Supreme Court debates ERISA exemptions in Cunningham v Cornell University

31 January 2025 4 min read

By Jonathon Rose, Emily Heck and Brian Benjet

At a glance

Cornell is facing class action due to allegations that its retirement plan paid unreasonable record keeping fees.
The key issue is what plaintiffs must allege to state a plausible claim for a prohibited transaction under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
Cornell employees argue that any transaction with a service provider is presumptively prohibited, shifting the burden to the fiduciary to prove an exemption.
Cornell contends that simply showing a transaction with a service provider is insufficient; plaintiffs must allege facts suggesting the transaction was unreasonable or unnecessary.
Some Justices seem inclined to agree with the employees that exemptions should be affirmative defenses, while others express concerns about the implications of this position.

The US Supreme Court heard an argument on Wednesday, January 22, 2025 from Cornell University and its employees over dismissal of a class action alleging that Cornell University’s retirement plan paid unreasonable record keeping fees.

Case background and ERISA

The lawsuit, Cunningham v Cornell University, alleged various breaches of fiduciary duty and prohibited transactions under ERISA. In particular, the Cornell employees alleged that payments made to the plan’s service providers – the Teachers Insurance and Annuity Association of America and Fidelity Investments Inc. – constituted prohibited transactions because the fees charged for investment management and recordkeeping were too high. The district court granted Cornell’s motion to dismiss the prohibited transaction claims, and the Second Circuit Court of Appeals affirmed the dismissal.

Key question for the Supreme Court

The case presents the following question for the Supreme Court: What must a plaintiff allege to state a plausible claim for a prohibited transaction under ERISA? The Cornell employees are asking the Supreme Court to determine the relationship between two sections of ERISA: Section 406, which sets out transactions that are prohibited under the statute, and Section 408, which lists exemptions to those prohibitions. The Supreme Court must decide whether these exemptions should be addressed as elements in a plaintiff’s complaint, or whether the exemptions are affirmative defenses to be proven by the plan fiduciary.

Arguments from Cornell University employees

The Cornell employees argue that Section 406(a) of ERISA provides that any transaction for services between a plan and a 'party in interest' to the plan is presumptively prohibited. In other words, the existence of a transaction or payment with a service provider alone is sufficient to allege a prohibited transaction, and the burden would then shift to the fiduciary to show that an exemption under Section 408 is satisfied.

Cornell University's counterarguments

By contrast, Cornell argues that merely showing that a plan entered a contract with, or made payments to, a party in interest for services to the plan is insufficient to allege a plausible prohibited transaction claim. If this were the case, nearly every service provider arrangement under an ERISA plan would be subject to litigation. Cornell notes that Section 406 explicitly references the exemptions in Section 408, meaning the prohibitions in Section 406(a) of ERISA cannot be read in isolation from the exemptions in Section 408. Thus, if employees seek to prove that a transaction was prohibited, they must allege facts sufficient to suggest that the plan’s recordkeeping arrangements were unreasonable, unnecessary, or otherwise a prohibited transaction. This could include allegations such as the fact that a lower-cost alternative existed, or that the services at issue were unnecessary.

Supreme Court Justices' perspectives

During oral argument, Justices Ketanji Brown Jackson, Sonia Sotomayor, and Elena Kagan seemed inclined to agree with the petitioners that the Section 408 exemptions to prohibited transactions should be affirmative defenses, and not elements of pleading a Section 406 claim. Justice Brown Jackson focused on the “information asymmetry” between participants and the plan, given that plaintiffs do not have access to the relevant information until discovery, and also questioned whether a court could convert a motion to dismiss to a motion for summary judgment if the fiduciary attached relevant documents (such as the service provider contract), or a court could conduct limited discovery as a way to alleviate concerns that more litigation will ensue.

Justices Brett Kavanaugh and Samuel Alito expressed their concerns about the ramifications of the petitioners’ position, suggesting it “seems nuts” to plead a prohibited transaction simply due to the existence of a recordkeeping arrangement. Justice Kavanaugh said that accepting the petitioners’ position would be an “automatic ticket to pass go” and get to discovery, summary judgment; the litigation would substantially increase. Justice Alito suggested that petitioners’ position would be tantamount to “closing your eyes to the realities of litigation,” because the scope of the decision would impact all employers.

Implications of the case and Circuit split

This case provides the Supreme Court with an opportunity to resolve an increasing circuit split on the pleading standard for a prohibited transaction claim. In particular, the Eighth and Ninth Circuit Courts of Appeals permit a prohibited transaction claim to proceed by simply alleging that there was a transaction with any party in interest. Conversely, the Third, Seventh, and Tenth Circuits have declined to follow such a literal reading of the statute. These circuits require a showing beyond the mere existence of a service provider relationship, such as self-dealing, fraud, or an intent to benefit the party in interest.

Based on the Circuit split, and the arguments presented, it would be a surprise for the Court to adopt the petitioners’ liberal pleading standard because it would almost certainly lead to a significant increase in prohibited transaction claims litigation, involving agreements for necessary services that comply with the statutory exemption in Section 408(b)(2).