As we previously described, the courts in Navarro v. Wells Fargo (“Navarro II”) and Lewandowski v. Johnson and Johnson (“Lewandowski II”) recently dismissed putative class actions alleging that employers breached their ERISA fiduciary duties by failing to prudently manage their self-funded health plan’s prescription drug benefit, purportedly causing plan participants to overpay for health benefits. The courts dismissed the plaintiffs’ claims because they lacked Article III standing—that is, (1) an injury in fact that was (2) caused by the employer’s alleged misconduct and (3) could be redressed by a favorable court order.
But another court, when analyzing substantially similar allegations, recently allowed some of the plaintiffs’ claims to proceed beyond the pleading stage. On March 9, 2026, the Southern District of New York found that the plaintiffs in Stern v. JPMorgan Chase adequately alleged Article III standing regarding their overpayment for prescription drugs and plausibly alleged that their employer caused the health plan to engage in transactions prohibited by ERISA.
This alert summarizes Stern and the current status of cases alleging that participants in self-funded health plans paid too much for their health benefits coverage due to amounts their health plans paid to pharmacy benefit managers (“PBMs”) for administrative services and certain prescription drugs.
Key takeaways are:
- Article III standing: Stern largely agreed with prior cases holding that plaintiffs lack Article III standing to challenge generalized allegations of “excessive” premiums for health coverage. But, unlike other courts that have addressed substantially similar allegations, Stern held that the plaintiffs’ claims that they paid excessive out-of-pocket expenses costs for prescription drugs, in the form of “specific overpayments, made on specific dates, at specific markups,” plausibly alleged an injury in fact.
- Fiduciary Status: Stern dismissed the plaintiffs’ breach of fiduciary duty claims because ultimately the plaintiffs were challenging the employer’s decisions regarding the structure of the plan’s prescription drug benefit. An employer makes such decisions regarding benefit design as the plan’s settlor and not an ERISA fiduciary. The plaintiffs could not “recast” their criticisms of the plan’s pharmacy benefit as a fiduciary breach by labeling those criticisms as a failure to monitor plan costs.
- Pleading Standard for Health Plan Excessive Fee Claims: Stern applied the “meaningful benchmark” standard from excessive fee cases involving defined contribution retirement plans to a health plan. The court held that even if the plaintiffs had alleged conduct that was subject to ERISA’s fiduciary standards, their fiduciary breach claims would still fail because they failed to establish an overpayment based on an “apples-to-apples” comparison—that is, the amount similarly situated plan participants paid for prescription drugs.
- Prohibited Transactions Claims: Stern held that the plaintiffs’ prohibited transactions claims could proceed under the pleading standard set forth in Cunningham v. Cornell University because they tracked the elements of ERISA section 406. But the court expressed skepticism regarding the viability of the claims and required the plaintiffs to file a reply to the defendant’s answer pursuant to Federal Rule of Civil Procedure 7(a)(7), to the extent it invoked any of ERISA section 408’s prohibited transaction exemptions. Rule 7(a)(7) is an infrequently used procedural mechanism pursuant to which a court can order a plaintiff to file a reply to a defendant’s answer to a complaint.
Stern v. JPMorgan Chase
Like the plaintiffs in Navarro II and Lewandowski II, the Stern plaintiffs challenged their employer’s decision to enter into a “traditional” PBM pricing arrangement, which the plaintiffs claimed was “built on opaque pricing structures,” such as spread pricing. The plaintiffs claimed that their employer failed to consider alternative pricing structures, including pass-through PBM arrangements, specialty drug carve-outs, and contracting with lower-cost pharmacies (as opposed to steering plan participants to pharmacies owed by the plan’s PBM). The plaintiffs claimed that they paid too much in premiums and out-of-pocket costs for prescription drugs as a result of their employer’s conduct.
Article III standing
The court held that the plaintiffs failed to allege an injury in fact due to higher premium payments, but sufficiently alleged they were injured when they overpaid for prescription drugs in the form of deductibles, copayments, and coinsurance:
- Higher Premiums: The court held that the plaintiffs’ higher premium theory was speculative because the plaintiffs failed to plausibly allege that increases in overall plan spending resulted in higher premiums. The plaintiffs’ claim that the employer maintained a “consistent” ratio of employer-employee funding was belied by their own allegations, which demonstrated that the employer did not maintain a “rigid” funding formula. Further, the court noted that the plan document expressly reserved the employer’s discretion to determine how much it contributed to plan funding.
GROOM INSIGHT: Stern joined with Navarro II and Lewandowski II to hold that plan language affording an employer “sole discretion” to determine the amount participants contribute to the plan rendered the plaintiffs’ alleged injury due to excessive premiums speculative. These decisions underscore the importance of clear plan terms affording an employer complete authority to set employee premiums and cost-share obligations and to require employees to fund all health plan costs.
- Higher Out-of-Pocket Costs: The court held that the plaintiffs’ allegations that they paid too much in out-of-pocket costs for prescription drugs was sufficiently concrete to establish Article III standing. The court held that the Supreme Court’s decision in Thole v. U.S. Bank did not require the dismissal of the plaintiffs’ claims. Unlike the plaintiffs in Thole, who continued to receive their monthly pension benefits and did not allege any financial injury, the plaintiffs in Stern alleged personal financial harm when they overpaid for prescription drugs. The court’s ruling in this regard joined with the District of New Jersey’s decision in Lewandowski I. Further, the court rejected the employer’s argument that other plan benefits may have offset higher prescription drug costs; the court held that receiving other benefits does not eliminate the “economic harm caused by overpaying for a specific benefit.”
Breach of Fiduciary Duty Claims
The court dismissed plaintiffs’ breach of fiduciary duty claims because the plaintiffs challenged conduct that is not subject to ERISA’s fiduciary standards. And, even if plaintiffs had challenged fiduciary conduct, their claims would still fail because the plaintiffs failed to plausibly allege “actual overpayment.”
- Settlor conduct: The court dismissed the plaintiffs’ breach of fiduciary duty claims because it found that the employer did not act as an ERISA fiduciary with regard to the challenged conduct. The plaintiffs’ allegations focused “less” on plan administration and “more” on the employer’s decisions regarding the “design and structure” of the plan’s prescription drug benefit. Even though the plaintiffs labeled the conduct at issue as fiduciary, the plaintiffs targeted the employer’s choices regarding the “architecture of the benefit offering.” The court rejected the plaintiffs’ argument that they were challenging the employer’s fiduciary duty to “monitor” plan costs, holding that the “essential character” of the allegations challenged plan design and not plan administration.
GROOM INSIGHT: Stern’s holding that the employer was not acting as an ERISA fiduciary in connection with the challenged conduct is a key victory for employers. Navarro II and Lewandowski II did not address whether the challenged conduct was subject to ERISA’s fiduciary standards because those courts dismissed the plaintiffs’ claims for lack of Article III standing.
- Meaningful benchmark: The court held that even if plaintiffs had alleged conduct that is subject to ERISA’s fiduciary standards, their fiduciary breach claims would still fail because plaintiffs failed to establish overpayment in comparison to a “meaningful benchmark,” i.e., an apples-to-apples comparator. Plaintiffs alleged that they paid more for drugs than what pharmacies paid—not more than what similarly situated plan participants paid. As a result, the plaintiff failed to plead “actual overpayment” sufficient to support an inference of a breach of the duty of prudence.
GROOM INSIGHT: Stern’s application of the “meaningful benchmark” standard to a health plan is an important development that may impact whether plaintiffs in future cases alleging excessive health plan costs can plausibly allege a claim for relief.
Prohibited Transaction Claims
The court allowed the plaintiffs’ prohibited transaction claims to proceed on the basis that the employer’s decision to hire the PBM was a fiduciary function and the plaintiffs’ allegations tracked the elements of the provision of ERISA governing prohibited transactions, section 406. The court specifically noted the employer may have “ample defenses” to the prohibited transactions claims under ERISA section 408, but found that it was bound by Cunningham’s holding that claims tracking the statutory elements of a prohibited transaction are sufficient to state a claim for relief.
The court, however, directed plaintiffs to file a reply to the employer’s answer, to the extent the employer’s answer invoked any ERISA section 408 exemptions to the claimed prohibited transactions. The plaintiffs recently filed their reply.
GROOM INSIGHT: Stern illustrates that courts are continuing to grapple with Cunningham’s implications, including whether and how to apply the judicial tools—such as Rule 7—that the Supreme Court instructed lower courts to apply to weed out meritless claims.
What’s Next in Litigation Regarding Prescription Drug Costs?
As the litigation in Stern proceeds beyond the pleadings stage, the plaintiffs’ appeals in Navarro II and Lewandowski II are being briefed. Notably, the Lewandowski II plaintiffs cited Stern in support of their argument that the district court erred when dismissing their claims of higher out-of-pocket costs due to lack of Article III standing. The appeals likely will be decided in 2027.
What’s Next in Litigation Regarding Health Plan Costs?
Even though Stern allowed some of the plaintiffs’ claims to proceed, this case marks an important victory for employers.
Like the decisions in Navarro II and Lewandowski II, Stern demonstrates that plaintiffs’ generalized allegations that they paid “too much” for health coverage are insufficient to establish Article III standing. And, Stern demonstrates that clear plan terms regarding an employer’s authority to determine the amount it contributes to plan funding can help defeat such claims. Further, Stern underscores that employers’ decisions regard plan design are not subject to ERISA’s fiduciary standards—even where plaintiffs try to frame their claims as targeting plan administration, including the “monitoring” of plan costs. These critical holdings from Stern, together with its application of the “meaningful benchmark” standard, likely will have applicability to other theories the plaintiffs’ bar may advance in future health plan excessive fee cases.
We will continue to monitor this developing area of ERISA litigation.
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