Harris v. Harvard Pilgrim Health Care Inc.

• Decision Date: 10 December 1999
• Docket Number: 99-1557,Nos. 99-1390,s. 99-1390
• Parties: (1st Cir. 2000) MICHAEL HARRIS AND WENDY HARRIS, Plaintiffs, Appellees, v. HARVARD PILGRIM HEALTH CARE, INC., Defendant, Appellant, MICHAEL HARRIS AND WENDY HARRIS, Plaintiffs-Appellants, v. HARVARD PILGRIM HEALTH CARE, INC., Defendant-Appellee. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 274

208 F.3d 274 (1st Cir. 2000)

MICHAEL HARRIS AND WENDY HARRIS, Plaintiffs, Appellees, v. HARVARD PILGRIM HEALTH CARE, INC., Defendant, Appellant, MICHAEL HARRIS AND WENDY HARRIS, Plaintiffs-Appellants, v. HARVARD PILGRIM HEALTH CARE, INC., Defendant-Appellee.

Nos. 99-1390, 99-1557

United States Court of Appeals for the First Circuit

Heard December 10, 1999

Decided March 31, 2000

[Copyrighted Material Omitted]

Kenneth W. Salinger, with whom Steven L. Schreckinger and Palmer & Dodge LLP were on brief for Plaintiffs.

Paul R. Collier, III, with whom Collier, Shapiro & McCutcheon was on brief for Defendant.

Before Stahl, Circuit Judge, Cyr, Senior Circuit Judge, and Lipez, Circuit Judge.

CYR, Senior Circuit Judge.

Harvard Pilgrim Health Care, Inc. ("HPHC"), an ERISA plan administrator, appeals from a district court judgment directing it to defray its pro rata share of the legal fees expended by plan members Michael and Wendy Harris ("the Harrises") in obtaining an earlier tort action settlement, part of which settlement the Harrises were contractually obligated to remit to the plan. For their part, the Harrises cross-appeal from district court orders (i) directing them to reimburse the plan for medical benefits previously received, and (ii) dismissing their state-law action for unfair or deceptive trade practices.

I BACKGROUND

After Michael Harris sustained personal injuries in a 1991 motorcycle accident, HPHC remitted $102,874.29 toward his medical costs pursuant to the ERISA plan. Thereafter, the Harrises sued the party allegedly responsible for the accident. HPHC in turn filed a $102,874.29¹ state-law lien against any award the Harrises might obtain in their legal action. The HPHC lien was predicated principally on the subrogation provision in the ERISA plan:

H.4. SUBROGATION. If another person or entity is, or may be, responsible to pay for expenses or services related to the Member's illness and/or injury which [HPHC] paid or provided, then [HPHC] is entitled to subrogation rights against such person or entity. [HPHC] shall have the right to proceed in the name of the Member, with or without his or her consent, to secure right of recovery of its cost, expenses, or the value of services rendered under this Agreement. [HPHC] is also entitled to recover from a Member the value of services provided, arranged, or paid for, when the Member was reimbursed for the cost of care by another party.

H.5. MEMBER COOPERATION. The Member agrees to cooperate with [HPHC], and to provide all requested information, and to assign to [HPHC] any monies received for services provided or arranged by [HPHC]. The Member will do nothing to prejudice or interfere with the rights of [HPHC].

(Emphasis added.); see also Mass. Gen. Laws Ann. ch. 111, § 70A.²

The Harrises eventually settled their lawsuit for $737,500, $264,727.31 of which was for their attorney fees and costs. Their attorney purportedly settled the suit at two-thirds its estimated value after assessing the risks of litigation, particularly allegations that Harris had been intoxicated and exceeding the speed limit at the time of the accident. HPHC took no part in the settlement.

In their 1997 lawsuit, the Harrises alleged that the HPHC lien was excessive because the reimbursement requirement in the ERISA plan ought not take effect unless and until the Harrises were made whole by the settlement, whereas they had received only two-thirds of their estimated damages from the settlement. Second, the Harrises claimed, under the equitable common-fund doctrine HPHC should bear its proportionate share of the $264,726 attorney fee incurred by the Harrises in generating the settlement fund from which HPHC demanded reimbursement. Finally, the Harrises argued that the excessive lien claim asserted by HPHC constituted a breach of contract and violated the Massachusetts unfair or deceptive trade practices act. See Mass. Gen. Laws Ann. ch. 93A. HPHC thereafter counterclaimed for lien enforcement and the parties submitted cross-motions for summary judgment.

The district court ruled that: (1) the breach of contract and chapter 93A claims brought by the Harrises were preempted, see Harris v. Harvard Pilgrim Health Care, Inc., 20 F. Supp. 2d 143, 147-48 (D. Mass. 1998); (2) as were the lien provisions in Mass. Gen. Laws Ann. ch. 111, § 70A, see id. at 148-49; (3) HPHC possessed a contractual right to reimbursement for all its medical payments to Harris, regardless whether the tort settlement made the Harrises whole, see id. at 149-51; and (4) HPHC was responsible for a pro rata share of the legal fees incurred by the Harrises since the subrogation clause in the ERISA plan is silent as to attorney fees, and the common-fund, fee-shifting doctrine should be adopted as federal common law under ERISA, see id. at 152-53.

HPHC appeals the second and fourth rulings; the Harrises cross-appeal the first and third rulings.

II DISCUSSION

A. The HPHC Appeal

HPHC claims that the district court erred in adopting, as federal common law, the rule that an ERISA-plan subrogee is liable for its proportionate share of the attorney fees expended by a plan member in generating the settlement fund. It argues that ERISA requires deference to the plain language of the subrogation clause contained in the ERISA plan, which in this instance neither mentions attorney fees specifically, nor qualifies its general language that HPHC is entitled to recover "the value of services provided, arranged, or paid for."³

The issue thus presented is one of first impression in this circuit. Among the courts of appeals which have considered it, the majority view is that an ERISA plan need not contribute to attorney fees where its plain language gives it an unqualified right to reimbursement. See, e.g., Walker v. Wal-Mart Stores, Inc., 159 F.3d 938, 940 (5th Cir. 1998); United McGill Corp. v. Stinnett, 154 F.3d 168, 172-73 (4th Cir. 1998); Health Cost Controls v. Isbell, 139 F.3d 1070, 1072 (6th Cir. 1997); Bollman Hat Co. v. Root, 112 F.3d 113, 116-17 (3d Cir. 1997); Ryan v. Federal Express Corp., 78 F.3d 123, 127-28 (3d Cir. 1996). Since "one of the primary functions of ERISA is to ensure the integrity of written, bargained-for benefit plans[,]" United McGill, 154 F.3d at 172, generally speaking ERISA does not mandate that a covered plan include particular substantive provisions. Thus, "the plain language of an ERISA plan must be enforced in accordance with 'its literal and natural meaning.'" Id. (citation omitted).

The majority of courts construing state laws which regulate non-ERISA insurance contracts have read the common-fund doctrine into contractual clauses giving insurers an unqualified right to reimbursement from their insureds. See, e.g., York Ins. Group of Maine v. Hall, 704 A.2d 366, 368 n.3 (Me. 1997). Typically, these courts have read the reimbursement clauses' silence on the issue of attorney fees as an ambiguity, then based their holdings on the prevailing state-law principle that ambiguities in insurance policies must be construed in the insured's favor. See id. at 369.

By contrast, however, ERISA creates precisely the opposite presumption: unqualified plan provisions need not explicitly rule out every possible contingency in order to be deemed unambiguous. ERISA merely requires that covered plans be "'sufficiently accurate and comprehensive to reasonably apprise such ["average plan"] participants and beneficiaries of their rights and obligations under the plan.'" Walker, 159 F.3d at 940 (quoting 29 U.S.C. § 1022(a)(1) (summary plan description)). It therefore follows that an ERISA plan which unambiguously requires its members to reimburse the plan for all benefits paid does preclude offsets for attorney fees. See id.⁴

Notwithstanding the great weight of contrary authority, the district court was persuaded -- mistakenly in our view -- by the decision in Waller v. Hormel Foods Corp., 120 F.3d 138 (8th Cir. 1997). Waller dealt with a plan markedly different from the provisions construed in the cases we have cited. See supra note 4. The Waller plan merely provided: "In the event of any payment by the [plan] for health care expenses, the [plan] shall be subrogated to all rights of recovery which you or your dependent, receiving such payment, may have against any person or organization." Waller, 120 F.3d at 139. Thus, the Waller plan neither defined the term subrogation, nor vested the plan with a direct right of reimbursement to all benefits paid in behalf of the plan member.

Furthermore, reimbursement and subrogation are distinct remedies. Subrogation empowers the plan to stand in the shoes of its member, and thus to enforce the plan member's rights and remedies against third parties through litigation. By contrast, reimbursement affords the plan a direct right of recovery against the plan member. See Provident Life & Accident Ins. Co. v. Williams, 858 F. Supp. 907, 911 (W.D. Ark. 1994). Thus, Waller held simply that a plan member might interpret the term "subrogation" to mean that "the Plan will pay reasonable fees and expenses so as to encourage beneficiaries to press claims to which the Plan will be partially subrogated." Waller, 120 F.3d at 141. No such inference would be compelled, however, were the plan to seek recovery, not through subrogation, but independently, based on its own right to direct reimbursement.

The Harrises rely as well on several district court decisions which have held that the common-fund, fee-sharing doctrine may be read into otherwise unqualified ERISA subrogation provisions. See, e.g., Hartenbower v. Electrical Specialties Co. Health Benefit Plan, 977 F. Supp. 875, 885 (N.D. Ill. 1997); Carpenter v. Modern Drop Forge Co., 919 F. Supp. 1198, 1205-06 (N.D. Ind. 1995); Martz v. Kurtz, 907 F. Supp. 848, 855-56 (M.D. Pa. 1995), rev'd per curiam, 92 F.3d 1172 (3d Cir. 1996); Provident Life, 858 F. Supp. at 912; Serembus v. Mathwig, 817 F. Supp. 1414, 1423-24 (E.D....