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Executive Summary 

An employee of Johnson & Johnson sued the company and the company’s Pension & Benefit Committee members, asserting that they violated their fiduciary duties to the company’s health plans by not negotiating for better prices for generic specialty drugs. The complaint asserted that the Plan paid more for several drugs than was necessary by noting that lower prices were available at various retail outlets than the Plan paid via its PBM’s (Express Scripts) formulary. The complaint also contends that the company and PBM steered plan participants to the PBM’s mail-order site and drugs that were more profitable for the PBM than the most “cost-effective” option for the Plan and the plan participants. As a result, the lawsuit seeks actual damages to the Plan and participants, statutory penalties, and attorneys’ fees.  

This is a new avenue for fiduciary lawsuits by plaintiffs’ attorneys, so the industry will be watching the results closely to see how it is resolved.  In the meantime, it is a reminder that all employee benefit plans are subject to ERISA and that employers, as fiduciaries, have to administer their plans to benefit the plan participants and beneficiaries. They should also carefully and regularly document those actions.

The Lawsuit 

An employee of Johnson & Johnson, Ann Lewandoski, is the lead plaintiff in Lewandowski v. Johnson & Johnson et. al., filed in the US District Court, District of New Jersey on February 5, 2024. The case seeks certification as a class action on behalf of participants in the Johnson & Johnson Salaried Medical Plan and Salaried Retiree Medical Plan (the “Plans”). The Plans used Express Scripts (“ESI”) to manage the prescription drug benefit under the Plan. The lawsuit alleges that J&J mismanaged the Plan in several respects and allowed the Plan and the participants to overpay for generic specialty drugs. Specifically, the suit alleges that:

• The Plan did not use an open RFP process to find its PBM but was steered to ESI by its broker (Aon).  
• The Plan agreed to permit a markup on generic specialty drugs of 498% without any bargaining over the price. It listed several such drugs that the plaintiffs allege can be purchased much more cheaply at retail pharmacies.
• The Plan steered participants to the ESI mail order process, which paid more than the retail prices that were generally available. 
• The Plan fiduciaries failed to act prudently in their interactions with ESI and failed to act as other plans did with respect to their PBMs and prescription drug coverage.
• The complaint also alleges that it refused to conform with many administrative procedures of the Plan, such as obtaining plan documents upon request, and that the plaintiff took on administrative burdens of the Plan to save the Plan money. 

The complaint seeks damages, equitable relief, statutory penalties, the removal of the plan fiduciary, the appointment of an independent fiduciary, and attorney fees.  

Employer plans governed by ERISA are not subject to punitive damages, which is one reason that employer plans obtain some benefit from being covered by ERISA. Moreover, ERISA requires all lawsuits brought by plan participants or beneficiaries to be filed in federal court and requires any plaintiff to pursue administrative remedies under the Plan before being able to sue.  

ERISA permits plaintiffs to be made whole from violating any fiduciary duties, and for attorney’s fees to be awarded, so there is an incentive for plaintiff’s attorneys to sue ERISA plans.  

The lawsuit names the employer, Johnson & Johnson, the Benefits Committee, and several individual members of the Benefits Committee as defendants and notes that they are all fiduciaries with respect to the Plan and, therefore, owe a duty of loyalty and prudence to the Plan and its beneficiaries. The claim is that the fiduciaries violated that duty concerning the prescription drug benefit under the Plan. The complaint cited many instances where it alleged that the prescription drugs were more expensive under the Plan than they would have been from other, commercially available, means and that this was due to the failure of the Plan fiduciaries to negotiate better terms for the prescription drug formulary offered by the PBM that manages the Plan prescription drug benefit. The complaint alleges that the failure to negotiate caused the Plan participants to pay more than necessary for the drugs in the Plan and even depressed wages for the employees due to the increased costs for prescription drugs being paid by the Plan.

This line of argument seems somewhat of a stretch under ERISA. The fact that an employer plan overpaid for some benefit and that caused the employer to pay lower wages is novel but unlikely to be considered by a court, assuming the court conforms to the causes of action under ERISA – which are limited to those of the plan – not some indirect harm that could have been avoided.  

ERISA and Fiduciary Obligations 

This is a unique lawsuit in several respects. Although the complaint does cite harm that was caused to the plaintiff, it makes its strongest case for relief based on the claim that the Plan paid more than it should have for various classes of prescription drugs (from specialty drugs to formulary drugs to generics). However, the J&J plan is almost certainly self-funded.  It would be a real stretch to sue the fiduciaries of a self-funded plan for losses to the plan since the employer is, by definition, going to have to pay for the costs of the plan (above whatever the plan participants' cost-share might be).  So, the lawsuit is making the case that the employer didn’t do as good a job as it could have in managing the employer’s costs!  Of course, the lawsuit alleges that that failure did cause the plan participants to spend more than they should have. 

ERISA does require the plan fiduciaries to manage the plan for the exclusive purpose of providing benefits to the plan participants and beneficiaries, and to do so with the requisite care of a prudent fiduciary, following the plan documents and paying “reasonable” expenses. The complaint alleges that the fiduciaries failed in all of those aspects. Those failures for a self-funded plan, as noted above, would not generally cost the plan anything since the employer is responsible for the costs of the plan. Unlike retirement plans, health plans typically do not maintain a trust with any plan assets (due to an exception in ERISA and administrative guidance that permits the avoidance of a trust). However, in this case, there is an unusual aspect that did not get much discussion in the complaint. The Plan here maintains a VEBA (voluntary employee benefits association) trust that is funding some part of the Plan. That could cause a very different result in the court case compared to most other plans where there are no actual plan assets because there is no trust. 

Changes to the tax code in the 80s made VEBAs much less attractive to employers.  The changes limited how much employers could pre-fund in the VEBA – limiting contributions to current costs. Due to that change, there was little incentive to continue to use a VEBA, given the trust obligations (such as annual auditing of the assets and increased fiduciary obligations) for employer contributions. They still have some utility for employees to pre-fund retiree medical expenses, and often, employers continue to maintain the trusts due to inertia or other reasons.

Conclusion 

This case is in its very early stages. However, it raises serious questions for health plan administration and indicates the need for all plan sponsors to take their fiduciary duties under ERISA seriously. It seems unlikely that an employer as sophisticated as J&J punted on the costs for prescription drugs under its plan. Regardless of the eventual outcome of the lawsuit, if plaintiffs’ attorneys see one avenue to attack employer plans and seek class action certification, they will likely keep looking for new opportunities, and employers can blunt those allegations through the prudent management of their plans.  

This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.