Cornell Workers Score SCOTUS Revival of Retirement Plan Suit (1)

Cornell University employees will get another chance to challenge their retirement plan’s service provider arrangement after the US Supreme Court took a worker-friendly view of ERISA’s prohibited transaction rules.

The justices’ unanimous opinion makes it easier for workers to successfully argue that retirement plan service provider arrangements violate the Employee Retirement Income Security Act’s prohibited transaction rules. Attorneys had predicted that a victory for the workers could mean employers would face an increase in litigation and administrative costs as well as hefty settlements.

Fiduciaries defending their retirement plans in court must plead and prove that they qualify for a statutory exemption that would make an otherwise prohibited transaction permissible, Justice Sonia Sotomayor said Thursday. Plaintiffs challenging their retirement plans under ERISA’s prohibited transaction rules don’t have to include details in their complaints showing that these statutory exemptions don’t apply to block their cases, according to the opinion.

Plan participants alleging prohibited transactions “must plausibly allege that a plan fiduciary engaged in a transaction proscribed therein, no more, no less,” Sotomayor wrote for the court. “Plaintiffs are not required to plead and prove that the myriad §1108 exemptions pose no barrier to ultimate relief.”

The court conceded that Cornell raised “serious concerns” when it said a ruling to this effect would spur meritless litigation and impose financial burdens on retirement plan sponsors. But district judges have tools at their disposal to “screen out meritless claims,” the Supreme Court said, including imposing sanctions, dismissing cases on standing grounds when there’s no sufficient injury, and requiring plaintiffs to file replies when defendants raise ERISA exemptions in their answers.

Circuit Split

The class case asked the justices to resolve a circuit split over ERISA’s prohibited transaction rules, which put guardrails on arrangements between benefit plans and interested parties. Appeals courts disagreed about whether the statutory exemptions from these rules must be addressed in a plaintiff’s complaint, or whether they’re defenses to be demonstrated by the plan fiduciary.

In its decision favoring Cornell, the Second Circuit said prohibited transaction claims based on service provider compensation must include allegations the services were unnecessary or overpriced. The Eighth and Ninth circuits say simple allegations of a paid service provider arrangement could be enough to state a claim, while the Third, Seventh, and Tenth circuits require something more, like allegations of self-dealing or fraud.

Cornell is one of more than 20 prominent universities to be accused since 2016 of mismanaging their retirement plans in violation of ERISA. These cases have spawned about $140 million in settlements, two trials, multiple appeals court rulings, and another Supreme Court decision. Cornell’s victory in the Second Circuit affirmed a 2019 decision rejecting nearly all the employees’ ERISA claims over their retirement plan’s fees and investments.

‘Untoward’ Results

In a concurring opinion, Justice Samuel Alito agreed that the text of ERISA doesn’t require plaintiffs to negate a long list of affirmative defenses in order to make a claim. But this “straightforward application” of the text is likely to cause “untoward practical results,” because it will allow lawsuits to advance to discovery based on allegations of common, innocent conduct, he said.

Alito, joined by Justices Clarence Thomas and Brett Kavanaugh, encouraged district courts to adopt the uncommon procedural step of requiring plaintiffs to file a reply to an answer that raises one of ERISA’s prohibited transaction exemptions as an affirmative defense.

Mayer Brown LLP represented Cornell. Schlichter Bogard LLC and the University of Virginia School of Law Supreme Court Litigation Clinic represented the employees.

The case is Cunningham v. Cornell Univ., U.S., No. 23-1007, 4/17/25.