Supreme Court: Two 5-4 Decisions On FLSA and ERISA

This morning, the United States Supreme Court issued two employment decisions which had two things in common.  They both were both 5-4 decisions and they both reversed the Third Circuit Court of Appeals.  Justice Kennedy was the swing vote.  In the first case, Justice Thomas’ opinion found that a FLSA lawsuit brought by a single plaintiff on behalf of herself other others similarly situated could not proceed after her individual claim was mooted by her failure to accept an offer of judgment from the defendant hospital employer.  In the second lawsuit, Justice Kagan’s opinion found that an employer’s ERISA plan could properly recover in a lawsuit from its employee/beneficiary funds which employee recovered in a personal injury lawsuit from a third-party based on the equitable lien in the ERISA plan to recover funds already paid by the plan to the employee for his injuries.  However, because the ERISA plan was silent on the subject of attorney fees, the common law doctrine concerning a common fund would be applied to reduce the ERISA’s plan’s recovery by the 40% contingency fee that the plaintiff paid his personal injury attorney to recover the funds.

In the FLSA lawsuit, the plaintiff employee alleged that she and other similarly situated employees were not paid in accordance with the FLSA because her hospital employer automatically deducted 30 minutes each day from their paycheck for lunch whether they worked through lunch or not.   Genesis Healthcare Corp. v. Symczyk, No. 11-1059 (4-16-13).  No other employees joined her lawsuit.  Upon filing its answer to her complaint, her savvy employer made an offer of judgment under Civil Rule 68 – i.e., offered her the full requested relief of $7500 of unpaid wages plus any attorney fees, costs and expenses that the court might deem appropriate.  She was given 10 days to accept the offer, which she ignored.  The trial court, however, was impressed.  By offering her full relief, the employer mooted her individual claim (under the law of the Third Circuit – which is not universally accepted on this point), which was dismissed.  Because no one else had joined her lawsuit, and she had no personal interest in the pending lawsuit,  the case was dismissed.  The Third Circuit reversed, objecting to allowing employers to cherry pick cases by paying off the representative plaintiff.  However, the Supreme Court reversed.

While the FLSA authorizes an aggrieved employee to bring an action on behalf of himself and “other employees similarly situated,” 29 U. S. C. §216(b), the mere presence of collective-action allegations in the complaint cannot save the suit from mootness once the individual claim is satisfied.

                . . . . .

The Court of Appeals concluded that respondent’s indi­vidual claim became moot following petitioners’ Rule 68 offer of judgment. We have assumed, without deciding, that this is correct.

Reaching the question on which we granted certiorari, we conclude that respondent has no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness. Respondent’s suit was, therefore, appropriately dismissed for lack of subject-matter jurisdiction.

The Court distinguished this case for damages from equitable cases where the fleeting nature of the underlying claim (such as the lawfulness of pre-trial detentions) would almost always render a case moot before it could be heard.  Notably, the Court did not address the larger issue of whether a rejected offer of judgment renders the case moot, which is an unsettled issue of law.  The lower courts held that it did and the plaintiff did not appeal that issue to the Supreme Court.

In the second case, an employee was injured in a car accident and his employer’s health plan paid $66,866 in medical costs.  US Airways, Inc. v. McCutchen, No. 11-1285 (4-16-13).   The employee then retained a lawyer to sue the driver of the car which injured him.  That driver had also killed and/or seriously injured 3 other people, had limited insurance coverage and settled for $10,000.  However, the employee’s own insurance carrier paid $100,000.  Of the $110,000  recovered by the employee, 40% of it went to his attorney’s contingency fee.  Although he was left with only $66,000, the employer’s health plan then sued him under §502(a) of ERISA to recover reimbursement of the $66,888 in medical expenses it paid on his behalf. The terms of the health plan provided:

“If [US 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 [US 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.”

The health plan’s right to reimbursement is an equitable lien by agreement on the proceeds of the personal injury litigation.   Nonetheless, it is a contractual right and is not subject to common law rules concerning equitable liens.  Therefore, the plan’s contractual rights could not be defeated by the common law doctrines of unjust enrichment, double recovery, or common fund.  However, because the plan was silent on the allocation of attorney fees, the Court’s majority (and the point on which the minority dissented because the terms of the plan were plain and uncontested), concluded that the silence would be filled by the common law doctrine of the common fund.  The plan did not specify whether its right to recovery went to the first dollar or only to the dollars recovered (i.e., after deduction for attorney fees).  

The majority found that the plan’s contractual right to recovery was reduced by the 40% attorney contingency fee.   Otherwise, the plan would receive a full ride at the employee’s expense.  The employee here would be out of pocket for bringing the lawsuit that the plan failed to bring or contribute towards. To rule otherwise, would also create a disincentive for the employee to have brought the personal injury lawsuit in the first place.    Of course, employers could avoid having to share with personal injury attorneys in the future by revising the terms of their ERISA plans to explicitly avoid responsibility for those fees and/or specify how its recovery would be calculated.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.