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Supreme Court – Updates for 2020

We are barely two months into the new year and already there are significant updates to the 2020 Supreme Court Preview included in our December 2019 Client Advisory (available here). Below are updates regarding the employee benefit cases before the Court previously mentioned in our Advisory:

IBM v. Jander, U.S., No. 18-1165. In a decision issued January 14, 2020, the U.S. Supreme Court vacated and remanded the Jander case to the U.S. Court of Appeals for the Second Circuit. On remand, the Court asked the Second Circuit to consider whether to allow new arguments made by the IBM plan fiduciaries and federal agencies regarding the duty to act on inside information when managing the assets of an employee stock ownership plan (ESOP).

The opinion from the Second Circuit was a plaintiff-friendly outlier following the U.S. Supreme Court’s 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, where the Court established a new pleading standard for stock-drop cases. In so-called stock-drop cases, plaintiffs allege that they are harmed when ERISA fiduciaries cause a plan to continue holding company stock when the fiduciaries knew (or should have known) of conditions that may cause a decline in the value of the stock. Post-Dudenhoeffer, plaintiffs must plausibly allege an alternative to continuing to hold the stock that the fiduciary could have taken without violating insider-trading laws, and that a prudent fiduciary in the same circumstances would not view as more likely to do more harm than good.

In Jander, the Second Circuit surprisingly concluded the plaintiffs had plausibly alleged that the fiduciaries for the IBM plan, who were also insiders of the company, might have had a duty to more promptly disclose the problems that led to a 7% drop in IBM’s stock price. The Second Circuit explained that because disclosure of the overvaluation of IBM’s microelectronics business would have occurred during its likely sale of the business, the disclosure was “inevitable” and, thus, a prudent fiduciary should have made the disclosure sooner.

Rather than considering the merits of the Second Circuit’s decision, the Supreme Court sent the case back to the Second Circuit to determine whether certain arguments made by IBM fiduciaries (i.e., that ESOP fiduciaries have no duty under ERISA to act on insider information) and the federal government (i.e., that the existence of a duty to disclose insider information under ERISA would contravene securities laws), which the Court concluded had not been directly raised in the lower courts, should be addressed by the Second Circuit prior to review by the Supreme Court.

Following the remand on procedural grounds, it is not clear whether the Second Circuit will decline to hear the arguments lodged by the IBM fiduciaries and the government agencies or address the substance of the newly raised defenses. For the time being, Dudenhoeffer’s high bar for pleadings to survive a motion to dismiss in stock-drop lawsuits remains in place but it is an open question whether Jander is capable of changing the landscape.

Rutledge v. Pharm. Care Mgmt. Assoc., U.S., No. 18-540. Following the recommendation of the Solicitor General, the Supreme Court recently decided to grant review of the U.S. Court of Appeals for the Eighth Circuit’s 2018 decision in Pharm Care Mgmt. Assn. v. Rutledge. The issue now before the Court is whether ERISA preempts state law attempts to regulate pharmacy benefit managers (PBMs). PBMs act as third party administrators who process and pay prescription drug claims and are typically responsible for developing and maintaining drug formularies, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers.

Rutledge concerns an Arkansas law that created a process for pharmacies to challenge below-cost reimbursements for dispensing generic drugs. The Eighth Circuit held that the Arkansas law was preempted by ERISA because it is “relate[d] to and has a connection with employee benefit plans.” In its petition for certiorari, however, Arkansas argued that the Eight Circuit decision contradicts Supreme Court precedent holding that state laws of general application that incidentally regulate both ERISA and non-ERISA plans should not be preempted by ERISA.

The Court’s decision to hear the case is important because the majority of U.S. states have enacted laws that attempt to regulate PBMs and ERISA preemption would leave a significant portion of the U.S. population outside the reach of those laws. According to the Kaiser Family Foundation, in 2017 approximately 156 million Americans received their health insurance coverage through employer-sponsored group health plans, and private health insurance, including group health plans, accounted for approximately 42% of the total U.S. retail prescription drug spend. Taken together, these statistics suggests that PBM regulation that includes PBMs servicing group health plans would significantly affect the prescription drug market.

The Court’s most recent discussion regarding ERISA preemption occurred in 2016 in Gobeille v. Liberty Mut. Ins. Co., where it concluded that ERISA preempted a Vermont statute requiring third party administrators of self-insured group health plans to report claims information to state health care databases. The majority opinion in Gobeille held that ERISA preempts a state law that "acts immediately and exclusively upon ERISA plans . . . or where the existence of ERISA plans is essential to the law's operation . . ." or that " 'governs . . . a central matter of plan administration' or 'interferes with nationally uniform plan administration.' " Benefits professionals have since wondered whether the Gobeille opinion expands the preemption standard initially articulated in the Supreme Court’s 1995 decision, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Inx. Co., which held that ERISA preempts state laws that affect an employee benefit plan’s structure or administration, preclude uniform plan administration, or provide plan participants with remedies outside of ERISA. The Rutledge decision will hopefully provide some clarity regarding the scope of ERISA preemption and what it means for a state law to be “related to” an ERISA plan.

We will continue to provide updates regarding U.S. Supreme Court decisions that affect employee benefit plans through this Benefits Law Update blog - subscribe here.

Topics: Fiduciary Duties, Plan Administration