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Beth Bar

New York Law Journal

10-11-2007

A federal appeals court in Manhattan has ordered a trial judge to reconsider his certification of a class and his approval of a $42.5 million settlement agreement in an action brought under the Employee Retirement Income Security Act (ERISA).

Second Circuit Judge Roger B. Miner wrote the opinion. Second Circuit Judge Rosemary S. Pooler and Eastern District of New York Judge Frederic Block, sitting by designation, joined in the ruling.

This is the second time the 2nd Circuit has reversed Judge Brieant's determination in the case. In 2005, the appeals court vacated the judge's approval of the settlement, and ordered him to consider whether certain of the plaintiffs, who contracted directly and indirectly with Merck-Medco Managed Care to receive pharmacy benefit management services, had standing.

The plaintiffs allege that the company breached its fiduciary duties under ERISA by: managing lists of preferred prescription drugs to favor the products of its parent company, Merck, over competing drugs; implementing programs that were intended to increase the sale of Merck drugs; and entering into drug purchase contracts with pharmaceutical manufacturers that were favorable to it but more costly to the plans.

They also accused Merck-Medco of "including the effective transfer of Plan assets to Merck through drug purchase agreements with Merck negotiated by Medco" and of failing to disclose to the plans that it was not acting in their best interests, but rather acting to benefit Merck.

On July 31, 2003, Brieant granted preliminary approval of the settlement agreement and of the plaintiffs' motion for certification.

At the ensuing hearing to determine the fairness of the agreement, self-funded plans (plans that paid the entire cost of prescription drugs directly to Merck-Medco and which as a result carried the direct risk of higher drug costs) asserted, among other arguments, that only a self-funded plan or sponsor could adequately represent their interests. Other plaintiffs pay premiums to insurance companies, which mitigates their risk.

Brieant, however, in a May 2004 decision said that no such conflict of interest existed.

"The same legal theory underlies all [c]lass [m]embers' claims, that Medco violated ERISA in exercising its discretionary authority to negotiate with drug manufacturers on behalf of its [P]lan sponsors, and in its control over the formularies and therapeutic drug interchange program," the judge said in In re: Medco Health Solutions, Inc., Pharmacy Benefits Mgmt. Litig., 03 MDL 1508.

Central States Southeast and Southwest Areas Health and Welfare Fund, Sweetheart Cup Co., Iron Workers Tri-State Welfare Fund, attorney Linda J. Cahn, Carefirst Blue Cross Blue Shield, Northwest Airlines Prescription Plan, and a number of individual plaintiffs and fiduciaries plaintiffs appealed Brieant's decision to the 2nd Circuit.

On appeal, the circuit did not reach the merits of the case because it concluded that the threshold question of Article III standing of the settling class plaintiffs was insufficiently established. Accordingly, it remanded to the district court to resolve the issue. The appellate court, however, retained jurisdiction pursuant to United States v. Jacobson, 15 F.3d 19 (2nd Cir. 1994).

'ANTAGONISTIC INTERESTS'

On remand, Judge Brieant permitted the parties to submit additional discovery to further develop the record as to the issue of the plaintiffs' standing. In an Aug. 10, 2006, decision, he determined that several individual plaintiffs possessed standing, a ruling the circuit did not contest.

However, the circuit was persuaded by the reiterated argument of self-funded plans that they were entitled to independent representation.

Judge Miner wrote that the "antagonistic interests" of the self-funded plans should be adequately and independently represented. As a result, he ordered Brieant to certify a subclass encompassing those plaintiffs.

"While we agree with the District Court that the Plans advanced similar theories of liability against Medco predicated on the same or similar facts, we are persuaded by the challenges to class certification raised by the Self-Funded Plans based on the nature of their relationship with Medco," the circuit said.

Miner noted that "only self-funded Plans assumed the direct risk of absorbing any increases in prescription drug costs that were caused by Medco's conduct."

The circuit also directed Brieant to take another look at the allocation of proceeds under the settlement, which would give insured plaintiffs 55 percent of the total award.

On remand, Brieant must now appoint attorneys for the self-insured plans. Counsel for this subclass and counsel for the insured plans will likely negotiate how the settlement should be allocated between them.

Stephen J. Herman of Herman, Herman, Katz & Cotlar in New Orleans, who represents an individual plaintiff, said in an interview that the self-funded plans, which were injured "far more than the insured plans," will likely receive greater recovery than the insured plans.

Kenneth M. Kramer represents Medco Health Solutions, Merck & Co., Merck-Medco Managed Care and Medco Health Solutions. A call to Kramer was not immediately returned.

In addition to Herman, the plaintiffs are represented by the following firms: Coleman Law Firm; Pavalon, Gifford, Laatsch & Marino; Robins, Kaplan, Miller & Ciresi; Foley & Lardner; Linda J. Cahn, a solo practitioner; Abbey Spanier Rodd & Abrams; Quinn Emanuel Urquhart Oliver & Hedges; and Boies, Schiller & Flexner.