Two Texas District Courts Issue Stay of DOL's Controversial Investment Advice Fiduciary Rule 

On July 25, 2024, Judge Jeremy D. Kernodle of the Eastern District of Texas issued an order staying the effective date of the April 25, 2024, final rule promulgated by the U.S. Department of Labor (DOL) that redefined when a person is a fiduciary on the basis of rendering "investment advice for a fee or other compensation" (2024 Fiduciary Rule). Fed'n of Americans for Consumer Choice v. DOL, No. 6:24-cv-163-JDK (E.D. Tex. July 25, 2024). We previously discussed the 2024 Fiduciary Rule and its anticipated impact here. The rule was set to initially take effect on September 23, 2024, with all provisions becoming fully effective in 2025, but the new ruling will stay implementation of the rule nationwide.

As previously reported, on May 2, 2024, the Federation of Americans for Consumer Choice (FACC), joined by multiple individuals and companies in the insurance industry, filed a complaint alleging that (1) the DOL exceeded its authority under ERISA and the Internal Revenue Code in promulgating the 2024 Fiduciary Rule and amendments to related prohibited transaction exemptions (PTEs), and (2) the Fiduciary Rule and PTE amendments are arbitrary and capricious in violation of the Administrative Procedure Act (APA). The plaintiffs asked the court to issue preliminary and permanent injunctions preventing the rule's implementation and enforcement as well as to vacate the rule. In their complaint, the plaintiffs relied heavily on Chamber of Commerce v. DOL, 885 F.3d 360 (5th Cir. 2018), which struck down a substantially similar version of the rule in 2018. 

Shortly after filing the complaint, the plaintiffs moved to stay implementation of the 2024 Fiduciary Rule and PTE amendments. In their motion, the plaintiffs cited several irreparable harms that they contend would result if the 2024 Fiduciary Rule were to take effect, including "significant compliance burdens" in the form of "additional disclosures and documentation for all tax-qualified annuity sales, potential liability under ERISA, and potential enforcement actions by the DOL." 

In its July 25 ruling, the court found that the plaintiffs are likely to succeed on the merits of their claims "because the 2024 Fiduciary Rule conflicts with ERISA in several ways, including by treating as fiduciaries those who engage in onetime recommendations to roll over assets from an ERISA plan to an IRA," which is a "non-trust-and-confidence relationship" and because the PTE amendments constitute "an arbitrary and capricious exercise of DOL's regulatory power." In addition, the court agreed that the plaintiffs would suffer irreparable harm if the 2024 Fiduciary Rule were not stayed and that the balance of equities and public interest favored granting a stay. The stay is in effect until further order of the court.

On May 24, 2024, a group of insurance trade associations led by the America Council of Life Insurers (ACLI) filed a second challenge to the rule in the Northern District of Texas. American Council of Life Insurers v. DOL, No. 4:24-cv-00482 (N.D. Tex. May 24, 2024). This second lawsuit asserted claims similar to those in the Eastern District of Texas litigation and challenged additional and related PTE amendments. On July 26, 2024, Judge Reed O'Connor of the Northern District of Texas adopted the reasoning of Judge Kernodle and issued an order staying the effective date of the challenged rule and PTE amendments "during the pendency of this suit and any appeal." The court denied the plaintiffs' request for a preliminary injunction, finding that a stay order – the "less drastic remedy" – provided complete relief to the plaintiffs. 

When crafting the remedy, Judge O'Connor stated that remand to DOL was not appropriate, because the "[p]laintiffs are virtually certain to succeed on their claims that the Rule exceeded DOL's statutory authority, making remand inefficient and a potential waste of judicial resources." When addressing the plaintiffs' likelihood of success on the merits, he wrote that "[p]laintiffs are virtually certain to succeed" and that the rule "exceeds the DOL's authority by departing from the common law... [j]ust as the 2016 Rule conflicted with the statutory text when it attempted to broaden 'fiduciary' just six years ago." An appeal by DOL to the Fifth Circuit is anticipated. 

Litigation Alleging Excessive Costs and Fees in Health Plans Continues

Four former employees of Wells Fargo & Company (Wells Fargo) filed a putative class action on Tuesday alleging the company violated ERISA and caused plaintiffs to incur higher premiums and out-of-pocket costs under the company's prescription drug benefit administered by its pharmacy benefits manager (PBM), Express Scripts. Navarro v. Wells Fargo Co., No. 24-cv-3043 (D. Minn. July 30, 2023). The complaint, which mimics a similar lawsuit filed against Johnson & Johnson (J&J) by the same attorneys in February 2024, alleges that Well Fargo and its executives responsible for its health plan's administration breached their ERISA fiduciary duties of loyalty and prudence and caused prohibited transactions between the plan and parties-in-interest in violation of ERISA.

Similar to the claims against J&J, the plaintiffs allege the defendants overpaid Express Scripts for generic drugs that they assert are available at "drastically lower prices." The complaint contains multiple examples comparing alleged drug costs under the plan to alleged costs to consumers without insurance at various pharmacies. They also assert that the Wells Fargo plan participants and beneficiaries are steered to an Express Scripts-owned mail-order pharmacy for certain drugs and that the mail-order pharmacy charges higher prices for those drugs than what is available at other pharmacies. In addition, they contend that the defendants improperly agreed to pay excessive administrative fees to Express Scripts. According to the plaintiffs, all these allegedly excessive fees and costs resulted in higher costs for the plan and for participants and beneficiaries.

In the complaint, the plaintiffs assert that Wells Fargo should have employed a pass-through PBM, which they contend would have allowed plan participants and beneficiaries access to a wide range of pharmacies and lower costs, and that the company should have regularly monitored their PBM and engaged in a request for proposal (RFP) process to obtain competitive bids for PBM services. They also allege, "on information and belief," that the defendants used a conflicted employee benefits consultant to guide their selection of a PBM. According to the plaintiffs, "[p]rudent fiduciaries would have – and other similarly sized companies' plan fiduciaries have – used their bargaining power to demand and obtain substantially better contractual terms, including terms relating to prices and the way in which prices are determined." The plaintiffs acknowledge that the contract between Wells Fargo and Express Scripts is "not public." 

The complaint seeks plan-wide injunctive relief under ERISA § 503(a)(2), including the recovery of alleged losses to the plan and the appointment of an independent fiduciary. It also seeks injunctive and equitable relief to plan participants and beneficiaries under ERISA § 503(a)(3) to remedy the alleged increased premiums, deductibles, co-pays, and other out-of-pocket expenses they claim they incurred and their alleged "lower wages or limited wage growth."

In the J&J litigation, the defendants filed a motion to dismiss the lawsuit, which is pending before the court. 

Upcoming Speaking Engagements and Events

This afternoon, Joanne and Tax Member Rob Kovacev are presenting the webinar "Perspectives Post-Chevron: What to Expect and How to Navigate the New Regulatory Landscape." 

The firm is sponsoring the ERISA 50th Anniversary Symposium and Gala on September 12.

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