February 11, 2025

A district court judge recently issued an opinion in Lewandowski v. Johnson and Johnson (J&J), a highly-anticipated ruling in a case that has been closely monitored within the industry for its potential implications for ERISA fiduciary duty and vendor management.

The lawsuit alleges that the company, along with its Pension & Benefits Committee and certain human resources officers, failed to act "prudently" and in the best interests of plan participants in managing the prescription drug benefits of its employee health plans. The complaint cites specific ERISA standard on a fiduciary’s “Prudent man standard of care” (29 USC 1104(a)), which is more detailed and has been the subject of litigation (as is the case here) and voluminous academic work, professional advisory, and layperson commentary.

The complaint generally argues that J&J’s selection and oversight of its pharmacy benefit manager (PBM) resulted in unreasonably high prescription drug prices, ultimately harming plan participants and beneficiaries, thus violating the ERISA standard on a fiduciary’s standard of care.

The complaint highlights instances in which the J&J plan allegedly paid significantly more for prescription drugs than comparable market rates, particularly for certain specialty generics. Plaintiffs argue that these excessive payments contributed to increased premiums and cost-sharing obligations for participants. Additionally, the lawsuit asserts that J&J failed to conduct a competitive request for proposal (RFP) process before selecting its PBM and suggests that the contract’s terms may have been influenced by a conflicted consultant rather than an objective fiduciary process. The plaintiffs contend that these decisions violated ERISA’s requirement that fiduciaries act with the “care, skill, prudence, and diligence” that a reasonable fiduciary would exercise under similar circumstances.

The J&J plan filed a motion to dismiss on various grounds and the district court’s opinion, issued at the end of January, addressed three primary claims raised by the plaintiff. First, the judge dismissed the plaintiff’s allegation that J&J’s actions caused plan participants to pay higher premiums and cost-sharing amounts. The court found that the connection between J&J’s PBM contract and increased participant costs was too speculative to establish a concrete financial injury under ERISA. Because ERISA requires plaintiffs to demonstrate actual harm, the court determined that the plaintiff had not sufficiently linked the plan’s drug pricing structure to her own financial losses.

Second, the court rejected the plaintiff’s argument that she personally overpaid for prescription drugs. The complaint had identified specific instances where the plaintiff allegedly paid more for certain medications than she would have under different plan arrangements. However, the court found that because the plaintiff had already reached her deductible and maximum out-of-pocket (MOOP) costs for the year, any overpayments would not have had a financial impact. Even if she had been charged lower prices for her prescriptions, her total out-of-pocket spending would have remained the same. As a result, the court ruled that she lacked standing to pursue this claim. This opinion does raise questions, however, about the standing of a hypothetical plaintiff in the same situation who has not reached their MOOP.

The court allowed one claim to proceed — an allegation that J&J failed to provide plan documents within the 30-day timeframe required by ERISA. This claim is relatively common in ERISA litigation and the judge’s opinion on this claim generally does not have broad implications for employers or plan sponsors. If proven, this violation could result in penalties of up to $100 per day¹, which would result in a maximum penalty of $2,900 to the plan sponsor.

The court gave the plaintiff 30 days to amend the dismissed claims to address the deficiencies identified in the ruling. While the judge signaled skepticism that the claims regarding higher premiums and prescription drug overpayments could be successfully revised, the plaintiff may attempt to introduce additional facts or find another participant who has not reached their maximum out-of-pocket limit to pursue similar allegations.

While this development is favorable for the ERISA plan in this case and helpful as employers may face other litigation, we continue to urge caution against drawing too many inferences about litigation risk for particular plan actions and fiduciary decisions from early-stage litigation. In general terms, we anticipate that fiduciaries will continue to follow ERISA’s standard of care and engage in a prudent decision-making process–taking stock of the broader circumstances, the broader context, and make decisions based on the “whole picture” with diligence and care.

This is not the only case where the ERISA fiduciary standard of care is being challenged relative to vendor management. The Business Group is also monitoring Navarro v. Wells Fargo & Company, a similar lawsuit in which the plaintiffs assert that the company’s health plan and its participants were forced to overpay for prescription drugs due to mismanagement of the plan’s PBM services. Briefing is still ongoing in that case.

For additional background on the lawsuit and matters at issue here, see New Legal Challenge to ERISA Fiduciary Duty as Landmark Law Turns 50 (August 22, 2024).

 

¹ Note that the Opinion (and thus this article) cites a maximum penalty of $100 per day, however in some cases an adjusted maximum of $110 per day may apply.

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Resource Employee Retirement Income Security Act (ERISA) Pharmacy/Prescription Drugs