The United States Supreme Court is busy with potential ERISA cases. Having already accepted three ERISA cases for the current term (See, Supreme Court to Decide 3 Cases on Ability to Sue Under ERISA), on January 10, 2020, the high court agreed to hear a case involving preemption.
Rutledge v. Pharmaceutical Care Management Association. The case surrounds an Arkansas statute regulating pharmacy benefit managers’ drug-reimbursement rates, which is similar to laws enacted by most states. The statute mandates that pharmacies be reimbursed for generic drugs at a price equal to or higher than the pharmacies’ cost for the drug based on the invoice from the wholesaler. The US Court of Appeals for the Eighth Circuit, previously upheld a motion to dismiss by the Pharmaceutical Care Management Association finding the state statute was preempted by ERISA. The Supreme Court asked the U.S. Solicitor General to weigh in on whether they should accept the case. The Solicitor General filed a brief arguing they should and that they should overturn the decision. Oral arguments are expected to be heard this Spring.
This case is important as the Justices will again examine the limits of ERISA’s preemption of state laws and the current Court’s thinking on the matter. The decision is likely going to influence cases challenging state mandated payroll deduction IRA programs such as California’s CalSavers program being challenged as preempted by the Howard Jarvis Taxpayer’s Association. (See, Friday the 13th Unlucky for CalSavers as U.S. Maintains Law is Preempted by ERISA.)
No Dudenhoeffer Clarification. In other news, the high court has already made a decision on one of the ERISA cases it agreed to hear, IBM v. Jander. Actually, it decided not to decide the case but sent it back to the United States Court of Appeals for the Second Circuit on the procedural grounds that arguments were being made for the first time at the high court but the Supreme Court is a court of review. In so doing the Justices passed on the opportunity to clarify the standard for what plaintiffs must plead in their complaint for breach of the fiduciary duty of prudence when a plan is invested in employer stock announced in its 2014 Dudenhoeffer decision. In Dudenhoeffer, the Supreme Court held that to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must allege an alternative action plan fiduciaries could have taken that would be consistent with securities law and that a prudent fiduciary would not view as likely to cause harm to the plan. Further, lower courts need to consider whether the complaint alleges that a prudent fiduciary could not have concluded that stopping purchases of the employer stock or publicly disclosing negative information would do more harm than good to the plan by causing a drop in the stock price.
In Jander, the issue is what a plaintiff must plead to allege an alternative action that a prudent fiduciary would not have viewed as causing more harm than good. Whether Dudenhoeffer can be satisfied by general allegation that the harm of an inevitable disclosure of alleged fraud increases over time. In 2019, the Second Circuit held that Jander plaintiffs properly alleged that no fiduciary could have concluded that an earlier disclosure that IBM’s microchip division was losing $700 million per year would have done more harm than good. Therefore, IBM’s motion to dismiss was denied.
However, IBM argued that ERISA imposes no duty on an ESOP fiduciary to act on inside information for the first time at the Supreme Court. Likewise, the Securities Exchange Commission and Department of Labor argued that an ERISA duty to disclose inside information that is not required to be disclosed by securities laws would conflict with the insider trading and corporate disclosure rules of the federal securities laws. The Second Circuit did not address these arguments because they were not made in the lower court. Therefore, the High Court vacated the judgment of the Second Circuit and remanded the case back to that court to determine whether it will hear the merits of the arguments.
While the Supreme Court did not decide the issue yet, it is likely that Jander will wind up back at the high court or the issue will be decided in another case before long.