On April 17, 2025, the Supreme Court of the United States clarified the pleading requirements to bring a prohibited-transaction claim under the Employee Retirement Income Security Act of 1974 ("ERISA") in Cunningham v. Cornell Univ., 604 U.S., 2025 WL 1128943 (2025). Justice Sotomayor delivered the unanimous opinion of the Court, with Justice Alito writing a concurring opinion to which Justices Thomas and Kavanaugh also joined.
Resolving a circuit split on the issue, the Court held that plaintiffs need only allege each element of § 1106(a)(1)(C) to plausibly state a prohibited transaction claim; plaintiffs need not anticipate or negate any statutory exception that may apply to such a claim in their complaint. Id. at *8. Rather, such statutory exceptions are affirmative defenses for which the burden of proof rests with the defendant. Id. at *5.
ERISA categorically bars fiduciaries from (i) "caus[ing] the plan to engage in a transaction" (ii) that the fiduciary "knows or should know . . . constitutes a direct or indirect . . . "furnishing of goods, services, or facilities" (iii) "between the plan and a party in interest."1 29 U.S.C. § 1106(a)(1)(C). However, "Section 1108 separately enumerates 21 exemptions to those prohibited transactions" in circumstances where such transactions are permitted. Cunningham, 2025 WL 1128943, at *3. In Cunningham,Cornell University employees sued the University, alleging that Cornell caused the defined contribution retirement plans, for which it is the named administrator, to engage in prohibited transactions for recordkeeping services. Id. at *1. The trial court granted Cornell's motion to dismiss, and the Second Circuit Court affirmed, holding that at least some of the exemptions enumerated in Section 1008 are incorporated into Section 1106's prohibitions, thereby requiring a plaintiff to affirmatively plead that the exceptions do not apply to survive a motion to dismiss. See Cunningham v. Cornell Univ., 86 F.4th 961, 971, 975 (2d Cir. 2023).
Citing its prior opinion in Meacham, the Supreme Court reversed, emphasizing that "Congress's structural choice to place the prohibited conduct and the relevant exceptions in different statutory provisions" confirmed that "the § 1108 exemptions are 'writ[ten] in the orthodox format of an affirmative defense.'" Cunningham, 2025 WL 1128943,at *5 (quoting Meacham v. Knolls Atomic Power Lab., 554 U.S. 84, 102 (2008)). Because "an 'affirmative defense' is 'not something the plaintiff must anticipate and negate in her pleading,'" the Court reasoned, "[a] plaintiff need only allege the three elements within § 1106(a)(1)(C), notwithstanding the potential applicability of a § 1108 exemption." Id. at *5 (quoting Perry v. Merit Sys. Prot. Bd., 582 U.S. 420, 435, n. 9 (2017).
As the Supreme Court acknowledged in its opinion, this holding creates the augury of "an avalanche of meritless litigation" against plan fiduciaries. Id. at *7. Because it is a practical reality that plan fiduciaries must engage the services of outside third parties in certain contexts, plaintiffs may now satisfy their pleading burden and move on to discovery merely by alleging that plan fiduciaries engaged such third parties. The burden of pleading and proving that an exemption applies, permitting the transaction, is now on the defendant. Since "getting by a motion to dismiss is often the whole ball game because of the cost of discovery" (id. at *8 (Alito, J., concurring)), the Court acknowledged that its holding raises "serious concerns," but nonetheless concluded that such concerns "cannot overcome the statutory text and structure." Id. at *7 (unanimous opinion).
In an attempt to head off a potential deluge of new cases, the Court highlighted several mechanisms that district courts may employ to efficiently weed out meritless claims before parties incur substantial costs of litigation, including: (i) requiring a plaintiff to file a reply to an answer under Federal Rule of Civil Procedure 7; (ii) imposing sanctions against a plaintiff under Federal Rule of Civil Procedure 11; or (iii) invoking ERISA's cost-shifting provisions. Id. at *8."Whether these measures will be used in a way that adequately addresses the problem that results from our current pleading rules remains to be seen." Id. at *8 (Alito, J., concurring). Given the discretion afforded to trial courts, it seems likely that their application and efficacy will not be uniform and that, regardless, the costs to fiduciaries of defending prohibited transaction claims is likely to increase.
Footnote
1. While the Court's holding refers only to the prohibition enumerated in Section 1106(a)(1)(C) of "furnishing of goods, services, or facilities between the plan and a party in interest" (Cunningham,2025 WL 1128943 at *3), Section 1106(a)(1) enumerates other prohibited transactions as well (see 29 U.S.C. § 1006(a)(1)(A)–(B), (D)–(E)).
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