Third Circuit Upholds Dismissal of ERISA Claims over Drug Rebates

On September 25, 2024, in Knudsen v. MetLife Group Inc., the Third Circuit Court of Appeals (Third Circuit) affirmed the dismissal of a putative class action lawsuit claiming ERISA violations by defendant MetLife for its retention of prescription drug plan rebates. The Third Circuit found that the plaintiffs, who were former MetLife employees, had failed to allege the necessary financial harm to establish standing as required under Article III of the US Constitution.

In Knudsen, MetLife was the sponsor and plan administrator of a self-insured ERISA plan that offered various benefits, including prescription drugs, to employees and their families. The plan was funded by MetLife’s contributions and participant contributions toward premiums, which were held in several trusts. The plan contracted with a PBM to negotiate volume discounts and rebates with drug manufacturers. The plan document terms expressly stated that the rebates would be applied to plan expenses and would not be considered when calculating any copayments or coinsurance.

Nonetheless, the plaintiffs claimed that MetLife violated its ERISA fiduciary obligations by diverting $65 million in drug rebates from the plan to itself from 2016 to 2021. The plaintiffs alleged that MetLife’s misappropriation of plan funds caused participants to pay higher out-of-pocket (OOP) costs, primarily in the form of premiums, and that MetLife owed these funds to participants. They argued that if MetLife allocated the rebates to the plan, the amounts “may have” been used to reduce participant premium contributions or cost-sharing or been distributed to plan participants in proportion to their contributions to the plan. The plaintiffs asserted ERISA breach of fiduciary and prohibited transaction claims and alleged that MetLife violated ERISA’s anti-inurement provision.

MetLife filed a motion to dismiss the complaint alleging that the plaintiffs lacked Article III standing because they were not injured by how the rebates were used. The district court granted MetLife’s motion after concluding that the plaintiffs had failed to plead facts to show a personal injury-in-fact. The district court drew analogies between MetLife’s plan and the defined benefit retirement (aka pension) plan in Thole v. US Bank NA, in which the US Supreme Court explained that an alleged injury to a plan is not necessarily an injury to the participants themselves.

Upon appellate review, the Third Circuit first outlined the basic requirements to establish Article III standing; specifically, that a plaintiff must show 1) a personal injury-in-fact 2) caused by the defendant, and 3) that would likely be addressed by a favorable court decision. The injury-in-fact must be actual or imminent and not conjectural or hypothetical.

Next, the Third Circuit discussed Thole and agreed with the district court and MetLife that analogies could be made between a self-funded health insurance plan and a pension plan since in both situations the sponsor bears the financial risk of providing benefits to participants. Thole involved claims brought by pension plan participants alleging an injury due to the sponsor’s mismanagement of plan assets. In Thole, the Supreme Court held that participants had not established an injury-in-fact based on financial harm to the plan assets because they had received the fixed periodic payments they were entitled to under the plan, and the outcome of the suit would not affect their benefits.

However, the Third Circuit declined to hold that Thole categorically barred an ERISA plaintiff’s assertion of injury based on increased OOP costs. Accordingly, the Third Circuit disagreed with MetLife’s argument that under Thole, an ERISA group health plan participant, like a pension plan participant, has no injury unless they plead the denial of promised benefits (e.g., reimbursement of healthcare claims or a substantial likelihood that the benefits will not be paid) and that any increase in participants’ insurance costs is immaterial to the analysis. Rather, the Third Circuit indicated that a plaintiff could establish financial injury under other circumstances and suggested an example in which plan participants were charged more in premiums than allowed under the plan documents.

But in Knudsen, the Third Circuit determined that the plaintiffs had failed to demonstrate a concrete actual financial injury (i.e., that their increased OOP costs were due to MetLife’s retention of the rebates, and that they had an individual right to these withheld amounts). The Third Circuit noted that although the plaintiffs generally alleged that their OOP costs increased, they did not specify which OOP costs increased, in what years, or by how much. Nor did the complaint allege that under the plan documents, the drug rebates and/or plan asset value were used to calculate participant OOP costs. Therefore, based on the pled allegations, it was speculative that MetLife’s alleged misappropriation of drug rebate money resulted in the plaintiffs paying more for their health insurance or had any effect at all.

Consequently, the Third Circuit affirmed the district court’s dismissal of the complaint without prejudice but noted that the district court could exercise discretion on remand in responding to a request to amend it.

Following several high-profile ERISA fiduciary breach class action lawsuits brought against group health plan sponsors, the Third Circuit’s decision in Knudsen serves as an important reminder that Thole is still the law of the land. Thus, plaintiffs in these lawsuits may face significant difficulties in establishing Article III standing. Of course, the Third Circuit did not preclude the possibility of a plaintiff doing so on a particular set of facts. We will continue to monitor these legal developments and report any relevant updates in Compliance Corner. Regardless of the outcome of any litigation, group health plan sponsors should review their own ERISA fiduciary governance practices and ensure they are fulfilling their fiduciary obligations to their plans and participants, including following the terms of their plan documents.

Knudsen v. MetLife Group, Inc.