Plaintiffs' Allegations of Cognizable Harm Fall Short in Closely Watched ERISA Health Plan Litigation

On September 25, 2024, the U.S. Court of Appeals for the Third Circuit affirmed a district court dismissal without prejudice of claims alleging MetLife Group, Inc. (MetLife), the sponsor and administrator of the MetLife Options & Choices Plan (the Plan), breached ERISA's fiduciary duty and anti-inurement provisions and engaged in prohibited transactions when it directed drug rebates from its pharmacy benefits manager (PBM) Express Scripts, Inc., to itself instead of to the Plan to reduce participant contributions, co-pays, and co-insurance or to participants directly. Knudsen v. MetLife Group, Inc., No. 23-2420 (3d Cir. Sept. 25, 2024). According to the Third Circuit, the plaintiffs lack Article III standing because they "failed to allege harm that is 'actual or imminent,' as opposed to theoretical, conjectural or hypothetical."

According to the decision, the Plan is an ERISA self-funded health plan funded through employer and employee contributions. The Plan documents "expressly provided that MetLife would receive prescription-drug rebates from Express Scripts and 'appl[y] these [rebates] toward[] Plan expenses,'" and state that the rebates are not considered in calculating any co-payments or coinsurance under the Plan. From 2016 to 2021, the Plan was credited with approximately $65 million in drug rebates pursuant to its contract with Express Scripts. The plaintiffs alleged that the Express Scripts contract was a plan asset and that the rebates themselves were plan assets because they resulted from MetLife's exercise of its fiduciary authority in entering into the PBM contract and/or when allocating the rebates. The plaintiffs contend that they were wrongfully denied their equitable interest in the Plan's drug rebates.

The court summarized the plaintiffs' theory of standing as their "pa[ying] more for their health insurance because MetLife illegally kept $65 million in rebates instead of using those rebates to reduce Plaintiffs' out-of-pocket expenses." It also recounted well-established case law addressing Article III standing and its requirement that plaintiffs establish a non-speculative injury caused by the complained of conduct that can be redressed by a decision in their favor. According to the court, in order to survive a motion to dismiss on standing, the plaintiffs had to include in their complaint non-speculative allegations that if proven "would establish that they have or will pay more in premiums, or other out-of-pocket costs, as a result of MetLife not applying the $65 million in rebates to the Plan." The court found that the plaintiffs failed to do so.

Significantly, however, the court rejected MetLife's argument, based on Thole v. U.S. Bank, N.A., 590 U.S. 538 (2020), and Perelman v. Perelman, 793 F.3d 368 (3d Cir. 2015), "that a beneficiary of an ERISA regulated defined-benefit plan has no injury unless the plan participants plead that they did not receive promised benefits." The court "decline[d] to hold that Thole and Perelman require dismissal, under Article III, whenever a participant in a self-funded healthcare plan brings an ERISA suit alleging that mismanagement of plan assets increased his/her out-of-pocket expenses." According to the court, a "fundamental tenant of injury-in-fact" is that "financial harm, 'even if only a few pennies,... is a concrete, non-speculative injury.'" The court left the door open for the plaintiffs to replead their claims to try to meet this standard, stating the district court on remand may exercise its discretion in responding to any requests to amend the complaint.

While this case is a win for MetLife, the court's refusal to dismiss the case for lack of standing under the reasoning of Thole and Perelman may prove significant for health plan ERISA litigation filed in the Third Circuit. Whether other circuits will follow the Third Circuit's lead is something we will be watching. On September 27, 2024, Wells Fargo & Co. filed in federal court in Minnesota a motion to dismiss putative class claims relating to its management of its health plan's prescription drug benefit, arguing, in part, that the plaintiffs lacked standing to seek plan-wide relief because they received all benefits to which they were entitled and the individual harms they alleged were too speculative. Navarro v. Wells Fargo & Co., No. 24-03043 (D. Minn. Sept. 27, 2024).

Courts Continue to Field Smoking Surcharge Litigation

Several new lawsuits were filed recently alleging that employers violated ERISA's non-discrimination rule by charging higher health insurance premiums to employees who use tobacco products. On September 16, 2024, two plaintiffs sued Walmart, Inc., in the Eastern District of Wisconsin on behalf of a proposed class, claiming that the world's largest private employer is "unfairly targeting employees based on their health status" as smokers. Cunningham v. Walmart, Inc., No. 2:24-cv-01177 (E.D. Wisc. Sept. 16, 2024). According to the complaint, Walmart's health plan charges workers a penalty of between $30 and $195 per biweekly pay period depending on the number of covered family members identified as tobacco users. The plaintiffs assert that employees and family members can stop paying the penalty if they complete a smoking cessation program, but completion does not allow the plan members to recoup already paid penalties. The lawsuit argues that forward-looking relief is not enough to satisfy ERISA's requirements.

Under ERISA's non-discrimination provisions, plans cannot discriminate in coverage provided or premiums charged based on "health status-related factors," such as tobacco use. But group health plans are allowed to adjust premiums, copays, and deductibles "in return for adherence to programs of health promotion and disease prevention." 29 U.S.C. § 1182(b)(2)(B). Such wellness programs must offer a "reasonable alternative standard" for participants who do not meet the initial standard, i.e., identifying as a non-smoker. The complaint against Walmart argues that in order to meet the U.S. Department of Labor's (DOL) regulations about what constitutes a "reasonable" alternative, the option must provide participants a way to earn the "full reward." That, the complaint says, would require employees who complete the smoking cessation program to be reimbursed for all of the penalties they paid during the plan year. The lawsuit further alleges that Walmart failed to provide the required notice of a reasonable alternative standard "in all plan materials" because plan materials do not offer information about a path to earning retroactive relief. The complaint also claims that Walmart breached its fiduciary duty as a plan administrator. 

On the same day, the same legal team filed a similar lawsuit against GardaWorld Cash Services, Inc., in the Western District of North Carolina. Artis v. GardaWorld Cash Servs., Inc., No. 3:24-cv-00837 (W.D.N.C. Sept. 16, 2024). Another a proposed class action, the suit claims that GardaWorld's smoking cessation and vaccine wellness programs both violate ERISA's requirement that plan members who do not meet initial standards have a reasonable alternative to earn the full reward. According to the complaint, GardaWorld does not allow tobacco users who complete a smoking cessation program to be reimbursed for penalties already paid during the plan year and offers no alternative to avoid the penalty for not getting a COVID-19 vaccination. The complaint also alleges that GardaWorld failed to provide required notifications and breached its fiduciary duty as a plan administrator.

Just last week, Advocate Aurora Health, Inc., was hit with a similar lawsuit from the same law firm. Rogers v. Advocate Aurora Health, Inc., No. 24-08864 (N.D. Ill. Sept. 25, 2024). 

Another ERISA challenge to a smoker surcharge was before the Ninth Circuit in September, though not to discuss the merits. Instead, the court heard arguments and ordered further briefing related to whether an arbitration provision in Sodexo's health plan could prevent employees from taking the company to court. Platt v. Sodexo, SA, No. 23-55737 (9th Cir. Aug. 23, 2023). Sodexo appealed a California district court decision that declined to send the case to arbitration because plan members, including the plaintiff, never consented to the arbitration clause added to plan documents in 2021. According to Sodexo, only consent on behalf of the plan, not individual members, is required. It argued other aspects of employer-sponsored health plans, such as premiums and deductibles, are routinely changed without participant consent.

Complicating matters, the plan's arbitration clause limits participants to bringing individual arbitration claims, prohibiting them from seeking relief on behalf of a class or the plan. Attorneys for the plaintiff argued, among other theories, that the arbitration clause is invalid because it prevents plan members from effectively vindicating their rights under ERISA to assert claims on behalf of the plan. DOL filed an amicus brief arguing that the representative action waiver in the arbitration clause is an unenforceable waiver of the statutory remedies provided by ERISA § 502(a)(2) and 409(a), which allow individuals to seek plan-wide relief. The DOL is clear that the waiver should be invalidated but does not take a position on whether arbitration may be compelled if the court finds the waiver provision severable from the rest of the arbitration agreement. 

Several days after the September 12, 2024, hearing, the Ninth Circuit panel ordered the parties to file supplemental briefs addressing the issue of severability "assuming that a prohibition on representative actions violates the effective vindication doctrine." The Second, Third, Sixth, Seventh, and Tenth Circuits have already relied on the effective vindication doctrine to find unenforceable benefit plan arbitration clauses with representative action waivers. See Cedeno v. Sasson, 2024 WL 1895053 (2d Cir. May 1, 2024), Harrison v. Envision Mgmt. Holding Inc. Bd. of Dir., 59 F.4th 1090 (10th Cir. 2023), cert. denied sub nom., 2023 WL 6558426 (U.S. Oct. 10, 2023); Parker v. Tenneco, Inc., 2024 WL 3873409 (6th Cir. Aug. 20, 2024); Smith v. Bd. of Directors of Triad Mfg., Inc., 13 F.4th 613 (7th Cir. 2021); Henry v. Wilmington Trust NA, 72 F.4th 499 (3d Cir. 2023), cert. denied sub nom., 2023 WL 6797729 (U.S. Oct. 16, 2023).

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