This past week brought two significant ERISA decisions that will likely impact the litigation landscape facing large employers with self-funded employee health benefit plans. In the first (Stern v. JPMorgan Chase), an ERISA fiduciary lawsuit brought by employees against their employer relating to mismanagement of pharmacy benefits survived dismissal and will proceed to discovery. In the second (Oregon Potato Company v. Marsh McLennan), a federal judge ruled that a party cannot contract away or exonerate itself from fiduciary status. These decisions add to the growing body of case law relating to the fiduciary duty that plan sponsors owe to monitor and oversee the compensation and discretionary decision-making of service providers, vendors, and brokers/consultants, including pharmacy benefit managers (PBMs).
JPMorgan Lawsuit Survives Dismissal
In Seth Stern et al. v. JPMorgan Chase & Co., et al., S.D.N.Y. 1:25-cv-2097, the plaintiffs alleged that JPMorgan, as the sponsor and administrator of its self-funded employee health benefit plan, breached its fiduciary duty by allowing its PBM, CVS Caremark, to charge inflated prices for drugs dispensed to plan beneficiaries and earn excessive fees and other compensation from plan assets, at the expense of plan members.
As previously covered by Frier Levitt (see article on JPMorgan ERISA class action lawsuit), the complaint alleged that Caremark engaged in several practices that increased plan costs and inflated prices for prescription drugs, such as “spread pricing,” formulary manipulation, and retention of drug manufacturer rebates. The complaint further alleged that JPMorgan Chase, as the plan sponsor, failed to adequately oversee and audit the PBM, resulting in excessive charges that could have been avoided had JPMorgan Chase been more vigilant.
The JPMorgan decision follows two other ERISA lawsuits with similar facts and legal theories brought against Johnson & Johnson and Wells Fargo. However, the courts in those other cases dismissed the complaints for lack of standing (without prejudice and leave to amend, so the cases are continuing). The Court in JPMorgan departed from these prior decisions and denied JPMorgan’s motion to dismiss, holding that, at the pleading stage, the plaintiffs had identified a cognizable injury (in the form of higher out-of-pocket costs) sufficient to confer standing. The Court noted, similar to Frier Levitt’s analysis, that the Johnson & Johnson and Wells Fargo decisions appeared “inconsistent with the well-established motion to dismiss pleading standard.” (See article on the Johnson & Johnson dismissal).
However, the JPMorgan decision was not a complete victory for the plaintiffs. The Court noted that, although plaintiffs had alleged the minimum necessary to satisfy the lenient pleading standard (under which the court must accept the factual allegations in the complaint as true), it appeared unlikely that the plaintiffs would prevail on the merits. The Court acknowledged JPMorgan’s substantial defenses, including the fact that the plaintiffs had not identified an apples-to-apples comparison of what they paid for drugs as opposed to other comparable plans, and thus the plaintiffs had failed to plead any “actual overpayment on their part sufficient to support an inference of breach.” (See Decision at 19 n.5.)
The Court further circumscribed the scope of the plaintiffs’ legal theories and claims. Among other things, the Court ruled that “plan design decisions” made by JPMorgan and the terms the plan sponsor negotiated with CVS Caremark, including the terms that determine the rates paid by plan beneficiaries, are not fiduciary acts. In other words, “choices about the architecture of the benefit offering” do not implicate fiduciary duties because they are “not about the discretionary management of plan assets or the administration of particular claims.” Nevertheless, JPMorgan could be liable for engaging in “prohibited transactions” under ERISA Section 406, to the extent the company failed to ensure that service providers, including the PBM, received “reasonable” compensation for their services.
Thus, while the plaintiffs successfully defeated JPMorgan’s motion to dismiss, they did not come out unscathed. Their claims were narrowed and they will have an uphill battle persuading the Court of the merits of their claim moving forward. Nevertheless, the decision is a wake-up call for plan sponsors, as it serves as a blueprint for drafting lawsuits that can survive a motion to dismiss and force a plan sponsor to engage in costly discovery.
Marsh McLennan Decision Clarifies That ERISA, Not the Contract, Determines Fiduciary Status
In Oregon Potato Company, et al. v. Marsh McLennan, et al., E.D. Wash. 4:25-cv-5139, the plaintiff (OPC) sued the consulting firm and associated vendors that provided services for OPC’s employee health benefit plan. Although the case largely centered on the alleged mismanagement of medical benefits as opposed to pharmacy benefits, the decision is equally relevant because it relates to the plan sponsor’s fiduciary duties with respect to service providers (whether in the pharmacy or medical benefit space) to the plan.
The plaintiffs alleged that broker/consultant Marsh McLennan, along with service providers that exercised discretionary authority over the plan’s assets, mismanaged the plan’s medical expenses. Specifically, the plaintiffs claimed that defendants used funds from one client account (the “Health Reimbursement Arrangement” or HRA) to satisfy a deficit for another client account (the medical plan), which was not permitted by ERISA or the plan documents.
The defendants moved to dismiss, arguing that the contract with OPC stated that Marsh McLennan was “not a fiduciary” and that “OPC retained the ultimate decision-making authority with respect to all decisions concerning the Plan.” The Court rejected this argument, reasoning that ERISA looks to the party’s function, not contract terms, to determine whether fiduciary status attaches. Furthermore, the Court agreed that, based on the plaintiffs’ allegations (which again must be accepted as true at the pleading stage), defendants were fiduciaries that breached their duty by taking unnecessary and excessive fees and committed a prohibited transaction under ERISA.
The case reaffirms the principle that service providers cannot contractually “write off” their fiduciary duties where they exercise discretionary authority over plan assets. The case is particularly relevant in plan sponsor litigation against PBMs, where PBM contracts often disclaim fiduciary duties.
Takeaways for Plan Sponsors
Ultimately, the JPMorgan and Marsh McLennan cases make it easier for plaintiffs to plead breach of fiduciary duty claims in relation to ERISA-governed plans and may increase the risks of similar suits against plan sponsors. Indeed, now that the JPMorgan lawsuit has survived dismissal, the decision may encourage “copycat” lawsuits against other large employers with employee health benefit plans.
Notably, both decisions strengthen plan sponsors’ claims for recovery from PBMs. If employees can sue employers for the conduct of their PBMs, it is even clearer that plan sponsors can seek redress against their PBMs, rebate aggregators, and other service providers for inflating drug costs, excessive compensation, and other fiduciary breaches.
How Frier Levitt Can Help
In an increasingly uncertain litigation landscape, plan sponsors have a clear strategy to protect themselves and mitigate the risks of ERISA lawsuits: conduct a meaningful audit of their plans’ service providers, including PBMs. Frier Levitt is experienced in conducting such audits on behalf of some of the largest companies and entities in the country. If you are a plan sponsor that has not audited your PBM or has concerns about PBM mismanagement, our team can help audit your PBM arrangements and lower your risk of facing ERISA liability.
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