however, did not end its analysis there. It pointed out that the plan was “silent on the allocation of attorney’s fees,” and found that it left “space” for the common fund rule to operate.  The Court explained that the plan did not address how to pay for the costs of a third party recovery – that is, the attorney’s fee payable by McCutchen. The Court noted that third party recoveries “do not often come free: To get one, an insured must incur lawyer’s fees and expenses.” Without cost sharing, the Court continued, the insurer would “free ride” on its beneficiary’s efforts, “taking the fruits while contributing nothing to the labor.” Moreover, the Court continued, in this case, McCutchen would be “made worse off” by pursuing a third party. As the Court pointed out, McCutchen spent $44,000 (representing a 40 percent contingency fee) to get $110,000, leaving him with a real recovery of $66,000, but U.S. Airways claimed $66,866 in medical expenses. “That would put McCutchen $866 in the hole,” the Court said, adding that, in effect, he would pay for “the privilege of serving” as U.S. Airways‘ collection agent.

Accordingly, although the Court ruled that neither general principles of unjust enrichment nor specific doctrines reflecting those principles, such as the common fund rules, could override the specific provisions of a plan, where the plan (as in this case) was silent on the allocation of attorney’s fees, the plan should be read to retain the common fund doctrine.  The Court therefore vacated the circuit court’s decision and remanded the case for further proceedings consistent with its opinion. [U.S. Airways, Inc. v. McCutchen, 2013 U.S. Lexis 3156 (U.S. April 16, 2013).]

Comment: The dissent agreed with the first portions of the Court’s decision regarding the applicability of equitable defenses to U.S. Airways’ claim, but argued that the Court should not have applied the common fund doctrine to fill the policy’s “gap” because that was an issue that was not before the Court. Nonetheless, the majority decision makes it clear that, where a plan does not specifically provide for allocation of expenses incurred in obtaining a third party recovery, the common fund doctrine will apply.

Circuit Court Rules That Long Term Disability Benefits May Not Be Reduced by Amount of VA Benefits Claimant Received

In this case, the plaintiff participated, through his employer, in a group long term disability plan issued by Sun Life and Health Insurance Company, then known as GE Group Life Assurance Company (GE). Under the plan, a disabled beneficiary received 60 percent of his or her pre-disability salary. However, the plan reduced this benefit by amounts received as “Other Income.” This term was defined in the “Other Income” section of the plan, which listed seven categories of income that would be deemed “Other Income” for purposes of reducing payments under the plan. One of these categories defined “Other Income” to include “any amount of disability or retirement benefits under: a) the United States Social Security Act . . . ; b) the Railroad Retirement Act; c) any other similar act or law provided in any jurisdiction.”

The plaintiff could not work because he suffered from a blood disease that he contracted from the administration of vaccinations during his service in the U.S. Air Force. On account of this disability, he received service-connected disability compensation (VA benefits) under the Veterans’ Benefits Act. Sun approved the plaintiff’s claim for benefits under the plan. Upon learning that he was receiving VA benefits, however, Sun determined that these VA benefits qualified as “Other Income” and it reduced the amount of his monthly plan benefit by the amount of his VA benefits.

The plaintiff appealed that decision, but Sun denied his appeal. The plaintiff then sued. The district entered judgment for the plaintiff, and Sun appealed.

The U.S. Court of Appeals for the First Circuit affirmed. It rejected Sun’s argument that the plaintiff’s VA benefits had to be considered income from “a similar act or law.” As the circuit court explained, the primary purpose of the Veterans’ Benefits Act was to care for and to support those who have served in the Armed Forces of the United States. VA benefits, therefore, were not linked to employment. Notably, the circuit court added, because of this fundamental difference in purpose and scope, funding for Social Security Act and Railroad Retirement Act disability benefits is derived from a tax on both the employee and employer, whereas VA benefits are funded by Congress through the VA’s budget instead of by a tax on members of the military.

The circuit court therefore concluded that the VA benefits the plaintiff received were not “Other Income” for purposes of reducing the payment Sun owed to him under the plan. [Hannington v. Sun Life and Health Insurance Co., 2013 U.S. App. Lexis 6515 (1st Cir. March 29, 2013).]

Court Dismisses Action Seeking Disability Benefits that Was Filed after the Plans’ Three Year Limitations Period Had Run

The plaintiff in this case was a participant in the “Group Short Term Disability Insurance Policy” and “Group Long Term Disability Insurance Policy” of the Henry Ford Health System. Both plans, which were governed by ERISA, provided that, to qualify for disability benefits, an eligible participant had to provide proof of loss to the insurers within 90 days of the onset of any disability. Additionally, the policies required that any legal action brought to enforce the claims had to be filed within three years from the date proof of loss was required.

In June 2012, the plaintiff sued Cigna Group Insurance and Life Insurance Company of North America alleging that the insurers, as issuers of the short term and long term disability insurance policies, had wrongfully denied his claim for disability benefits. The insurers moved to dismiss.

The insurers argued that the plaintiff had alleged that he had become disabled on June 14, 2006. Thus, they continued, under the policies, his proof of loss was due on or before September 12, 2006, and any legal action had to have been filed on or before September 11, 2009. The insurers pointed out that the plaintiff had not filed his complaint until June 13, 2012, and they contended that it was time-barred.

The court granted the insurers’ motion. In its decision, it rejected the plaintiff’s argument that the policies’ three year limitations period should not be enforced because the policies were “not negotiated between the parties.” It reasoned that the plaintiff’s employer – not the plaintiff himself – negotiated the policies with the insurers. Therefore, the court held, the plaintiff’s contention that the limitations clauses were not enforceable because he did not negotiate and bargain for them was “without merit.”

The court also rejected the plaintiff’s argument that it should not enforce a three year insurance claim limitations because it was “bad law.” The court found no U.S. Supreme Court or en banc circuit court opinion overruling the relevant circuit court of appeals decisions that established that three year limitations periods in ERISA policies were reasonable. [Twort v. CIGNA Group Ins., 2013 U.S. Dist. Lexis 26646 (E.D.Mich. Feb. 27, 2013).]

Court Dismisses Another Action Seeking Disability Benefits that Was Filed after the Plan’s Three Year Limitations Period Had Run

The same court – the U.S. District Court for the Eastern District of Michigan – that issued the decision in the Twort case issued a decision in this case, which was brought by a former sales representative for Solvay America, Inc. The plaintiff challenged the decision by the plan administrator, Metropolitan Life Insurance Co., to discontinue his long term disability benefits (LTD) under Solvay’s long term disability benefit plan. He asserted that he suffered from a variety of medical issues that prevented him from working in his normal capacity as a sales representative. MetLife argued that the complaint should be dismissed because it was filed more than one year after the plan’s three year contractual limitation period ended.

The court upheld the three year contractual limitation period and ruled that the plaintiff’s claim was barred even though neither the summary plan description (SPD) nor MetLife’s final determination letter disclosed the existence of the plan’s three year contractual limitation period.

As the court explained, the plan document set forth the terms of the contractual limitations period for filing a lawsuit, providing that: “No lawsuit may be started more than 3 years after the time proof must be given.”

The court reasoned that a plan participant had constructive notice of the contractual limitation period when the SPD proscribed a procedure for the participant to obtain plan documents. In this case, the court continued, MetLife provided the plaintiff with the necessary information needed to file a claim. Furthermore the SPD provided in detail the process for the plaintiff to retrieve a copy of the entire plan:

You have the right to examine, without charge and upon proper request, all plan documents and copies of documents filed by the plan with the U.S. Department of Labor, such as annual reports and plan descriptions. You may obtain copies of plan documents and other plan information by written request to the plan administrator. The administrator may make a reasonable charge for any copies you request.

As the court pointed out, the plaintiff admitted that he did not request a copy of the plan document until more than 3 1/2 years after he received the adverse final determination on his claim. Had the plaintiff requested the plan document upon receiving the adverse final determination, the court stated, “he would have learned of the contractual limitation period for filing a lawsuit.” In the court’s view, it was not enough for the plaintiff to contend that the SPD was not written in a manner to apprise the average plan participant of rights afforded by the plan when the SPD provided a method for the plaintiff to obtain the entire plan document. Accordingly, the court granted MetLife’s motion to dismiss. [Moyer v. Metropolitan Life Insurance Co., 2013 U.S. Dist. Lexis 27770 (E.D. Mich. Feb. 28, 2013).]

Reprinted with permission from the June 2013 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

Related Publications

Get legal updates and news delivered to your inbox