The US Supreme Court issued a unanimous decision on April 17, 2025 that could have a lasting impact on retirement plan litigation. The decision in Cunningham v. Cornell University clarifies that when plaintiffs bring prohibited transaction claims under ERISA section 406(a), they are simply required to allege that a prohibited transaction has occurred. They have no obligation to address potential exemptions that may apply at the pleading stage of litigation. Instead, exemptions are affirmative defenses that must be raised by the defendant.
As a result, plaintiffs claiming that excessive fees were paid to service providers, among other claims, may now find it easier to defeat motions to dismiss and reach the discovery stage of litigation, which is costly for plan sponsors. The ruling likely gives plaintiffs an advantage and could increase the frequency of settlements between plaintiffs and plan sponsors.
Case Background
ERISA section 406(a) prohibits plan fiduciaries from entering into certain “prohibited transactions” with parties-in-interest that have the potential to injure an ERISA plan. This includes, under ERISA section 406(a)(1)(C), the furnishing of goods, services or facilities between the plan and a party in interest. ERISA section 408 contains a number of potential exemptions to the prohibited transactions under section 406(a), including a broad exemption under section 408(b)(2)(A) allowing a party-in-interest to provide services as long as the services are necessary for plans to operate and the compensation for such services is reasonable. Plan fiduciaries rely heavily on the ERISA section 408(b)(2)(A) exemption to hire service providers such as third-party recordkeepers.
Cornell University sponsors two 403(b) retirement plans and retained two recordkeepers to administer the plans, both of which were compensated through asset-based recordkeeping fees. Plaintiffs alleged that the plans’ fiduciaries had engaged in prohibited transactions under ERISA section 406(a)(1)(C) by paying the recordkeepers substantially more than reasonable recordkeeping fees. In dismissing the claim, the district court held that plaintiffs must allege “some evidence of self-dealing or other disloyal conduct” instead of merely pleading the elements of section 406(a)(1)(C). The Second Circuit affirmed the district court’s dismissal, but with a different rationale. Splitting from the Eighth Circuit, it held that in order for an ERISA section 406(a)(1)(C) claim to survive a motion to dismiss, the plaintiffs must affirmatively allege that the exemption under ERISA section 408(b)(2)(A) does not apply. The court reasoned that otherwise, a plan sponsor could be sued any time it hired a service provider. The Eighth Circuit had concluded that plaintiffs must only plead the elements of a prohibited transaction (i.e., that a service agreement exists) for a claim under ERISA section 406(a) to survive a motion to dismiss.
The Decision
In resolving the circuit split, the Supreme Court reversed the Second Circuit’s ruling and reasoned that there is no statutory basis for requiring a plaintiff to plead elements in addition to those specified in ERISA section 406(a). The Court held that plaintiffs seeking to bring a section 406(a)(1)(C) claim only need to allege that a plan fiduciary engaged in a prohibited transaction—they are not required to plead that a section 408 exemption is unavailable.
Justice Sotomayor wrote the opinion, which focused on the plain text of section 406(a)(1)(C). The Court outlined the three elements of a claim, quoting the statute: it prohibits fiduciaries from “(1) ‘causing a plan to engage in a transaction’ (2) that the fiduciary ‘knows or should know … constitutes a direct or indirect … furnishing of goods, services or facilities,’ (3) ‘between the plan and a party in interest.” The opinion focused on the statutory construction of ERISA sections 406(a)(1)(C) and 408(b), noting that the exemptions outlined in section 408(b) are written “in the orthodox format of an affirmative defense” with the exemptions separate from the prohibitions in section 406(a). The opinion went on to note that there are twenty-one potential exemptions listed in section 408, and it would be unreasonable for a plaintiff to demonstrate that none of them apply.
The Court recognized Cornell’s concerns about the possibilities for meritless litigation if plaintiffs are not required to address the potential applicability of an exemption at the pleading stage, but noted that these concerns could not overcome the clear statutory language of ERISA section 406(a). Instead, the Court identified the existing tools district courts have at their disposal to screen out frivolous claims, including (1) requiring plaintiffs to file a reply under Federal Rule of Civil Procedure 7, specifying factual allegations that the section 408(b)(2)(A) exemption does not apply, (2) expediting or limiting discovery to mitigate unnecessary costs, (3) dismissing claims that fail to identify a specific injury, (4) imposing Rule 11 sanctions against plaintiffs and their counsel where an exemption obviously applies, and (5) requiring plaintiffs to pay attorneys’ fees.
The Cunningham v. Cornell decision does not change the scope of ERISA prohibited transactions. However, it does simplify the pleading requirements necessary for plaintiff Section 406(a) claims to survive a motion to dismiss. As a result, plan sponsors could incur higher litigation defense costs, increasing incentives to settle claims, including those with little merit.
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