Following on the heels of the Lewandowski suit against Johnson & Johnson, on July 30, 2024, a second “copycat” ERISA suit alleging similar violations was filed against Wells Fargo by beneficiaries of the bank’s prescription drug benefit plan. See Navarro v. Wells Fargo & Company, D. Minn. 24-cv-3043. This is further indication of the incoming wave of litigation against Plan Sponsors, which Frier Levitt has warned about for years, for failing to properly monitor and audit the PBMs and other service providers that administer part or all of their employee pharmacy benefit plans.
The risk of similar suits facing Plan Sponsors is especially concerning in light of the recent scrutiny PBMs have received regarding the various ways that PBMs siphon funds from plans and their members, including spread pricing, rebate retention, and secret administrative and other fees. Just this past month, both the FTC and the House Committee on Oversight and Accountability issued detailed reports on potential PBM abuses (Read more here). Additionally, it was announced last week that CVS Caremark will pay $45 million to the State of Illinois to resolve allegations that it had retained drug manufacturer rebates that were owed to the State on a 100% pass-through basis. (Read more here). Thus, it is likely that ERISA breach-of-fiduciary suits against Plan Sponsors for failure to actively monitor PBMs and oversee plan design will become increasingly common moving forward.
The Allegations against Wells Fargo
The Navarro plaintiffs, who are all former employees and members of the Wells Fargo prescription drug benefit plan (the “Plan”), allege that Wells Fargo and other trustees failed to fulfill their fiduciary obligation (i) in their selection of Express Scripts as the Plan’s PBM, (ii) in negotiating drug prices and administrative fees with Express Scripts, and (iii) by failing to exercise greater oversight and monitoring of Express Scripts’ pricing and formulary decisions, among other things. Wells Fargo also allegedly relied on the Aon Rx Coalition as a broker to assist in the PBM negotiation and selection process, but failed to address or vet the significant conflict of interest arising from the compensation Aon receives from PBMs. The above failures, Plaintiffs allege, resulted in higher drug prices that were passed on to plan beneficiaries.
The complaint identifies numerous prescription drugs for which the prices under the Plan were significantly higher than the pharmacy acquisition costs for the same drugs and, in some instances, higher than the cash price (i.e., the price paid by patients without insurance) available at numerous retail pharmacies. For example, the complaint states that Plan beneficiaries had to pay more than $9,994 for a 90-day supply of the generic drug fingolimod (used to treat multiple sclerosis), when the same prescription was available at a retail pharmacy for as low as $648 without insurance. Another example is the HIV drug abacavir-lamivudine, which similarly reflected a price of $3,107 compared to $123 available at a retail pharmacy, or a 2,400% markup. The complaint further alleges that, on average, prices for preferred generic drugs under the Plan were 114% greater than acquisition costs, and that prices for specialty generic drugs were 383% greater than acquisition costs.
These allegations are largely analogous to the Johnson & Johnson complaint, which also involved Express Scripts as the PBM, and identified several drugs with eye-popping mark-ups compared to the acquisition or retail cash price. Frier Levitt has extensively covered Johnson & Johnson lawsuit, which you can read about here.
The Significance of the Wells Fargo Plan Operating as a VEBA Trust
The Complaint states that all of the Plan’s expenses are paid from the Wells Fargo & Company Employee Benefit Trust, which is a tax-exempt entity under section 501(c)(9) of the Internal Revenue Code also known as a Voluntary Employees’ Beneficiary Association (“VEBA”). The fact that the Plan’s assets are held in a VEBA trust may be relevant for demonstrating Wells Fargo’s role as an ERISA fiduciary. Since ERISA fiduciary duties look to whether a trustee had discretion and control over plan assets (a term not defined within ERISA), the practical effect of the Wells Fargo plan operating as a VEBA trust is that Plaintiffs will be able to more easily establish connection to plan assets, and thereby establish that Defendants were plan fiduciaries. It should be noted that this arrangement is rather unusual: although ERISA typically requires that plan assets be held in trust, there is an exception to this requirement for employee health benefit plans where employee contributions are made through a “cafeteria plan” described in IRC Section 125. Without the existence of a trust, Plan expenditures would be funded through the general assets of the company, making the delineation between plan assets and non-plan assets less clear-cut. However, in light of the VEBA trust, this is not an issue facing Plaintiffs in the Wells Fargo case.
Similarly, the existence of the VEBA trust makes it more likely that Express Scripts, as the PBM that actually used the funds in the trust to administer the plan, is an ERISA fiduciary. As alleged in the complaint, Express Scripts’ contract with Wells Fargo states that Wells Fargo, not Express Scripts, retains “all … discretionary authority and control with respect to the management of the Plan and plan assets.” This is a way for PBMs to shield themselves from liability under ERISA. There is also significant disagreement among courts as to whether PBMs qualify as a functional fiduciary under ERISA. The fact that Express Scripts, here, would have been using Trust assets dedicated to the employee pharmacy benefit plan, would make it far clearer that Express Scripts was operating in the role of a plan trustee and fiduciary, undercutting any contractual arguments that Express Scripts is merely a provider of “ministerial functions,” and thus not an ERISA fiduciary. However, Express Scripts is not named as a Defendant in this case, likely due to the existence of an arbitration clause in the PBM contract.
Potential Obstacles Facing Plaintiffs
Due to the overall similarities between the Wells Fargo and Johnson & Johnson lawsuits, we can expect that many of the same arguments raised by Johnson & Johnson in their pending motion to dismiss will likely be echoed here. First, that Plaintiffs lacked standing to bring the suit; and second, that the complaint failed to plausibly allege imprudent decision-making or negotiations by Wells Fargo because it did not demonstrate that the Plan had paid more for a set of services than what similarly situated plans paid for the same basket of services.
As to the standing argument, none of the four plaintiffs at issue had purchased the outrageously inflated drugs identified in the complaint, such as fingolimod and abacavir-lamivudine. Instead, the drugs that the plaintiffs purchased had price markups of just a handful of dollars per prescription. Although under federal standing doctrine any amount of injury is sufficient to establish standing, the lack of any significant price gap in the drugs that the Plaintiffs actually purchased strengthens the inference that, on average, they may not have been harmed by the Plan’s decision to use Express Scripts as its PBM.
As to the second argument, Wells Fargo will likely argue that to adequately plead an ERISA imprudence claim as to the plan’s selection and monitoring of a PBM, the plaintiff must demonstrate that the Plan would have paid less for the entirety of a comparable prescription drug program, but for their alleged lack of prudence. In other words, it is insufficient to point to price disparities for a handful of specific drugs, because the Plan may still be obtaining an overall cost saving at the plan-wide level through its selection of Express Scripts as its PBM.
Other arguments may be available to Wells Fargo. For example, the complaint asserts the claim that the payments to Express Scripts constitutes a “prohibited transaction” under Section 406 of ERISA; but, the payment of reasonable compensation for “services necessary for the establishment or operation of the plan” is a notable exception to ERISA § 406. Additionally, among the relief requested by Plaintiffs is the restoration of any “profits made from plan assets.” However, it is abundantly clear even from the Complaint that all of the “profits” went to Express Scripts and/or the Aon Rx Coalition, and that Wells Fargo is equally a victim of Express Scripts’ PBM abuses as the plan beneficiaries. Finally, the complaint makes a misleading comparison between “traditional” PBMs and “pass-through” PBMs, and argues that Wells Fargo should have selected a pass-through PBM which would have cured much of the alleged violations. Of note, it is an open secret within the industry that even “pass-through” arrangements with PBMs typically incorporate hidden fees and retained rebates, such that the Plan may not have obtained much or any of the savings that Plaintiff naively believe to be possible by merely changing to a “pass through” contract.
Conclusion
Frier Levitt has repeatedly warned about the incoming wave of lawsuits against Plan Sponsors that fail to proactively monitor their PBM contracts. The Wells Fargo and Johnson & Johnson lawsuits reflect a sea change in the litigation landscape, and we expect more similar cases to be filed in the near future. Thus, it is critical that Plan Sponsors place greater scrutiny on their PBM contracts and retain the necessary experts and competent counsel to ensure that they are in compliance with their fiduciary obligations under ERISA.
