Today the Second Circuit solved a possible conflict between different kinds of employee welfare benefit plans by carving out a sub-class.
Merck-Medco contracted to manage pharmaceutical benefits for the plans and their members. The plans alleged that Merck-Medco breached fiduciary duties under the Employee Retirement Income Security Act of 1974 by favoring itself (and its drug-making parent) at the expense of the plan beneficiaries.
The district court approved a $42.5 million settlement and plan of allocation, certified a class under Rule 23(b)(3), and awarded attorneys’ fees. But several plans opted out of the class, and others filed objections. The objectors argued that some plans suffered bigger losses because they bore the risk of drug price increases whereas other plans passed that risk on to others. They also asserted that the plan of allocation didn’t adequately address the disparity.
The district court rejected their points, but the Second Circuit didn’t. Although upholding the settlement and the fee award, the court concluded that the potential conflict warranted creation of a sub-class consisting of plans that directly paid for increases in drug prices. It also directed the district court to reconsider the allocation plan. Central States Southeast and Southwest Areas Health & Welfare Fund v. Merck-Medco Managed Care, L.L.C., No. 04-3300 (2d Cir. Oct. 4, 2007).