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