Lawsuit Filed Alleging Fiduciary Breach of Johnson & Johnson Health Plan

Johnson & Johnson, the medical and pharmaceutical megacorporation, is facing a novel class action lawsuit alleging that it overpaid for pharmacy benefits and therefore overcharged employee plan members and their dependents.

A class action lawsuit has been filed against Johnson & Johnson. The plaintiff in Lewandowski v. Johnson & Johnson is an employee of Johnson & Johnson, who claims that Johnson & Johnson breached its ERISA fiduciary duties and mismanaged its prescription-drug benefit program. The lawsuit alleges that the breach cost the plan and its participants millions of dollars by requiring them to pay more in prescription drug prices and higher premiums, deductibles, copays, and coinsurance.

The lawsuit, believed to be the first of its kind, may open up a new pathway in ERISA fiduciary litigation. Previously, ERISA fiduciary lawsuits were typically filed against plan sponsors of retirement plans and often centered around the fees paid to retirement plan advisors, recordkeepers, and vendors. ERISA’s fiduciary duties have always applied to all ERISA covered plans, including health plans, and not just the retirement plans that have been the focus of recent litigation. In addition, the Consolidated Appropriations Act of 2021 expanded fee disclosure responsibilities of ERISA plans by requiring health plan fiduciaries to review compensation paid to service providers in determining whether the provider’s fees are reasonable.

The suit alleges that by failing to use its bargaining power in the marketplace, Johnson & Johnson breached their fiduciary duty of prudence.

According to the Department of Labor (DOL), “the primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.” In addition, all plan fiduciaries must act prudently, diversify plan investments where applicable, and strictly follow the terms of their plan documents so long as the documents are consistent with ERISA. Plan fiduciaries must also avoid conflicts of interest.

Breach of fiduciary duty damages are not always limited to the company sponsoring the plan. ERISA fiduciaries may be held personally liable to restore any plan losses or return any profits made through improper use of plan assets.

The Lawsuit

The primary claim is that Johnson & Johnson mismanaged the plan’s specialty-drug program, particularly with respect to generic-specialty drugs. The lawsuit claims Johnson & Johnson breached their fiduciary duties when they agreed to pay its pharmacy benefit manager (PBM) higher prices for generic drugs when those same drugs were available at lower prices. The lawsuit also claims Johnson & Johnson mismanaged other aspects of their prescription-drug program by steering beneficiaries to the PBM’s mail-order pharmacy, whose drug prices were routinely higher than at retail pharmacies for the same drugs.

The plaintiff alleges Johnson & Johnson mismanagement caused the plan and beneficiaries to vastly overpay for generic-specialty drugs and costing the plan and their beneficiaries millions of dollars. In addition, the plaintiff alleges that Johnson & Johnson failed to exercise prudence in administering its prescription drug plan in its:

• selection of a PBM;
• requirement to have the plan and its participants and beneficiaries pay unreasonably high prescription drug prices;
• failure to manage and oversee key aspects of the plan;
• failure to negotiate contract terms that would have prevented the PBM from enriching itself at the expense of the plan and its participants;
• failure to consider carving out their specialty-drug program from their broader contract with the PBM; and
• failure to protect plan assets and beneficiaries’ interests.

The suit alleges that by failing to use its bargaining power in the marketplace, Johnson & Johnson breached their fiduciary duty of prudence.

OneDigital will continuing to monitor this case and others. It is not unlikely that this allegation is just the beginning. Health plan sponsors are strongly encouraged to review ERISA’s fiduciary requirements and ensure that its plan fiduciaries are following the terms of their plan documents and regularly reviewing plan and participant fees. Plan sponsors may want to review current contract terms with PBMs and other service providers along with the process and documentation for having considered and engaged in those agreements. Sponsors should also confirm they are receiving appropriate direct and indirect compensation disclosures from applicable service providers.

If this lawsuit made you want to learn more about Pharmacy Benefit Managers, we've got you covered. Check out our post PBMs Explained - What Are They and How Do They Relate to Soaring Pharma Costs?