Recent scrutiny of pharmacy benefit managers, also known as “PBMs,” has resulted in various lawsuits alleging that the high drug costs they charge violate ERISA. Among the first lawsuits in what appears to be a wave of new litigation against employers is Lewandowski v. Johnson & Johnson et al., No. 3:24-cv-00671, currently pending in the District Court of New Jersey.

PBMs serve as the middlemen between drug companies, pharmacies, insurers, employers, and patients, helping set prices for prescription drugs. PBMs help insurers and employers select and purchase medication for their health plans and negotiate discounts with manufacturers. PBMs also set payment terms for the pharmacies that buy and dispense the drugs to patients.

In Lewandowski, Plaintiff claims that her employer, Johnson & Johnson (“J&J”), breached its fiduciary duty under ERISA by overpaying for prescription drugs. Plaintiff alleges that J&J failed to demand lower prices from its PBM when establishing the arrangements for its group-medical plan. The higher drug prices, according to Plaintiff, have resulted in lower wages and higher health insurance costs for J&J employees.

In June, J&J moved to dismiss the lawsuit for lack of standing. According to J&J’s motion, Plaintiff received all the benefits she was contractually entitled to receive – that is, prescription drug benefits at the cost established in the Plan documents – which in turn shows that Plaintiff cannot establish injury-in-fact resulting from J&J’s alleged improper conduct. Moreover, J&J claims that Plaintiff’s out-of-pocket expenses would not have changed even if her prescription drugs through the Plan cost nothing. The Plan’s cost-sharing obligations associated with Plaintiff’s substantial medical (non-drug-related) expenses would have still resulted in the same out-of-pocket amount each year. Accordingly, Plaintiff has not suffered a cognizable injury that can be traced to the challenged conduct.

Plaintiff responded that the Plan’s overpayments were passed on to her in the form of monthly premiums, which she alleges were higher than they would have been absent Defendants’ fiduciary breaches. Plaintiff also asserted she incurred greater out-of-pocket costs at the pharmacy counter than she would have paid absent Defendants’ fiduciary breaches. Under Plaintiff’s theory, this harm straightforwardly satisfies Article III’s requirements. Moreover, Plaintiff claimed that at the initial pleading stage, she was not required to (1) specify the flaws in Defendants’ process for managing the Plan or (2) support her cost allegations “with any comparisons to other plans.” She also claims she was not obligated to rebut Defendants’ “explanation” for the challenged conduct.

Defendants’ motion to dismiss has been fully briefed as of August 12. However, both Plaintiff and Defendants recently filed notices of supplemental authority citing to the Third Circuit’s decision in Knudsen v. MetLife Group, Inc., No. 23-2420 [Sept. 25, 2024], affirming the dismissal of a similar lawsuit. There, Plaintiffs alleged that Defendant retained $65 million in PBM drug rebates which allegedly caused the increased out-of-pocket costs. The Third Circuit held that Plaintiffs lacked standing to lead the suit because they couldn’t show they were owed the rebate savings, thus failing to establish an injury-in-fact. Specifically, the Court said, “Plaintiffs must show that the purported violative conduct was the but-for-cause of their injury in fact, namely, an increase in their out-of-pocket costs above what they would have been if MetLife had deposited the rebate monies into the Plan trust.”

Lewandowski argued that in Knudsen, the Court held that ERISA plaintiffs do have Article III standing if their complaint alleges they “have or will pay more in premiums, or other out-of-pocket costs” as a result of the defendant’s ERISA violations. Lewandowski attempted to distinguish Knudsen, arguing that her complaint includes specific, nonspeculative allegations that the Third Circuit held would satisfy standing. In its submission, J&J reiterated that Plaintiff has not alleged that she was charged more than the Plan documents permit. And because Plaintiff’s out-of-pocket costs were unaffected by the challenged actions, she does not have standing.

The case is pending a decision on the motion to dismiss. If Plaintiff successfully survives the dismissal, we can expect to see even more of these cases filed by plaintiffs’ firms, regardless of the merits of the allegations.