On April 17th, 2025, the United States Supreme Court issued a unanimous opinion in Cunningham v. Cornell University establishing a plaintiff-friendly pleading standard applicable to prohibited transaction claims under the Employee Retirement Income Security Act (“ERISA”). The Court’s holding makes it significantly easier for plaintiffs to defeat early-stage motions to dismiss, engage in costly discovery, and extract a settlement as to an alleged prohibited transaction claim.
Background
ERISA bars certain prohibited transactions between a plan and a related party, i.e. a “party-in-interest,” to prevent conflicts of interest. However, there are several exemptions that allow plans to interact or conduct business with a party-in-interest if specific requirements are met. In Cunningham, the plaintiffs accused Cornell’s retirement plans of engaging in prohibited transactions by paying excessive fees for recordkeeping and other administrative services. The University responded that these transactions were exempt under ERISA Section 408(b)(2), which allows certain transactions with parties-in-interest if the following three (3) requirements are met: 1) the service is necessary for the establishment and operation of the plan, 2) such service is furnished under a reasonable contract or arrangement, and 3) compensation paid for the service is reasonable. The district court dismissed the participants’ transaction claims, and the Second Circuit affirmed the dismissal, ruling that the plaintiffs must plead and prove the absence of such exemptions in order to state a claim under ERISA Section 406(a)(1)(C).
The Supreme Court’s Ruling
The Supreme Court reversed the Second Circuit’s ruling, holding that in order to state a claim under ERISA Section 406, plaintiffs need only allege the elements contained in Section 406, and do not need to plead the absence of an exemption. According to the Court, whether an exemption applies is an “affirmative defense” that the defendant must argue, and not something a plaintiff must plead to get to the next step of the case. In other words, the burden falls on the plan fiduciaries to prove that they have satisfied all three (3) requirements under ERISA Section 408(b)(2), and the plaintiff is not obligated to show that the defendant has failed to satisfy these criteria at the pleading stage. The Court primarily based its decision on the fact that exemptions are in a separate section of ERISA from the ban on certain transactions.
In reaching its decision, the Court acknowledged that its ruling had the potential to increase meritless litigation and harm plans, identifying it as a “practical” and “serious” concern. To address this concern, the Court highlighted the following “tools” that district courts could use to help screen meritless claims:
- Federal Rule of Civil Procedure 7, which permits a court to order plaintiffs to file a detailed response to a defendant’s answer;
- Finding that the plaintiff suffered no harm because of the exemption, and therefore the plaintiff has no standing to bring the case;
- Ordering targeted early discovery; and
- Awarding the cost of litigation to the plan if the claim is found to be meritless because an exemption exists.
Impact and Recommendation
This ruling makes it easier for participants to sue plans for everyday plan transactions with their service providers and survive a motion to dismiss in the early stages of litigation. While the effectiveness of the Court’s recommended tools to protect employers and plan fiduciaries remains to be seen, plan sponsors should take immediate steps to minimize litigation risk by engaging in compliant and well-documented actions and plan administration processes, especially relating to the selection of third-party service providers.
If you have any questions regarding this decision and its impact, please contact the Labor & Employment Group at Lindabury, McCormick, Estabrook & Cooper, P.C.