Central States Southeast and Southwest Areas Health and Welfare Fund, Sweetheart Cup Company, Inc., and Iron Workers Tri-State Welfare Fund, Movants-Appellants, Linda J. Cahn, Esq., Movant-Appellant, Group Hospitalization and Medical Services, Doing Business as Carefirst Blue Cross Blue Shield, Movant-Appellant v. Merck-Medco Managed Care, L.L.C. A/K/A Medco Health Solutions, Inc., Defendant-Counter-Claimant-Appellee, Frank Steve McMillan David J. Gibson, Adam Miles, Monica Keim, on Behalf of Northwest Airlines Prescription Plan and All Other Similarly Situated Plans, Pamela Stolz, on Behalf of Northwest Airlines Prescription Plan and All Other Similarly Situated Plans, Rosemarie Delong, Carl J. Goodman, Trustees of the United Food & Commercial Workers, Gary Pietrzak, on Behalf of the Minnesota Teamsters Health and Welfare Plan, and Peabody Energy Corporation, Consolidated Betty Jo Jones, Intervenor Genia Gruer, on Behalf of Herself and All Others Similarly Situated, Walter J. Green, on Behalf of Himself and

Citations: 433 F.3d 181; 36 Employee Benefits Cas. (BNA) 1577; 2005 U.S. App. LEXIS 26879Docket: 04-3300-

Court: Court of Appeals for the First Circuit; December 7, 2005; Federal Appellate Court

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The appeal concerns the District Court's approval of an amended settlement agreement related to class action lawsuits against a pharmaceutical benefits manager (PBM) under the Employee Retirement Income Security Act of 1974 (ERISA). The settlement has implications for over 815,000 employee health benefit plans, impacting approximately fifty-one million Americans who receive or have received prescription benefit coverage. The case involves multiple parties, including various health and welfare funds, individual plaintiffs, and fiduciaries representing employee welfare benefit plans. Legal representation includes attorneys from several law firms advocating for both the movants-appellants and the plaintiffs-appellees. The appeal was argued on May 18, 2005, and decided on December 8, 2005, by the United States Court of Appeals for the Second Circuit.

Group Hospitalization and Medical Services, operating as CareFirst Blue Cross Blue Shield, is appealing a June 30, 2004 judgment from the United States District Court for the Southern District of New York, which denied CareFirst's motion to intervene in a class action lawsuit. The court ruled that CareFirst is not part of the class and thus lacks standing to object to or opt out of the settlement agreement. CareFirst, along with other appellants, is challenging this judgment, which includes the court's certification of the class action, approval of the amended settlement agreement, award of legal fees, and severance of cases for ERISA plans that opted out.

The appellants raise several key issues: (1) whether ERISA plan participants who did not experience economic or medical injuries have standing under Article III to claim that the PBM violated fiduciary duties; (2) whether a named ERISA trustee has standing for these claims; (3) potential conflicts of interest between self-funded and capitated plans necessitating subclasses; (4) whether the District Court abused its discretion in certifying the class and approving the settlement; (5) whether the court erred in denying CareFirst's intervention; and (6) whether the attorney's fee for an ERISA trustee who opted out was appropriately set.

Concerns exist regarding the standing of four representative plaintiffs who reportedly suffered no injuries from the PBM's actions, as well as the standing of a trustee with a contract with the PBM. The District Court's failure to address these standing issues led to the decision to vacate its judgment and remand for a determination on the jurisdictional question of Article III standing. The litigation began with a complaint filed on December 12, 1997, against Merck-Medco Managed Care and Medco Health Solutions, alleging breaches of fiduciary duties in violation of ERISA.

Between 1997 and 2002, five putative class action lawsuits were filed against Merck & Co., Inc. in the Southern District of New York, all of which were consolidated into a single action by the Judicial Panel on Multidistrict Litigation in 2001. Each case alleged that Medco, a subsidiary of Merck, breached fiduciary duties owed under ERISA to employee benefit plans. The actions aimed to represent all fiduciaries, participants, and beneficiaries of employee welfare benefit plans with prescription coverage that had contracts with Medco or used its formulary on an open basis. 

The plaintiffs included four named individuals—Genia Gruer, Walter Green, Mildred Bellow, and Elizabeth O'Hare—who sought derivative relief for their respective plans and those of over 815,000 other plans receiving Medco services. A fifth named plaintiff, Marissa Janazzo, a Plan trustee, aimed to represent her Plan and similarly situated trustees. The sixth case involved Harry J. Blumenthal, Jr. and Alan Horwitz, who represented a smaller group of about 2,000 Plans contracting directly with Medco. Blumenthal opted out of the class and objected to the Settlement Agreement. 

The plaintiffs contended that Medco misrepresented itself as an independent pharmacy benefit manager (PBM) capable of controlling prescription drug costs, leading plan sponsors to grant Medco discretionary authority over their pharmacy management for cost containment purposes.

Plaintiffs accused Medco of abusing its fiduciary authority and mismanaging formularies and drug-switching programs to benefit its parent company, Merck, while harming the Plans. They claimed that Medco failed to disclose its practices and the resulting costs and lost benefits to the Plans. Allegations included that Medco favored Merck products in formularies, encouraged switching to higher-cost Merck drugs, entered into disadvantageous drug-purchase contracts favoring Merck, engaged in ERISA-prohibited transactions transferring Plan assets to Merck, and generally acted in its own and Merck's interests rather than those of the Plans.

Medco's motion for summary judgment was deferred and later withdrawn during settlement discussions. In December 1999, multiple actions were consolidated and referred to Special Master Charles G. Moerdler for assistance with discovery issues. Intensive settlement negotiations began in summer 2001, overseen by the Special Master and the District Court, leading to a Settlement Agreement.

The Settlement Agreement defined the class as all employee welfare benefit Plans with contracts with Medco between December 17, 1994, and the final approval date of the settlement, which were subject to ERISA. Medco agreed to change its business practices to enhance disclosures regarding formulary and drug interchange changes and to contribute $42.5 million to a settlement fund for class members. Attorneys' fees and expenses, capped at 30%, will be drawn from this fund.

Plaintiffs must release all claims related to ERISA and transactions concerning Merck or Medco as part of the Settlement Agreement. This release extends to claims against third-party administrators (TPAs) and plan sponsors linked to Medco or Merck, but excludes anti-trust and non-ERISA contract claims. The settlement fund allocates amounts to settling Plans based on their proportionate share of total drug spending, with a 55% reduction for Plans that pay for prescription-drug benefits on an insured or capitated basis, as these Plans are less likely to have been directly impacted by the alleged misconduct. The District Court provisionally approved class certification and the amended Settlement Agreement on July 31, 2003, with a Class Notice issued to over 815,000 members by September 16, 2003. Class members were allowed to opt-out by November 14, 2003, and were informed of a "fairness hearing" on December 11, 2003, where objections were raised, some of which were withdrawn. It was noted that many TPAs failed to forward the Class Notice, leading to a supplemental notice ordered on March 15, 2004. The continued fairness hearing on May 6, 2004, revealed no new objections to the supplemental notice, with only three remaining from the initial hearing. Approximately 200 individual Plans opted out, and approval of the Settlement Agreement would close 13 of the 17 cases involved. Sweetheart, a Plan sponsor in Maryland, is a member of the class and has a contract with Systemed, an affiliate of Medco, for a prescription drug benefit program subject to ERISA.

Sweetheart, an uninsulated self-funded Plan, argued that its interests were not adequately represented by settling Plaintiffs, who included insured and capitated Plans. Iron Workers, another self-funded employee benefit fund, and Central States, a welfare benefit fund, joined Sweetheart in objecting to the Settlement Agreement, claiming unfair treatment in the allocation between self-funded and insured plans. They contended the Settlement favored insured plans, allowing them to benefit from the settlement fund despite suffering no damages. The Self-Funded Plans sought to intervene in the class action, asserting they should be recognized as a certified subclass due to inadequate representation of their interests.

The Self-Funded Plans criticized the Class Notice for lacking clarity regarding how the insured plans’ claims were reduced to 55% compared to self-funded claims. They argued that their unique interests were not adequately represented, as only a self-insured Plan could effectively represent them. However, the District Court, after a fairness hearing, determined that no significant conflict of interest existed, noting that all class members' claims stemmed from a common legal theory regarding ERISA violations by Medco in managing drug costs. The Court found the 55% reduction for insured Plans reasonable, concluding that common issues predominated despite some individualized damages concerns. Additionally, the Self-Funded Plans claimed the Settlement Agreement inadequately outlined the distribution of settlement funds, making it impossible for class members to determine their shares accurately.

Allocation of settlement funds will primarily be based on each settling Plan's proportionate share of total drug spending across all settling Plans. The District Court addressed concerns raised by Self-Funded Plans regarding the clarity of terms used in the Settlement Agreement, specifically the definition of "primarily," the non-primary bases for allocation, and the total drug spend during the class period. The Self-Funded Plans argued that the $42.5 million cash component's reasonableness was unsubstantiated. However, the District Court dismissed these claims, affirming that the Settlement Agreement is clear and that contract claims against Medco and third-party administrators (TPAs) remain intact and are not released under the agreement. The court highlighted Medco's acknowledgment during a prior conference that contract claims would not be released.

Additionally, CareFirst, a TPA providing services to ERISA plans, filed an amicus brief opposing the certification of the settling class and later moved to intervene. CareFirst's motion sought to include an opt-out provision for health benefit payors and to challenge class certification if their opt-out was ineffective. CareFirst had previously submitted an opt-out form to exclude itself from the settlement on behalf of its insured and self-funded ERISA plan customers, noting its role as an independent licensee of the Blue Cross Blue Shield Association and its agreements with Medco for pharmacy benefit management services. The District Court ultimately overruled the objections from the Self-Funded Plans.

CareFirst assigned Medco the management of its drug plans, granting Medco authority over the drug program, which included negotiating discounts with pharmacies and collecting rebates from manufacturers. CareFirst later accused Medco of breaching contractual obligations by failing to pass on manufacturer rebates, favoring more expensive drugs, and profiting from the difference between payments to pharmacies and charges to CareFirst. CareFirst operates both as an insurer for ERISA plans, assuming claims risk, and as a Third Party Administrator (TPA) for self-funded plans, responsible for paying claims and pursuing overcharges. CareFirst argued that a proposed Settlement Agreement could improperly release its claims against Medco unless it could opt-out on behalf of its insured and self-funded plans. The District Court denied CareFirst's motion to intervene, stating that the right to accept or reject the settlement belonged to the plan fiduciaries, not to CareFirst as a TPA, which lacks standing to object. The court noted that the settlement terms were carefully crafted and concluded that TPAs are merely administrators and cannot delegate fiduciary duties to evade the responsibilities vested in plan sponsors.

The rights potentially violated by the Defendant pertain to the Plan rather than the administrator contracted by the Plan fiduciaries. The District Court denied CareFirst's motion to intervene, clarifying that the authority to accept or reject the proposed settlement lies with the Plan Fiduciaries and not the third-party administrators (TPAs). The Court emphasized that the Settlement Agreement does not release any direct claims that TPAs might have against Medco, allowing TPAs to demand that a Plan opts out if they believe it is necessary.

On May 25, 2004, the District Court certified the action as a class action under Fed. R.Civ. P. 23(a) and (b)(3), granting preliminary approval to the Settlement Agreement of July 31, 2003, and determining it to be a fair and reasonable settlement for the Class. The Court also awarded legal fees and disbursements, severing cases where Plans opted out of the settlement.

Under the Settlement Agreement, attorneys' fees up to 30% and expenses are to be paid from the Settlement Fund. Plaintiffs' counsel, Abbey Gardy, LLP and Boies, Schiller, Flexner, LLP, requested $12.75 million in fees (30% of the settlement) and $893,294.50 in expenses. They agreed to cover a fee for the Lowey Firm, which sought $637,500 in fees and $19,576.96 in disbursements. The District Court found the fee application reasonable, noting that the total lodestar for all counsels was $7,138,047.25, reflecting nearly 16,000 hours of effort over six years of litigation. The Court acknowledged the contingency risk and quality of representation in determining the fee, ultimately awarding $12.75 million in fees and the specified disbursements, with total fees capped at 30% of the settlement fund.

Attorney Linda J. Cahn applied for legal fees and disbursements from the common fund established by a Settlement Agreement, requesting reimbursement for 2,182 hours of work, $4,698 in expenses, and 10% of the total attorneys' fees awarded to class counsel. The District Court recognized that Cahn's efforts contributed to improvements in the Settlement Agreement that benefitted class members, warranting a reasonable fee based on quantum meruit. Although the class counsel had initially agreed to the settlement without Cahn's input, her involvement was deemed significant in finalizing the terms. The Court determined that Cahn's reasonable time spent on the case was 804.4 hours, valuing her work at $200 per hour, resulting in a fee award of $160,880 and approval of her expenses. This total of $165,578 will be deducted from the 30% award to class counsel due to a cap on total fees. The Court noted that Cahn retains the right to pursue additional claims in the future related to the Blumenthal case. 

Separately, CareFirst filed timely appeals against the District Court's orders, arguing it was wrongfully denied the opportunity to intervene and present objections to class certification, claiming the Court's rejection was without adequate analysis. Additionally, a joint notice of appeal was filed by the Self-Funded Plans, along with Cahn’s own appeal.

CareFirst, acting as a Third Party Administrator (TPA), contends that it is obligated to pursue overpayment of benefits for the self-funded plans it manages. It argues that the District Court's denial of its motion to intervene has released its claims as an insurer without compensation, thereby impairing its contractual rights. CareFirst asserts that insurers and TPAs were excluded from the class, while the plans they administer were included. 

In relation to the District Court's class certification, CareFirst challenges the commonality of the settlement class claims, the typicality of the class representatives' claims, and their adequacy in representing the class. It also claims the District Court wrongfully prevented it from opting out its insured claims, which could allow Medco to argue that the Settlement Agreement releases CareFirst's claims by distributing proceeds directly to its insured customers, bypassing CareFirst itself. 

CareFirst, along with the Self-Funded Plans (Central States, Iron Workers, and Sweetheart), objects to the class certification, alleging that the self-funded Plans represent a distinct subclass with conflicting interests compared to insured Plans, which do not bear the risk of increased drug costs. They argue that self-funded Plans, which cover the full cost of drugs for their beneficiaries, should have been represented by independent counsel and not included in the certified class. 

The Self-Funded Plans further assert a lack of commonality and typicality due to differing damage levels among class members. Additionally, they claim that none of the named Plaintiffs have demonstrated a necessary injury-in-fact for standing under Article III, as the Individual Plaintiffs failed to demonstrate a cognizable injury and sought derivative relief under ERISA for the Plans contracted with Medco during the class period.

Movants-Appellants contend that Individual Plaintiffs have not sufficiently demonstrated injuries related to Medco's alleged misconduct concerning their respective Plans. Specifically, they assert that Janazzo, the trustee for her Plan, failed to provide a contract with Medco for prescription benefit coverage, thereby unable to show that her Plan experienced the necessary injury-in-fact due to Medco's actions. The discussion shifts to Article III standing, emphasizing that federal courts must determine whether a plaintiff has constitutional standing, which involves assessing the existence of a "case or controversy" as defined in Article III. Standing is essential to federal jurisdiction and requires that the plaintiff has a personal stake in the outcome, having suffered a specific, concrete injury that is actual or imminent rather than hypothetical. Additionally, there must be a causal link between the injury and the defendant's conduct, indicating that the harm is directly traceable to the alleged wrongful actions. If plaintiffs lack standing, the court lacks subject matter jurisdiction, a point that can be raised at any time, even sua sponte, by the court. The minimum constitutional requirements for standing comprise three elements: (1) a concrete and particularized injury, (2) a causal connection between the injury and the defendant's actions, and (3) the injury must not result from the actions of an unrelated third party.

To establish federal jurisdiction, a plaintiff must demonstrate a concrete injury that is likely to be redressed by a favorable court decision, rather than merely speculative harm. The burden of proof lies with the plaintiff, who must satisfy Article III standing requirements to enable the court to hear the case; without this standing, the court lacks subject matter jurisdiction and must dismiss the case. Jurisdiction is fundamental, as it empowers the court to declare the law, and once it ceases, the court's only role is to announce dismissal.

Additionally, federal appellate courts have a duty to ensure both their own jurisdiction and that of lower courts when reviewing cases. A notable principle is that if no named plaintiff in a class action establishes a case or controversy, then no individual can seek relief on behalf of the class. Each named plaintiff must show personal injury, not just injury to unnamed class members, as standing requirements apply equally to class actions. Importantly, a plaintiff cannot gain standing through the injuries of others; they must share the injury they claim. Although class representatives must possess standing, a class member can still participate in the class action even if the representative's claim has expired.

Class representatives must maintain individual standing upon class certification, but they can still represent a class even if their individual claims become moot. While plaintiffs may demonstrate statutory standing, this does not equate to constitutional standing. Courts have acknowledged that a plan participant can have Article III standing to seek injunctive relief related to ERISA's disclosure and fiduciary duties without proving individual harm. In Horvath v. Keystone Health Plan East, the Third Circuit affirmed that ERISA grants participants certain rights that allow them to seek injunctions without showing actual harm. This perspective is supported by ERISA's objectives of deterring fiduciary misdeeds, which promotes broad standing for participants.

However, claims for restitution or disgorgement under ERISA require plaintiffs to demonstrate individual loss to satisfy constitutional standing. In Horvath, while the plaintiff had standing for injunctive relief, she lacked standing for restitution as she did not allege personal injury from the breach. Statutory provisions cannot override constitutional standing requirements, as established in Raines v. Byrd, and the Eighth Circuit has similarly ruled that a direct injury must be pleaded to assert claims on behalf of an ERISA plan.

No constitutional standing was established for the plaintiffs because their alleged loss did not result in actual injury to their interests in the ERISA plan. The court emphasized that Article III limits judicial power and should prevent participants or beneficiaries who have not suffered an actual injury from enforcing fiduciary duties on behalf of the plan. Throughout the litigation, the issue of standing was raised multiple times, particularly concerning Janazzo's failure to demonstrate a relationship between her plan and Medco. The District Judge did not rule on the plaintiffs' Article III standing regarding the class action or the Settlement Agreement. Despite recognizing that Janazzo's inability to provide evidence could lead to dismissal, the Judge allowed the cases of the four individual plaintiffs to continue. In subsequent proceedings, the plaintiffs argued they had standing based on statutory grounds under ERISA, but the court clarified that statutory standing does not replace the need for constitutional standing. When the issue was revisited, the District Judge acknowledged that the plaintiffs might have derivative statutory standing but questioned Janazzo's constitutional standing, suggesting that opting out of the settlement weakened any claim of grievance. The Judge took the arguments under advisement without issuing a formal ruling on standing.

Standing issues remained unresolved when the District Judge provisionally approved the class on July 31, 2003, with Janazzo and the Individual Plaintiffs as certified class representatives. On December 9, 2003, Plaintiffs’ counsel indicated in a Joint Declaration that the named Plaintiffs risked dismissal due to questions about their standing, citing concerns that participants lacked the ability to sue for the benefit of Plans without showing direct injury. Objections regarding standing were reiterated on December 11, 2003. By May 25, 2004, when final approval for class certification and settlement was granted, the District Court had yet to rule on standing.

Serious doubts persisted regarding the Individual Plaintiffs' ability to demonstrate that Medco's alleged misconduct resulted in injury to themselves rather than solely to the Plans. The Plaintiffs’ claims primarily suggested that any harm stemmed from increased costs to the employer Plans, with no clear evidence of individualized injury, particularly for those paying flat co-pays. Only participants with percentage coinsurance could potentially demonstrate harm due to Medco's practices. Additionally, the Individual Plaintiffs failed to show injury from Medco's alleged failure to pass on formulary rebates or from wrongful disclosures.

Questions also arose about Janazzo's standing as a Plan trustee, as he did not produce a signed contract with Medco or a third-party administrator, and Medco claimed no record of providing services to Janazzo's Plan. Consequently, he could not show injury from Medco's actions. In contrast, the trustees of the Blumenthal Plan appeared to have standing and were suitable named plaintiffs during the consolidation and class certification, although the Class Notice indicated that the Blumenthal Plan intended to opt out or object to the Settlement Agreement.

The trustees of the Blumenthal Plan were not parties to the class action at the time of the final judgment that certified the class and approved the Settlement Agreement. Unresolved factual and legal issues regarding the Article III standing of the Plaintiffs remain in the District Court, which should address these jurisdictional questions first. The appellate court cannot consider additional issues—such as the motion for intervention, class certification, objections to the Settlement Agreement, or the fairness of attorney fees—until the jurisdictional question is resolved. The appellate court remands the case to the District Court to decide on Article III standing, allowing any party to restore jurisdiction to the appellate court within thirty days after the District Court's decision. The judgment of the District Court is vacated for further consideration consistent with this opinion. Additionally, notes clarify previous procedural orders and provide context on the nature of insured and self-funded plans, as well as information about Medco, a significant pharmaceutical benefit management company.

Twelve additional legal actions against Medco have been consolidated in the Southern District, all alleging breaches of fiduciary duties related to employee benefit plans under ERISA. Medco provides a standardized Preferred Prescriptions Formulary to healthcare providers and plan members to promote the use of preferred drugs, although not all plans employ this formulary. The law firm Abbey Gardy initially represented the plaintiff class, which includes Genia Gruer, Walter Green, Mildred Bellow, Elizabeth O'Hare, and Marissa Janazzo. Subsequently, they retained Boies, Schiller, Flexner to coordinate efforts on their behalf.

Pharmacy Benefit Managers (PBMs) like Medco are favored by health benefit payors, such as CareFirst, due to their cost-management strategies, including negotiated drug discounts and various drug utilization management programs. The Settlement Agreement clarifies that Third Party Administrators (TPAs) are generally excluded from the class, except when acting as plan sponsors, in which case they are included solely in that capacity.

The District Court noted that Ms. Cahn played a pivotal role in formulating the ERISA liability theory central to the complaints, having brought this concept to her prior law firm, Abbey Gardy. She was responsible for litigating the cases while at Abbey and was compensated for her work there. After leaving the Boies firm, Ms. Cahn continued litigation on behalf of a specific client who opted out of the class action settlement, and per the Court's directive, she was granted access to settlement documentation for review prior to finalization. Additionally, the District Judge appeared to support the notion that statutory standing allows beneficiaries to sue.

Beneficiaries have a potential "derivative right" to sue under ERISA, as referenced in the litigation concerning Medco Health Solutions Inc. However, the District Judge did not address constitutional standing in the case. The amended Settlement Agreement acknowledges that Merck and Medco have engaged in prohibited transactions under ERISA, resulting in damages to their clients. The Class Notice outlines allegations against Medco for breaching its fiduciary duties under ERISA in multiple ways:

1. Medco allegedly favored Merck's products in formulary decisions, prioritizing profits over the interests of the employee benefit plans (Plans).
2. It is claimed that Medco developed programs to incentivize pharmacists and physicians to switch beneficiaries to Merck's medications, potentially increasing costs for the Plans.
3. Medco allegedly entered contracts with drug manufacturers that disproportionately benefited Merck, harming the Plans’ financial interests.

Furthermore, the plaintiffs argue that Medco, as an ERISA fiduciary, is responsible for accurate communication and disclosures to the Plans and their beneficiaries, asserting that it breached this duty through misrepresentations and omissions of material information. 

Lastly, the Class Notice indicates that the plaintiff plan in the Blumenthal action may either opt out of or contest the Settlement Agreement.