Supreme Court’s ERISA Ruling Will Test Procedural Safeguards

A unanimous US Supreme Court decided last week that a plaintiff claiming a transaction is “prohibited” under the Employee Retirement Income Security Act’s Section 406(a)—which prohibits certain transactions between an employee benefit plan and “party in interest”—has no burden to also plead that the transaction doesn’t otherwise fall within an enumerated exemption to these transactions under ERISA Section 408.

The ruling in Cunningham v. Cornell University reversed the US Court of Appeals for the Second Circuit in holding that Section 408’s exemptions are affirmative defenses that must be asserted and proved by defendants. There are several key takeaways from the Supreme Court’s decision.

Application to all Section 406(a) challenges. Though the case involved only one of several prohibited transactions under Section 406(a)(1)—the “furnishing of goods, services, or facilities between the plan and a party in interest”—much of the Supreme Court’s analysis indicates that the same pleading burden applies to all challenges brought under Section 406(a), including the sale of employer securities to a party in interest.

Parties defending against any suit under Section 406(a) should assert all applicable Section 408 exemptions in responsive pleadings and expect to bear the burden of proof for those exemptions.

More lawsuits on the horizon. With no obligation to consider Section 408’s exemptions at the pleading stage, potential challengers can now more easily bring these claims with barebones allegations, and survive a motion to dismiss and enter discovery.

A plan participant need only allege that an employee benefit plan engaged in a covered transaction with a “party in interest.” This threshold won’t be difficult to meet given the broad prohibitions under Section 406(a)(1) and ERISA’s broad definition of a “party in interest”—which includes, for example, any fiduciary, counsel, or employee of the employee benefit plan and a plan service provider.

Most employee benefit plans rely on third-party service providers to help administer the plans, and the vast majority of employee stock ownership plan transactions are with a “party in interest” as defined by ERISA. These plans and transactions will be prime targets of exploratory litigation following the Supreme Court’s decision.

Procedural safeguards to be tested. The Supreme Court acknowledged the “serious concerns” that its decision will increase the number of lawsuits filed against employee benefit plans. Justice Samuel Alito penned a separate concurrence about these “untoward practical results” that he expected would result from the decision.

The Supreme Court sought to reassure plans by inviting lower courts to use their discretion where appropriate to weed out meritless litigation through existing procedural mechanisms such as expedited or limited discovery, cost-shifting, Rule 11 sanctions, and requiring the plaintiff to reply to an answer under Rule 7.

It’s uncertain whether, and to what extent, these mechanisms will quell expensive, time-consuming litigation for employee benefit plans, their sponsor companies, fiduciaries, and third-party providers.

Congress may still choose to intervene and amend Section 406 to impose some additional pleading requirements on potential litigants. But until then, it remains the role of defense counsel and the courts to ensure employee benefit plans don’t devolve into litigation profit centers for the plaintiff’s bar.

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

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mark A. Nebrig is co-head of the litigation group at Moore & Van Allen and has worked on business disputes on behalf of ERISA fiduciaries, ESOP-owned companies, corporate directors, and officers.

Drew P. Newman is counsel in Moore & Van Allen’s litigation group, focusing on complex commercial litigation, including ESOP class action defense.

Joseph M. Piligian is an associate in Moore & Van Allen’s litigation group, focusing on n ESOP class action defense and complex commercial litigation.

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