Cunningham v. Cornell University, No. 23-1007 (U.S. April 17, 2025).
The Supreme Court issued its opinion in Cunningham v. Cornell University, on April 17, 2025, and held that plaintiffs claiming a qualified retirement plan paid excess or unnecessary fees to service providers only need to plead the basic elements of a prohibited transaction. This forces plan administrators to assert affirmative defenses and demonstrate that only reasonable compensation was paid. This makes it easier for plaintiffs to sue plans and survive early motions to dismiss. It puts any plan at risk of being sued and being forced to go through expensive litigation and discovery to prove it did not engage in prohibited transactions.
Per the Supreme Court's decision, ERISA does not require a plaintiff to allege or demonstrate that services a plan obtained were unnecessary or overpriced or that there was any self-dealing or disloyal conduct by plan fiduciaries. The decision does little to limit or control a growing trend of litigation against plan fiduciaries who may or may not have violated ERISA or breached their fiduciary duty. In fact, it is likely to result in more litigation against innocent fiduciaries and force them into expensive settlements to avoid the even greater expense and uncertainty of defending themselves through costly litigation.
The Supreme Court explained that the way Congress structured ERISA, the burden to demonstrate a transaction was proper falls exclusively on the fiduciary, and it is not a plaintiff's burden to plead that the transaction was improper. This puts plans at risk of such litigation because most qualified plans engage third parties to perform recordkeeping or other services. That is, a plan simply engaging a service provider engages in a prohibited transaction unless the plan can demonstrate the services were necessary and not overpriced. As Justice Alito explained in his concurring opinion, "all that a plaintiff must do in order to file a complaint that will get by a motion to dismiss . . . is to allege that the administrator did something that, as a practical matter, it is bound to do."
The Supreme Court's decision resolved a split between different federal circuit courts and clarified how ERISA's prohibited transaction sections (29 U.S.C. §§ 1106 and 1108) interact. Section 1106(a)(1)(C) prohibits fiduciaries from (1) "caus[ing 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." Any entity or individual providing services to the plan is a "party in interest." Per the Supreme Court's decision, the language in Section 1106 prohibits payments from a plan to any entity or individual providing services to a plan. This shifts the burden to fiduciaries to plead affirmative defenses set forth in Section 1108, which provides exemptions to prohibited transactions. Specifically, Section 1108 allows a plan to engage providers for services necessary for the establishment and operation of the plan, if no more than reasonable compensation is paid.
Plan fiduciaries and service providers were hopeful the Supreme Court might find a way to limit the growing prohibited transaction litigation trend. The Supreme Court, however, explained it was bound to the plain language of ERISA as Congress designed it. Nevertheless, the Supreme Court explained courts have other methods for preventing unwarranted litigation against plans until Congress addresses the issue. Those options include using Federal Rule of Civil Procedure 7, which is rarely used but requires a plaintiff to submit a reply to a defendant's answer to a complaint. In this context, Rule 7 would require that a plaintiff's reply set forth "specific, nonconclusory factual allegations" showing the Section 1108 exemption(s) does not apply.
The Supreme Court also suggested district courts determine, as a preliminary matter, whether a plaintiff has suffered an actual injury. Article III of the Constitution requires a plaintiff to have suffered an injury to have standing to bring a complaint. As the Supreme Court explained, courts must "dismiss suits that allege a prohibited transaction occurred but fail to identify an injury."
The Supreme Court further explained that courts can limit discovery "to mitigate unnecessary costs," issue sanctions against plaintiffs or their attorneys for litigation brought without any good faith basis there was a prohibited transaction, and utilizing ERISA's fee shifting provision for plans to recoup their attorneys' fees and costs from plaintiffs who bring frivolous cases.
Despite the options courts have to limit such litigation, the Supreme Court's ruling will likely increase cases brought against plan sponsors and fiduciaries alleging prohibited transactions and excessive fees. More than ever, ERISA fiduciaries should ensure they have implemented strong procedures and well-documented processes for fiduciary decision making. Those include such things as the process of soliciting RFPs, selecting and retaining service providers, scrutinizing service provider agreements, and monitoring service provider performance and the fees their plans pay. Regular committee or board of trustee meetings, established procedures for selecting providers, and robust meeting minutes and materials are good practices that help ensure a plan does not engage in unnecessary or overpriced transactions. They also enable fiduciaries to better defend themselves against such allegations under this pleading standard.
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