This article was originally published by Law360 on April 24, 2025 and is made available here with permission.
ERISA prohibits fiduciaries from entering into prohibited transactions with related parties unless the transaction is specifically exempted. Does every ERISA plan fiduciary who hires a third party service provider to service its plan engage in a prohibited transaction? Or must plaintiffs challenging the arrangement additionally plead that there was something inappropriate about the transaction, such as that the service was unnecessary, in order to keep the claim from being dismissed?
The Plaintiffs’ bar has maintained in litigation challenging plan fees that no additional allegations must be made beyond the existence of the service arrangement to survive a motion to dismiss. They prevailed on April 17 when the Supreme Court issued its long-awaited decision in Cunningham v. Cornell University. Although Cornell maintained two 403(b) annuity plans, the decision applies equally to 401(k) plans and other plans subject to ERISA.
The unanimous decision written by Justice Sotomayor applied a strict interpretation of the statutory language and characterized prohibited transaction exemptions as affirmative defenses. The Court then applied the general rule that defendant fiduciaries must plead and bear the burden of proof for affirmative defenses.
The impact of this decision will extend beyond the Cornell dispute because all plan sponsors have similar service arrangements and also because the bar for surviving a motion to dismiss has been set so low. The Court, recognizing that its decision could encourage meritless lawsuits, took the unusual step of suggesting guardrails that could be imposed by district court judges to control those meritless lawsuits, including requesting reply briefs and imposing sanctions. However, these guardrails would be imposed at the discretion of individual judges and their application would likely be inconsistent. Since many fee cases are settled by defendants once they have seen that plaintiff has survived a motion to dismiss, this decision will predictably also increase the frequency of settlements of meritless claims.
Read the full article here.