Louisiana Sheriffs’ Pension and Relief Fund v. CVS Health Corporation

Background

This putative class action was brought under the Private Securities Litigation Reform Act by purchasers of CVS common stock during the period identified in the opinion. The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, which prohibit material misstatements or omissions connected to securities transactions. They also asserted control-person claims under Section 20(a) against the individual defendants.

The plaintiffs alleged that CVS’s Health Care Benefits segment received substantial savings from prior-authorization practices and artificial-intelligence tools used in reviewing Medicare Advantage claims. According to the complaint, CVS publicly attributed its financial success mainly to lower utilization during the COVID-19 pandemic, strong underlying performance, and other factors. The plaintiffs also alleged that CVS represented that its 2024 financial guidance fully accounted for known utilization trends, even though the guidance allegedly relied on 2020 data and did not account for the effects of phasing out certain artificial-intelligence tools.

The defendants moved to dismiss the complaint for failure to state a claim. On that type of motion, the court generally assumes properly pleaded factual allegations are true and asks whether they plausibly show a right to relief. The opinion considered the complaint and materials that could be reviewed at this stage.

Theories the Court Rejected

The court held that the plaintiffs had not pleaded actionable misstatements based on CVS’s alleged compliance with Medicare regulations. Securities-fraud claims based on an underlying legal violation must identify the law allegedly violated and explain how the violation occurred with particularity. The court found that the allegations that CVS subjected many claims to prior authorization or denied many requests did not, without more, show that CVS violated Medicare regulations.

The court also rejected the allegations concerning CVS’s statements that it was committed to “responsible” artificial intelligence. It found that the plaintiffs had not identified a commonly accepted meaning or objective measure for “responsible” in this context. The statements therefore conveyed no meaningful objective information on which an investor could reasonably rely.

The court separately rejected the theory that CVS’s 2024 guidance was misleading because it used stale 2020 data. The court assumed, for purposes of the motion, that the plaintiffs adequately alleged the use of outdated data. But it held that the complaint did not adequately plead scienter, meaning an intent to deceive or conduct so reckless that it approached intentional wrongdoing, by Karen S. Lynch or Thomas F. Cowhey. The former employees cited by the plaintiffs had not personally interacted with those defendants, and their allegations about management knowledge were too vague, speculative, or unsupported by details about the relevant reports and presentations.

Theories the Court Allowed to Proceed

The court held that the plaintiffs adequately pleaded that certain statements were misleading half-truths. Those statements included representations that CVS’s forecasts fully accounted for known utilization trends and statements identifying particular factors as the primary drivers of CVS’s financial success.

The court reasoned that, once CVS identified specific causes of its financial performance, it could not allegedly omit material information necessary to make those statements clear and complete. The plaintiffs plausibly alleged that CVS’s prior-authorization practices and related artificial-intelligence tools were significant contributors to cost savings, that the tools were being phased out, and that ending or reducing their use could affect utilization, the medical benefits ratio, and overall financial performance. The court emphasized that this theory did not require the plaintiffs to prove that the artificial-intelligence practices were illegal.

The court also held that the complaint adequately alleged scienter as to Lynch, Shawn M. Guertin, and Cowhey for these omission theories. It cited allegations about their positions, public statements concerning Medicare Advantage and CVS’s profitability, their involvement in financial reporting and forecasts, and information indicating the scale of the savings from the challenged practices. The court further held that the complaint adequately alleged loss causation, meaning a plausible connection between the alleged fraud and the investors’ losses, based on the May 2024 financial results and the October 2024 Senate report.

Disposition

Judge Margaret M. Garnett concluded that the defendants’ motion to dismiss was granted in part and denied in part. The court rejected the theories based on alleged noncompliance with Medicare regulations, “responsible” artificial-intelligence statements, and the alleged use of stale data in the 2024 guidance. It allowed the claims based on alleged omissions about the role, financial impact, and phaseout of CVS’s artificial-intelligence and prior-authorization practices to proceed at the pleading stage.