The Common Fund Doctrine: Soviet Era Ideology or Method of Sharing Attorneys’ Fees?

By Cory Bilton

Washington Monument in Distance - Ed 1

Back when I was an undergraduate, my friends and I sometimes took spontaneous road trips.  Three or four of us would pile into a car with an odd assortment of backpacks, snack foods, and musical instruments.  Since these trips often involved hundreds of miles through multiple states, paying for gas became a group responsibility.  Though the rule was unwritten, everyone in the car seemed to instinctively agree that each should pay a share of the gas money.  We didn’t spend a lot of time discussing this because it just struck everyone as the fairest way to take a road trip.  Each of us felt obligated to pay a share for the benefit that was being provided by the car.

Nearly every personal injury case includes claims, in addition to the injured person’s, for the money recovered from the wrongdoer.  You can think of these claimants as the passengers of a vehicle on a road trip.  Everyone in the car is trying to get to the same place; a successful settlement or judgment for the injured person.  Sometimes these claimants are other insurance companies.  For example, companies that provide health coverage or personal injury protection coverage.  Other times there are unpaid medical bills or unpaid expenses, and doctors or hospitals claim the right to be paid from the proceeds of the case.  These claims can arise because of language in a contract, a state statute, or because of equitable principles in the law.

No matter how the claim for payment arises, or what it is called, the claimant expects to be paid from a settlement or trial verdict in favor of the injured person.  In fact, in many cases, the claimant has no way to be repaid except through money recovered from the wrongdoer.  In these situations, it seems fair that each claimant should share in paying attorney’s fees in proportion to the amount each is owed.  The common fund doctrine is the legal principle that anyone who benefits from a settlement or verdict (which includes both the injured person and the claimants) proportionally share in the cost of the attorney’s fees required to get the settlement or verdict.

A numerical example may be helpful.  Let’s say that a personal injury attorney settles a client’s case for $10,000.  The client’s health insurer claims a right to be repaid $2,500 for medical treatment it paid on behalf of the client.  Let’s say there was one doctor who treated the client but did not accept health insurance, and the client had agreed to pay the doctor from the settlement for a billed amount of $1,000.   The lawyer’s fee is 1/3 of the recovery.  So the amount of money left after attorney’s fees is $6,667.  If entitled to full payment, the health insurer would get $2,500, the doctor would get $1,000, and the injured client is left with $3,167.  With the common fund doctrine, both the hospital and the doctor pay their proportional share of the attorney’s fee.  So the common fund doctrine says that the hospital should only be repaid $1,667 and the doctor should only be repaid $667.  Both the health insurer and the doctor reduced their claim by 1/3 to account for their proportional share of the attorney fees.  The client then gets the remaining $4,333.

Despite the reasonableness of the common fund doctrine, many doctors, hospitals, and insurance plans fight against it.  Many health insurance plans (particularly self-funded ERISA health plans) contain specific language stating that they do not agree to share in the expense of obtaining the money they are repaid.  Doctors’ offices and hospitals often have never heard of the common fund doctrine.  When I call to ask them to reduce their claim to share in the cost of obtaining the money they are to be paid with, the typical response is that I’m asking for a discount.   I’m not.  Instead, what I’m asking for is each person to pay their fair share of the expense of obtaining the money, from which everyone is being paid.

Courts seem to uniformly agree that the common fund doctrine is applicable in a number of circumstances where a settlement or judgment benefits more than just the plaintiff.

In Boeing Company v. Van Gemert, 444 U.S. 472 (1980), the US Supreme Court traced the origins of the common fund doctrine to cases dating back to 1882.  The opinion noted three features necessary for the application of the common fund doctrine: (1) the persons benefited must be small in number and easy to identify, (2) the benefit can be traced with accuracy, and (3) there is confidence that the costs can be shifted with exactness to those benefiting.  Id. at 479.

Garcia v. Foulger Pratt, 845 A.2d 16 (Md. App. 2004), provides a good overview of the use of the common fund doctrine in Maryland jurisprudence.  In holding that the common fund doctrine is part of the common law in Maryland, the court says that the common fund doctrine will not be preempted by statute unless the statute is explicit.

The DC Court of Appeals, in Peart v. DC Housing Authority, 972 A.2d 810 (DC 2009), elaborated on the use of the common fund doctrine in DC.  The court said it is proper to employ the doctrine so long as the parties benefited by the fund do not have adverse interests in initially obtaining the fund.

Lastly, the Virginia Supreme Court has adhered to the common fund doctrine as far back at 1879.  In duPont v. Shackelford, 369 S.E.2d 673 (Va. 1988), the court says the doctrine prevents the free riding of others who “sit idly by and reap the benefits of one litigant’s labors.” Id. at 677.  It follows that, if one of the other beneficiaries to the fund has employed its own attorney who participates in the proceeding, then the common fund doctrine is no longer applicable.  Id.

The bottom line is that there is little judicial disagreement on the justification and long heritage of the common fund doctrine.  The conflict over its use arises when the small print of a contract refuses to apply it.  Currently, the Supreme Court says that the language of the contract is binding, at least within the context of reimbursement language in self-funded ERISA plans.  See US Airways v. McCutchen.  Because of state laws and regulations that govern normal health insurance plans (including plans offered under the new ACA exchanges), debate about the common fund doctrine is currently confined to self-funded ERISA plans in our geographic area.  It makes sense that if you are riding in the car, you have to share in the cost of the gas.

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