On April 16, 2013, the U.S. Supreme Court issued its decision in US Airways, Inc. v. McCutchen (No. 11–1285), deciding the issue of whether equitable defenses, such as the principle of unjust enrichment, can override the reimbursement provision of a health benefits plan established under the Employee Retirement Income Security Act (ERISA). Specifically at issue in the case was §502(a)(3) of ERISA, which authorizes health-plan fiduciaries to bring a civil action to obtain appropriate equitable relief to enforce the terms of a plan. The Court held that such equitable defenses cannot override the clear terms of a plan.

The case arose from a dispute over a health benefit plan provision that required participants to reimburse the plan for medical expenses where the expenses were incurred as a result of the fault of a third party and the participant was able to obtain a recovery from the third party. After a participant in the health plan suffered injuries in a car accident, the plan paid medical expenses in the amount of $66,866. The participant then sued the driver and recovered $110,000 ($40,000 of which went to attorney’s fees). The employer, as a fiduciary of the health plan, then sued the participant under §502(a)(3) seeking reimbursement. In response, the employee asserted various equitable defenses to reduce the plan’s recovery, including unjust enrichment, and also argued that the plan was required to share in the attorney’s fees and costs incurred in obtaining the tort recovery.

The case eventually reached the Third Circuit Court of Appeals, which ruled that in a §502(a)(3) suit and regardless of the terms of an ERISA plan, a court must apply any “equitable doctrines and defenses” that traditionally limited the relief requested. The Third Circuit held that “the principle of unjust enrichment,” for example, overrides a plan’s reimbursement clause if and when they come into conflict. The court also held that the plan was required to share in the participant’s attorney’s fees and costs under the common fund doctrine.

The U.S. Supreme Court held that equitable defenses cannot override the clear terms of an ERISA plan. According to the Court, attempting to enforce the employer’s plan— “the modern-day equivalent of an ‘equitable lien by agreement’”—“means holding the parties to their mutual promises” and “declining to apply rules…at odds with the parties’ expressed commitments.” Because the health plan effectively disclaimed the application of unjust enrichment or other equitable defenses, the Court ruled that the participant could not rely on equitable defenses to defeat “the plan’s clear terms” and thereby reduce the plan’s recovery. However, the Court went on to find that the health plan was silent on the issue of whether it was obligated to share in the attorney’s fees and costs incurred in obtaining the tort recovery. As a result of this silence, the Court held that the common fund doctrine would provide the default rule, requiring the plan to reduce its reimbursement recovery by a pro rata share of the fees and costs incurred in the tort action. 

The McCutchen decision reinforces the importance of ERISA plan documents and the fact that plan terms override otherwise applicable equitable principles. It provides important guidance not only for those who litigate these types of cases, but also for those who draft the plans in the first place.
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Categories: ERISA | Supreme Court

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Wednesday's United States Supreme Court opinion in Kiobel v. Royal Dutch Petroleum Co. et al., 569 U.S. ___ (2013), has confirmed that the Alien Tort Statute (ATS) has a limited scope and cannot open the doors of United States courts to lawsuits based on ordinary torts committed by companies outside the territorial confines of the United States.  Although the Court did not meaningfully address the issue of corporate liability, its narrow holding all but guarantees that ATS will not become an issue in lawsuits against corporate clients in products cases.

At first blush, Kiobel does not appear to be the type of case that would interest product liability lawyers.  It involved Nigerian nationals who had obtained asylum in the United States suing foreign corporations that has allegedly aided and abetted the government of Nigeria in committing abuses against its citizens including, among others, extrajudicial killings, crimes against humanity, and torture.  It goes without saying that "crimes against humanity" are topics that are generally outside the pale of the average civil defense attorney's resume.
Representing clients in a global marketplace, however, often necessarily means representing clients who have potential exposure to liability abroad.  Although your client may not be accused of crimes against humanity, the prospect of a German client with an American office being sued in America for building a product in Guatemala that injured someone in Japan is still daunting.  Because ATS has a somewhat broad purpose:  to permit federal courts to recognize "certain causes of action based on sufficiently definite norms of international law,"  569 U.S. ___ (2013), it is conceivable that a clever plaintiffs' attorney would argue that principles of negligence or product liability were "sufficiently definite norms" of international law to warrant jurisdiction.

Whether that argument would be successful is doubtful.  But the Second Circuit, whose opinion the Supreme Court reviewed, had a simple, comforting answer for corporate clients:  ATS does not apply to corporations.  The hypothetical Japanese plaintiff simply could not sue a corporate defendant in America to recover for her injuries.  There would be no need to litigate if the lawsuit involved "sufficiently definite norms of international law." 

Wednesday, the Supreme Court skirted the issue of corporate liability, but announced a rule that should provide a similar degree of certainty to corporate clients.  Its decision did not turn on the corporate status of the defendant, but whether ATS applies extraterritorially.  The Court concluded that it does not. 

Writing for the majority, Chief Justice Roberts concluded that ATS was not intended to bring into the United States Courts claims involving torts committed against foreign subjects outside the territorial confines of the United States.  The majority noted that, historically, ATS had been used only rarely since its 18th century enactment, and historically used only to address claims that a person had violated the law of nations:  violating safe conduct, infringing on the rights of ambassadors, and piracy.  Therefore, it held that to warrant jurisdiction under ATS, a plaintiff's claim must "touch and concern the territory of the United States . . . with sufficient force to displace the presumption against extraterritorial application." 

No justice dissented from the majority opinion, and even the most critical concurrence—by Justice Breyer, joined by Justices Ginsburg, Sotomayor, and Kagan—tended to confirm that corporate clients will not, in the ordinary course of litigation, be faced with jurisdiction based on ATS.  The concurrence advocated reading ATS as permitting jurisdiction over extraterritorial torts when "the defendant's conduct substantially and adversely affects an important American national interest," emphasizing the importance of the United States not becoming a safe harbor for "a torturer or other common enemy of mankind."

In short, although the "easy" ATS answer is now gone, the average corporate client has little to fear from ATS.  Negligence and products liability—while serious allegations—are hardly the stuff from which allegations of being a "common enemy of mankind" are made.     

William F. Auther is the managing partner of the Phoenix, Arizona office of Bowman and Brooke, LLP, where he has an active trial practice in product liability and business litigation.  Amanda Heitz is an associate at Bowman and Brooke.

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Class Action Deemed to Be Improperly Certified by Lower Courts

CHICAGO – (March 27, 2013) The Supreme Court this morning reversed the judgment of the Third Circuit Court of Appeals in the case of Comcast v. Behrend, an opinion in alignment with the position of DRI – Voice of the Defense Bar in its amicus brief filed in August of last year. The majority held that the class action in Comcast v. Behrend was improperly certified under Rule 23(b)(3). 

In this case, subscribers sued Comcast Corp. and various Comcast subsidiaries, alleging that Comcast monopolized Philadelphia’s cable market and excluded competition in violation of federal antitrust laws. To constitute a class, plaintiffs proffered an expert damages model that purported to prove each class member’s damages by evidence common to all. Comcast responded that the plaintiffs’ model was incapable of calculating damages for the class because it was based on several erroneous assumptions about the asserted claims, and indeed that common proof of damages is impossible given significant differences among the class members. The district court nonetheless certified the class.

Comcast sought review in the Third Circuit Court of Appeals, which affirmed the certification order after expressly declining to consider Comcast’s contentions. While the Third Circuit acknowledged that, “[t]o satisfy . . . the predominance requirement, Plaintiffs must establish that the alleged damages are capable of measurement on a class-wide basis using common proof,” it nonetheless insisted that “[w]e have not reached the stage of determining on the merits whether the methodology [offered by Plaintiffs] is a just and reasonable inference or speculative.” The court concluded that Comcast’s “attacks on the merits of the methodology” have “no place in the class certification inquiry.” 

In his dissent, Judge Jordan stated in part, “not only have Plaintiffs failed to show that damages can be proven using evidence common to the class, they have failed to show . . . that damages can be proven using any evidence whatsoever—common or otherwise.” 

The Supreme Court held that the Third Circuit erred in refusing to decide whether the plaintiff class’s proposed damages model could show damages on a class-wide basis. Under proper standards, the model was inadequate and the class should not have been certified. The vote was 5–4 with Justices Breyer, Ginsburg, Sotomayor and Kagan dissenting.

Citing the Federal Judicial Center’s Reference Manual on Scientific Evidence, the majority held that “’The first step in a damages study is the translation of the legal theory of the harmful event into an analysis of the economic impact of that event.’ The District Court and the Court of Appeals ignored that first step entirely.”

The Third Circuit’s approach to class certification would have allowed plaintiffs to obtain certification without showing a reasonable likelihood that they will be able to prove their class-wide claims (predominately) by common evidence. This would have significantly lowered class plaintiffs’ burden under Rule 23 and resulted in the certification of many more non-meritorious class actions.
Brief author Jonathan F. Cohn of Sidley Austin LLP, Washington DC, is available for interview or for expert comment through DRI’s Communications Office.
For the full text of the brief, click here.

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On March 20 the U.S. Supreme Court held that the anti-lien provision of the federal Medicaid Act preempts a state’s right to take any portion of a Medicaid beneficiary’s tort judgment or settlement not designated as payment for medical care.  The Court’s ruling in Wos v. E.M.A., effectively blocks North Carolina’s efforts to recover up to one-third of any damages a Medicaid beneficiary recovers from a third party, as reimbursement for the state’s Medicaid coverage of the beneficiary’s medical treatment. Wos v. E.M.A., U.S. Supreme Court No. 12-98, issued March 20, 2013 (Slip Opinion).

The case involves a child — E.M.A. — who was born with serious birth defects which will prevent her from being able to work or live independently.  North Carolina’s Medicaid program funds part of E.M.A.’s medical care. E.M.A.’s parents settled a medical malpractice lawsuit related to her birth for $2.8 million dollars, even though expert witnesses estimated that total damages in the case exceeded $42 million dollars.  The amount of the final settlement was determined in part by the treating physician and hospital’s insurance policy limits.

Notably, the settlement agreement itself did not specify whether portions of the $2.8 million proceeds were allocated for medical or non-medical damages. The trial court approved the settlement, but placed one-third of the recovery into escrow pending a determination of how much E.M.A.’s parents were required to reimburse North Carolina’s Medicaid program for the cost of her treatment, under state law. The state had informed E.M.A.’s parents that it had spent $1.9 million on E.M.A.’s medical care, and that it would seek to recover that amount, up to one-third of the total recovery of any settlement or judgment of the malpractice claim, in accordance with state law.

E.M.A. and her parents then brought suit in federal court, claiming that the state’s law pertaining to its reimbursement rights violated the federal Medicaid statute.
In today’s decision, the Supreme Court ruled that North Carolina’s law is preempted to the extent that it permits the state to “take a portion of a Medicaid beneficiary’s tort judgment or settlement not designated for medical care.”  Wos at 2. The Court held that North Carolina’s law directly conflicts with the federal statute and “must give way.” Id.

The Court’s opinion states that North Carolina’s law was preempted because the state law lacks any limiting principle, and provides no mechanism for determining whether its allocation of up to one-third of the total recovery is reasonable. Id.

Justice Kennedy delivered the Court’s opinion.

Stay tuned for more detailed updates on how this decision affects the interplay between the federal Medicaid statute and state Medicaid programs.

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Categories: Medicare | Supreme Court

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Our Role as Lawyers in the Aftermath

Posted on December 19, 2012 03:37 by Stacy Moon

As parents, or friends of parents, the last weekend has been exceptionally difficult.  Friends have debated whether to tell their children what happened in Newtown, Connecticut, and, if so, how to explain what happened.  Many of us likely have friends calling for greater gun control, and others calling for greater access to guns for protection, all referencing the Second Amendment.  I, personally, have a difficult time with both sides of the issue.   On the one hand, I do not understand why a civilian needs an automatic or assault weapon.  On the other hand, the founding fathers put the right to bear arms in the Second Amendment, even before protecting the right against unreasonable search and seizure.  And the answer to my question can be answered by the question, "Why do you have to be able to say something offensive?" Some reenacting weapons are considered assault rifles because they have sniper scopes too. I know any number of responsible and irresponsible gun owners who take weapons into entirely inappropriate circumstances, but legally. Then again, it took three seconds to reload a rifle in 1787, when the constitution was written.  The issue of original intent versus modern circumstances is one that occurs in all constitutional issues, but seems to be more intense in these discussions of gun control, or not, and gun safety.  In short, the questions and issues are numberless, and a discussion covering all of them is coming.  We will be asked questions by friends because we are lawyers.  And we will not necessarily have all of the answers.

However, because we are attorneys, we will be asked our thoughts regarding the Second Amendment; gun control; gun access; gun safety; and other issues related to forceful treatment of mental health.  And we, as attorneys, will have varied opinions and varied strength of opinions.  But, the one thing we are uniquely qualified to do, by virtue of our training and professionalism, is steer the conversation to a respectful tone, with reasoned opinions.  We can ensure that all sides are heard, rationally.  We can ensure that the discussion is held without unchallenged hyperbole.  We are in possibly the best position to analyze the data that all sides will be throwing at us, to find flaws, and strengths, in the various arguments, and to present them, calmly and professionally to other people.

We, as lawyers, will not have, and should not think we have, all the answers.  But we can and should ensure that the upcoming discussions recognize the legitimacy of the various points of view and are held rationally, without rancor.
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In a major decision concerning privilege waiver, the Illinois Supreme Court, in Center Partners, LTD v. Growth Head GP, LLC, ruled that the subject matter waiver doctrine does not apply to privileged communications disclosed in an extrajudicial context.  The Court’s decision, which can be accessed here, answered a question of first impression in Illinois and will serve as influential authority when other states consider the scope of subject matter waiver.

Question at Issue
The precise question before the Court was whether, as a matter of law, the subject matter waiver doctrine applies to the disclosure of privileged information made outside of a litigation or judicial setting (an extrajudicial setting).

Illinois Supreme Court
Where a privileged communication is voluntarily disclosed, the subject matter waiver doctrine extends this waiver to all other communications pertaining to the same subject matter.  The purpose of the doctrine is to prevent a party from selectively disclosing favorable information while simultaneously withholding unfavorable information under the cloak of privilege. The question in Center Partners was whether the subject matter doctrine, and its underlying purpose, should apply in non-litigation contexts.

Facts of Case
The Center Partners case involved a complicated business transaction.  In short, three companies negotiated the purchase of Rodamco North America, N.V., including the General Partner of one of Rodamco’s holdings.  During the purchase negotiations, the purchasing entities and their lawyers exchanged privileged information concerning the legal implications of the transaction, rights and obligations of the parties to the transaction, and legal concerns and conclusions about the structure of a new partnership agreement.  A couple of years after the transaction was complete, a group of minority limited partners sued for breach of contractual and fiduciary duties, and sought all communications actually disclosed between the purchasing entities and all privileged, non-disclosed communications concerning the same subject matter.

Court’s Ruling
In an issue of first impression in Illinois, the Court ruled that the subject matter waiver doctrine does not apply where privileged communications are disclosed in an extrajudicial setting. The Court based its decision in large part on the doctrine’s underlying purpose.  The purpose is to prevent a party from using an evidentiary privilege offensively (sword) to disclose favorable information and later defensively (shield) to withhold unfavorable information pertaining to the same subject matter.

The Court reasoned that, outside the litigation context, parties generally do not decide to disclose privileged information for sword and shield purposes.  In many non-litigation settings, such as business transactions, parties disclose privileged information before litigation is initiated or even contemplated.  And expanding the subject matter waiver doctrine to non-litigation contexts would produce a perverse result: parties may “leave attorneys out of commercial negotiations for fear that their inclusion would later force wholesale disclosure of confidential information.” Consequently, the Court found that the purpose of the subject matter waiver doctrine is simply not served by expanding it to non-litigation contexts.

The Court placed one limitation on its ruling.  It stated that, if a disclosure is made during a business negotiation to gain a later tactical advantage in anticipated litigation, then the subject matter waiver doctrine would still apply if such a disclosure is later used by the disclosing party at any point during the litigation to gain a tactical advantage.

PoP Analysis
Most states have not addressed the issue whether the subject matter waiver doctrine applies in extrajudicial contexts, and this area of evidentiary privileges needs more development.  The Illinois Supreme Court’s decision in Center Partners is based on sound reasoning and will likely serve as persuasive authority when the issue arises in other states.  And while the decision was made in the non-litigation context of business transactions, it will likely serve as persuasive authority for disclosures made in other non-litigation contexts such as disclosures made during settlement negotiations, government investigations, regulatory compliance filings, or for public relations/media purposes.  For a more detailed analysis of these issues, see an earlier PoP post recommending an IADC article by Andrew Kopon and M.C. Sungaila.

The original post by Todd Presnell was published on December 3 and can be found here
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Terry Baynes of Thomson Reuters has an interesting article on efforts by a few plaintiffs’ attorneys to “crowd source” consumer arbitration claims.  The effort arises out of the Supreme Court’s decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), upholding class action waivers in mandatory arbitration clauses.  The article discusses how two plaintiffs’ attorneys have created a website to generate consumer interest in filing multiple arbitration claims against a company with the stated goal of overwhelming the company “with hundreds or thousands of claims.”   The article quotes one of the founding lawyers as saying, “If it happens enough, companies will want class actions again.”  Andrew Pincus, who represented AT&T Mobility before the Supreme Court, is quoted as calling the site “marketing front for plaintiffs’ law firms.”  Mr. Pincus discussed Concepcion at DRI’s 2011 Class Action Seminar in Washington, DC.  DRI will hold the next edition of the Class Action Seminar on July 25 and 26, 2013.  That program is expected to include discussions of the Supreme Court’s current term’s class action and collective action cases.  More details on that will follow soon.

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SCOTUS Update - Hadden v. United States

Posted on September 25, 2012 02:05 by Robert H. Wright

The Supreme Court of the United States is meeting today to decide which cert. petitions will be granted for the new term, which formally begins next Monday.  One of the petitions distributed for review at the conference will be that from Hadden v. United States, in which DRI – The Voice of the Defense Bar filed an amicus curiae brief in support of cert.  The issue in the case is whether, under the Medicare Secondary Payer Act, the government is entitled to full reimbursement of its Medicare payments when a beneficiary compromises a tort claim and recovers a reduced amount for medical expenses, or whether the government (like its beneficiary) is entitled to only a proportionate recovery from the settlement.  The petition is listed on the scotusblog.com (a blog devoted to coverage of the Supreme Court) as one of the “Petitions to Watch” at this conference.  Today, at about 9:30 a.m. eastern, the court is expected to release its list of the petitions granted in today’s conference.

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Class Actions and The Supreme Court

Posted on September 4, 2012 02:09 by Michael Aylward

As the rest of us return from the last long weekend of summer, the U.S. Supreme Court send us scurrying back to our computers this morning with news that it has accepted Travelers' cert petition in Standard Fire Ins. Co. v. Knowles, 11-1450.  At issue is a ruling by an Arkansas District Court declaring that Travelers could not remove a homeowner's class action against to federal court because the underlying claimants had stipulated that they were seeking damages under $5 million, the jurisdictional limit for removal under CAFA.  

In its cert petition, Travelers observed that last year, the Supreme Court ruled in Smith v. Bayer Corp,  131 S. Ct. 2368, 2382 (2011) that in a putative class action "the mere proposal of a class ... could not bind persons who were not parties."  In this case, it asks:  

When a named plaintiff attempts to defeat a defendant's right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a "stipulation" that attempts to limit the damages he "seeks" for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the "stipulation," exceeds $5 million, is the "stipulation" binding on absent class members so as to destroy federal jurisdiction?   

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This fall, the United States Supreme Court will reconsider the issue of affirmative action in higher education for the first time since its 2003 decision in Grutter v. Bollinger.  In Grutter the Court held that, “The Equal Protection Clause does not prohibit the [University of Michigan] Law School’s narrowly tailored use of race in admissions decisions to further a compelling interest in obtaining the educational benefits that flow from a diverse student body.”  The Court will consider the appeal of Abigail Fisher, a white student, who alleges she was denied admission to the University of Texas because of the color of her skin.  At issue in the Fisher case is whether the Court’s decisions interpreting the Equal Protection Clause of the Fourteenth Amendment, including Grutter, permit the University of Texas at Austin’s use of race in undergraduate admissions decisions. 

The Supreme Court’s decision stands to have great impact nationally.  Numerous amicus briefs have been filed in support of both litigants.  Of note, the University of California (UC) president and chancellors, the state of California, the California Institute of Technology and a group of student organization at UC campuses are among at least 69 organizations that have filed amicus briefs in support of the University of Texas at Austin.  California is one of a few states that have already prohibited affirmative action in college admissions following the passage of Proposition 209 in 1996.  In its amicus brief, UC attorneys argued that the university system’s experience after Prop. 209 “sheds important light on the practical, real-world obstacles faced by universities seeking to obtain the educational benefits that flow from a diverse student body.”  Similarly, the brief filed on behalf of the state of California by Attorney General Kamala Harris observed that if California, a large and diverse state, could not achieve an acceptable level of diversity in its public universities in the absence of race-conscious admissions policies, other states with more homogeneous populations would struggle to an even greater extent.

Despite several initiatives enacted after the passage of the proposition, UC has not been able to reverse the decline in minority admission and enrollment since 1998, when the law went into effect.  Between 1995 and 2009, African Americans consistently represented between 7 and 8 percent of new high school graduates in California.  In 1995, African Americans made up 7.3 percent of admitted freshmen at UC Berkeley, but by 1998, that figure had dropped to 3.2 percent. In 2010 and 2011, it was 3.9 percent. UCLA saw similar results.

Is diversity a sufficiently compelling reason to use race in admissions decisions?  Is there a compelling interest in obtaining educational benefits from a diverse student body?  Could a reversal of the Court’s decision in Grutter result in less diverse student bodies at public colleges and universities as has been experienced in California?


Alison Y. Ashe-Card

Womble Carlyle Sandridge & Rice, LLC

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