This past summer, Encore’s Fid Guru Blog published the article “Two District Courts Allow Tobacco Surcharge Cases to Advance, Establishing Troubling Precedents for both Tobacco Surcharge Cases and Other ERISA Cases.” In this article, we highlighted separate federal district court rulings allowing two “tobacco surcharge” lawsuits to survive the motion-to-dismiss, and forecasted that these rulings would lead to an increase in the number of similar tobacco surcharge lawsuits being filed. We also predicted that rulings to survive the motion to dismiss would lead to settlements, just as many class fiduciary lawsuits against defined contribution plans have similarly settled once surviving the motion to dismiss.
Unfortunately, our predictions have proven to be accurate. We are still compiling data for the entirety of 2025, but through the first three quarters we tracked as many tobacco surcharge lawsuits filed as we did during the entire 2024 calendar year. This increased frequency shows that plaintiff law firms will continue to file these lawsuits at a rapid pace, as long they can find individual plan participants to represent the impacted class and as long as the filed lawsuits continue to survive the motion to dismiss.
During the second half of 2025, since our initial article was published, district courts have continued to deny motions to dismiss tobacco surcharge lawsuits, siding with the plaintiffs in all but one of the cases we have monitored. While the specific results of these subsequent decisions are somewhat mixed, the trend of allowing these cases to move forward has continued. As discussed below, five of the six decisions allowed the suits to survive, either partially or fully, the motion to dismiss.
As we predicted, surviving the motion to dismiss has led several plan sponsors to settle rather than proceed to the resource-intensive and expensive discovery phase. Lucrative settlements are exactly what plaintiffs’ lawyers who are bringing these cases are looking for, as evidenced by the number of settlements compared to the number of trials.
What we did not predict, and quite frankly are surprised by, is both the speed with which some of these cases have settled and the high amounts they have settled for. For example, Bokma v. Performance Food Group, which survived the motion to dismiss in June, settled in October for just under $5 million. This timeframe of four months is much quicker than the typical timeframe to settlement of class fiduciary litigation against defined contribution plans. And it does not appear to be an isolated incident – we are aware of at least one other tobacco surcharge lawsuit that is discussed more below, Buescher v. North American Lighting, Inc., proceeding to settle in a similar timeframe. The Performance Food Group settlement also mirrors the nearly $5 million settlement of Ruiz v. Bass Pro Group, which was settled before the court ruled on the motion to dismiss, and which received final approval from the court earlier in 2025.
Another case in which a settlement agreement was reached only months after the class action complaint was filed in August 2024, and before the court could consider a motion to dismiss, was Smith v. U.G.N. The U.G.N. case settled for only $299,000, but it also covered a much smaller class of 430 members compared to approximately 5,500 members in the Bass Pro Group class.
So, we are seeing what we forecasted – increased class litigation driven by plaintiff law firms against ERISA health plans, with initial court rulings at the motion to dismiss stage favoring the plaintiffs. However, the settlement activity has occurred at an alarming pace and at an alarming level. Against that backdrop we have analyzed six rulings in the second half of 2025 and described our analysis below.
Background on tobacco surcharge rules
To level set, it is helpful to briefly review the tobacco surcharge rules. Pursuant to the HIPAA nondiscrimination rule, ERISA-covered group health plans may not discriminate against individual participants with respect to eligibility, contributions, or premiums based on a “health factor.” The relevant health factors include things like the individual’s health status, medical condition (including both physical and mental illnesses), claims experience, and medical history. People who use tobacco are addicted to nicotine, and addiction is a medical condition – and thus a health factor.
There is an exception to this rule for “wellness programs” that satisfy certain statutory and regulatory criteria. Employers who sponsor group health plans often take advantage of this “wellness program” exception in order to encourage their employees to live healthier lifestyles, with goals of improving employee health, reducing medical claims and limiting the incidence of chronic disease, among other things.
Wellness programs can take many forms, and only those that are connected to the terms of the individual’s participation in the group health plan are subject to the HIPAA nondiscrimination rules. For example, a typical smoking-cessation wellness program might impose different employee premium contribution requirements based on whether a participant is a smoker. Some plans might refer to the lower premiums paid by non-smokers as a “discount,” while others might refer to the higher premium paid by smokers as a “surcharge.”
The plan also must provide a “reasonable alternative standard” (RAS) – or a waiver of the otherwise applicable standard – to achieve the reward. For example, a smoker might be required to participate in a smoking cessation wellness program as an alternative to actually quitting smoking, in order to get the “full reward.” The regulations do not prescribe any specific RAS, but they do provide guidelines for determining what is reasonable. For example, the time commitment required must be “reasonable.” Additionally, if an individual’s personal physician concludes the plan’s standard is not medically appropriate for that individual, the plan must accommodate the physician’s recommendations.
Finally, the plan must give notice of the availability of a RAS in all plan materials that describe the terms of the wellness program. The regulations provide that the notice must also include a statement that recommendations by an individual’s personal physician will be accommodated. However, the regulations also make clear that information about the RAS and accommodating a physician’s recommendations is not required in plan materials that only mention the wellness program, without describing its terms.
The tobacco surcharge cases typically center on allegations regarding the adequacy of disclosure of this RAS, and what it means to offer the “full reward” (i.e., is there any requirement to retroactively refund any surcharges paid before an alternative standard was satisfied?). In addition to citing technical violations of the regulation’s requirements, the lawsuits generally claim that employers are violating their ERISA fiduciary obligations by administering non-compliant wellness programs and improperly collecting (and retaining) additional premium contributions from employees who use tobacco.
Key Takeaway #1: The almost nonexistent bar for plaintiffs to establish standing to bring tobacco surcharge cases continues.
In order to bring a claim in federal court, plaintiffs must establish that they have “standing” to sue. In other words, the plaintiff must show not just that the defendant engaged in actionable conduct under federal law, but also that they suffered an injury that is “fairly traceable to the defendant’s conduct” and that there is a remedy for that injury that can be awarded by the court. Standing is not merely a procedural hurdle; instead, it is a Constitutional requirement meant to prevent the courts from being overwhelmed by frivolous lawsuits, and to ensure that those who have actually been harmed by illegal conduct can gain timely access to the federal courts for redress.
Unfortunately, as we noted in our prior article highlighting the court rulings in Mehlberg v. Compass Group USA, Inc. and Bokma v. Performance Food Group Inc., the first two courts to address the standing issue in the context of these tobacco surcharge lawsuits have set a very low bar for plaintiffs. The key threshold issues were whether the plaintiffs had standing to sue, and whether the employers were acting as ERISA fiduciaries by virtue of administering allegedly non-compliant wellness programs. In both cases, the district courts sided with the plaintiffs on these issues.
The only allegations of harm or injury in the first two cases are related to the surcharge that the plaintiffs paid. Under the law, such a surcharge is perfectly permissible if it is pursuant to a wellness program that satisfies the relevant requirements, which include the availability of a properly disclosed RAS for having the surcharge waived. So, the lawsuits challenged the adequacy of the defendants’ smoking cessation wellness programs and the notices provided with respect to such programs.
However, the plaintiffs in both cases did not participate in the smoking cessation wellness program, which was the only way under the plan that they – as tobacco users – could have avoided the surcharge. The plaintiffs did not even allege that they wanted to participate in the smoking cessation wellness program. So, where is the connection between the alleged inadequacies of the wellness programs and the plaintiffs’ alleged injuries?
In both cases, the two courts found that by alleging that the surcharges were illegal, the plaintiffs sufficiently established standing. But the imposition of a surcharge only harms the plaintiffs if the plaintiffs wanted to participate in a legally sufficient smoking cessation wellness program and were prevented from doing so by illegal actions. Here the plaintiffs did not allege any interest in participating in a smoking cessation wellness program, hence they had no actionable injuries.
What has happened in the latest court rulings on the standing issue? With one exception, the trend of siding with the plaintiffs has continued:
- In Buescher v. North American Lighting Inc., Case No. 24-CV-2076 (C.D. Ill. June 30, 2025) the district court did not even address the issue of standing.
- In Chrinian v. The Travelers Companies, Inc., Case No. 24-cv-3956 (D. Minn. July 29, 2025) a district court rejected the employer’s motion to dismiss for lack of standing.
- In Fisher v. Gardaworld Cash Service Inc., Case No. 3:24-CV-00837 (W.D. N.C. August 28, 2025) the claims involve both smoking cessation and vaccination wellness programs. Citing Mehlberg, Bokma, and Travelers, but without otherwise engaging in any significant analysis, the district court concluded the plaintiffs have standing to sue because “they have alleged a concrete injury (their surcharge payments) that is traceable to [the employer’s] decision to impose tobacco and vaccine surcharges under a discriminatory ERISA plan, which can be redressed by a refund of the surcharge.”
- In Waggoner v. The Carle Foundation, Case No. 24-CV-2217 (C.D. Ill. September 16, 2025), the district court rejected the employer’s motion to dismiss for lack of standing. Citing Mehlberg and Bokma, the district court concluded the plaintiffs have standing because “A statutory right not to be charged causes a particularized injury that affects Plaintiff, and paying a fee that she should not have been charged is a concrete injury, not an abstract one that does not actually exist.”
- In Bailey v. Sedgwick Claims Management Services Inc., Case No. 2:24-cv-02749 (W.D. Tenn. September 26, 2025) the district court adopted the same position as the other courts discussed above regarding standing. Basically, regardless of whether the plaintiffs ever tried to leverage the alternative standard to avoid the tobacco surcharge, the court concluded “the Plaintiff has the right to not be charged an illegal surcharge in the first instance.”
- In Williams v. Bally’s Mgmt. Grp., LLC, Case No. 1:25-00147 (D. R.I. November 4, 2025), one of the most recent and most favorable decisions from the perspective of plan sponsors, the district court concluded the plaintiffs lacked standing to bring their fiduciary breach claims because they did not show any injury to the plan itself. (As the district court noted, it approached this issue differently than some other courts by analyzing it as a question of standing rather than one of what is required to state a claim under ERISA section 502(a)(2).)
The basic argument by employers challenging the plaintiffs’ standing in these suits is that the plaintiffs generally did not ever attempt to complete the alternative standard to avoid the surcharge, even though many acknowledged they were aware of the option – and of the consequences of not taking advantage. In the absence of any claim that the alleged violations by the employer prevented a participant from using the RAS to avoid the surcharge, the argument goes, there is no connection between the alleged misconduct and the harm – and thus the plaintiffs do not have standing to sue.
The plaintiffs have countered by arguing that a tobacco surcharge is not permissible under the HIPAA nondiscrimination rules unless all the requirements for the wellness program exception are satisfied. If the wellness program exception is not available for any reason, according to this argument, the tobacco surcharge is invalid – and the payment of the impermissible surcharge is the harm the plaintiffs have suffered that gives them standing to sue. The courts so far have agreed.
This highlights again the concern we expressed before about how the courts’ position on standing in these cases could be extended in different ways across other fiduciary litigation. For example, could an employee join an excessive fee lawsuit involving their employer’s 401(k) plan claiming that they should have received the employer match even though they weren’t contributing to the plan? Just like above, the only harm to this hypothetical employee is a foregone match they didn’t earn or try to claim.
Right or wrong, this appears to be the path most courts have chosen for analyzing the standing issue in tobacco surcharge litigation. If the courts instead insisted that only employees who actually tried to take advantage of the alternative standard had standing to sue, there would be far fewer tobacco surcharge lawsuits because most employees who try end up avoiding the surcharge (or earning the reward). Fewer class members typically leads to smaller settlements, which makes class action lawsuits far less attractive to the plaintiffs’ bar.
By letting any tobacco user sue, regardless of whether they tried to take advantage of the alternative, the courts have opened the door to an ongoing wave of tobacco surcharge litigation with no apparent end in sight.
Key Takeaway #2: Courts are finding reasons to let tobacco surcharge cases continue beyond the motion to dismiss stage, even if some courts dismiss the breach of fiduciary duty claims.
Five of the six court rulings since our last post have permitted questionable tobacco surcharge claims to survive a motion to dismiss, at least on certain grounds.
- The Buescher court allowed – without any real analysis – a challenge to the adequacy of the notice of the RAS, as well as a claim of breach of fiduciary duty based on offering a non-compliant wellness program, to continue. Less than six months later, on December 17, the parties filed a motion to stay, which indicates the parties are drafting a preliminary settlement agreement and are planning to file it no later than March 13, 2026.
- The Travelers case dismissed the plaintiffs’ breach of fiduciary duty claims because the plaintiffs did not “plausibly allege that the Plan suffered any losses from [the employer’s] alleged fiduciary breaches” as required by ERISA section 502(a)(2). The court also rejected the plaintiff’s claim that employers must offer more than one opportunity per year to satisfy the alternative standard and earn the “full reward.” However, the court refused to dismiss the plaintiff’s claim regarding the alleged failure of the smoking cessation program to adequately disclose that participants can, in some circumstances, involve their personal physician in setting a participant’s RAS.
- In Fisher, the district court agreed to dismiss the ERISA breach of fiduciary duty claims pursuant to ERISA section 502(a)(2) because the plaintiffs “have not plausibly alleged losses to the Plan.” However, the district court also allowed the case to move forward on claims relating to the alleged failure to adequately disclose the RAS.
- Carle allowed the breach of fiduciary duty claim to continue because the plaintiffs alleged – without offering any evidence – that the employer improperly retained the proceeds of the tobacco surcharge in its own general assets, rather than depositing them in a trust account (which is not required). Following a lengthy discussion, the court also allowed claims to move forward relating to the requirement to provide the “full reward” to those completing the RAS, but dismissed claims relating to the adequacy of disclosure of the RAS.
- Bailey found that an alleged failure to adequately disclose information about the option to involve a participant’s personal physician was sufficient to support a claim for a violation of the requirements for the wellness program exception. On the fiduciary breach claims, the district court followed the courts in Mehlberg and Bokma in finding plaintiffs had plausibly alleged the employer acted as a fiduciary with respect to assessing and collecting the tobacco surcharge and keeping the surcharge funds for its own benefit. The court also found that allegations of failing to monitor plan materials and communications for compliance with ERISA’s content requirements were sufficient to overcome a motion to dismiss. In terms of alleging harm to the plan, the court found that allegations of commingling the tobacco surcharge funds with general assets to enrich itself at the plan’s expense were sufficient.
The fact that seven out of the eight cases discussed here (including our prior article) survived a motion to dismiss is disheartening to say the least, and not just because there was no standing. There seems to be an ongoing failure by the courts to recognize the significance of a motion to dismiss. As Justice Alito observed in his concurrence in Cunningham v. Cornell,[1] “in modern civil litigation, getting by a motion to dismiss is often the whole ball game because of the cost of discovery.” Yet, for example, the court in Carle stated the following in denying a motion to dismiss:
The law in this area is unsettled. Therefore, the parties may reraise these arguments at a later stage in the proceedings where the record can be more fully developed and when the applicable procedural rules permit a more fulsome and searching analysis. See Giese, 2020 WL 12812484, at *7. The court may yet be persuaded to go in a different direction.
The court identified no factual issues that needed more development, nor any description of “applicable procedural issues” that might facilitate analysis. All they cited was an “unsettled” legal issue.
Also disturbing is that it isn’t even clear what private cause of action for noncompliance exists – other than perhaps pure injunctive relief — for a past HIPAA nondiscrimination rules disclosure violation, in the absence of an ERISA fiduciary breach or other actionable violation. As noted, some courts found no fiduciary breach but still allowed the case to move forward, without any explanation.
Some courts did identify minor disclosure violations. So, overall, what is the message for employers from these cases? The message is that a pro-wellness rule enacted by Congress is fraught with traps because (1) the plaintiffs’ lawyers have discovered this area of the law and are making millions of dollars, and (2) the courts are not doing their job in screening frivolous cases. The cases are victories for the plaintiffs’ attorneys, who – in spite of losing on major claims – know employers will often choose to settle instead of devoting additional resources to a lengthy and unpredictable litigation process.
Key Takeaway #3: Employers who lose on the motion to dismiss are more likely to settle than keep fighting, and the plaintiffs’ lawyers are the big winners.
Ironically, as noted, the one thing that might keep these cases from making it to the trial or appellate stage is the incentive employers have to settle if they fail to get the case dismissed.
Once the plaintiffs have overcome the motion to dismiss, employers often must choose between limiting their losses by settling the case or continuing into the uncertainty and cost that discovery and the rest of the litigation process entail. Regardless of whether they ultimately win or lose on the merits of the case, the unfortunate reality is that an early settlement often makes the most economic sense for the employer.
The details of the Bass Pro Group settlement help shine a light on why plaintiffs’ lawyers are so eager to bring these cases. Unlike Performance Food Group, Bass Pro Group reached the settlement agreement through mediation – which included written discovery and a “full day mediation” – before even getting to the motion to dismiss stage. Of the $4.95 million agreed upon maximum settlement amount, one-third ($1.65 million) plus almost $18,000 for costs and expenses goes directly to the plaintiffs’ attorneys. After another $40,000 is deducted for settlement administration expenses, a little less than $3.3 million will be available to divide among eligible class members, which includes all group health plan participants who paid a tobacco surcharge over a more 6.5-year period, from April 2018 through October 2024.
According to motions filed by the plaintiffs in support of the settlement agreement, the named plaintiff will receive $10,000. For other eligible class members, the plaintiffs’ attorneys estimate the “average per capita settlement check will be more than $580.” However, “some will be more and some will be less given that payments are allocated pro rata based on the amount of surcharges each class member paid during the relevant period.” Regardless of the settlement amount any class member actually receives, it clearly pales in comparison to the payout to the plaintiffs’ attorneys.
The same is true even for smaller settlements, such as the one in the U.G.N. case. There, the plaintiffs’ attorneys will be eligible to collect fees of almost $100,000 plus expenses. After accounting for any class representative service awards and other administrative expenses, a conservative estimate of the average per capita payment to class members is less than $500.
Key Takeaway #4: These lawsuits will almost certainly continue as long as initial court rulings are favorable for the plaintiff, and settlements are profitable for plaintiff law firms.
There are currently around 50 tobacco surcharge cases pending in the federal courts, and new ones are still being filed. The number of lawsuits filed increased from 2024 to 2025 and is likely to increase again in 2026.
Given the early success the plaintiffs’ attorneys have had overcoming motions to dismiss, and to obtain settlements without ever having to take any of these lawsuits to trial, there is no reason to expect anything but for more such suits to be filed.
[1] 604 U.S. 693 (2025)
