Supreme Court Decides Cunningham v. Cornell University

On April 17, 2025, the Supreme Court decided Cunningham v. Cornell University, No. 23-1007, holding that a plaintiff may state a prohibited-transaction claim in violation of ERISA § 406(a) without referencing the exemptions to that statute’s prohibitions in ERISA § 408 because the exemptions are affirmative defenses that defendants bear the burden of pleading and proving.

Cornell University maintains at least two retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). Employees participating in those plans may contribute to their individual investment accounts, and the account’s value is determined by those contributions, together with the University’s, and the market’s performance, less expenses. Among the expenses are fees paid to the plan’s service providers, including its recordkeepers.

In 2017, current and former participants in the University’s plans sued the University and other plan fiduciaries for alleged violations of ERISA. Among other things, the participants claimed that the fiduciaries had violated § 406(a) of ERISA, which bars plan fiduciaries from undertaking certain transactions deemed likely to injure the plan with various plan insiders (referred to in the statute as “parties in interest”). Because ERISA deems plan service providers, like recordkeepers, parties in interest, the participants claimed that the fiduciaries’ contracting with the recordkeepers for services violated ERISA § 406(a)(1)(C), which prohibits a plan fiduciary from “caus[ing] the plan to engage in a transaction” the fiduciary knows “constitutes a direct or indirect . . . furnishing of . . . services . . . between the plan and a party in interest.” The participants alleged that the fees the plans had paid to the recordkeepers were not reasonable, but they did not allege that the fiduciaries’ conduct in effectuating the transactions was disloyal or constituted self-dealing. The District Court granted the fiduciaries’ motion to dismiss the ERISA § 406(a) claim, finding that the omission of these allegations rendered the claim defective.

The Second Circuit affirmed the District Court’s holding, but on a different ground. It reasoned that a plaintiff may state a claim under ERISA § 406(a) only by sufficiently alleging the absence of any applicable exemption to ERISA § 406(a)’s prohibitions as set forth in ERISA § 408. ERISA § 408 provides 21 ways a transaction may be exempt from ERISA § 406(a)’s restrictions and permits the Department of Labor to establish more. The Second Circuit found that the participants had not alleged that the transactions they were challenging fell outside of ERISA § 408’s exemptions and affirmed dismissal of the participants’ claim.

The Supreme Court reversed and remanded, holding that a plaintiff “need only plausibly allege each of [the] elements of a prohibited-transaction claim” specified in ERISA § 406(a) to state a claim for a violation of that statute. The Court characterized the exemptions to ERISA § 406(a)’s prohibitions set forth in ERISA § 408 as “affirmative defenses,” which it held defendants bear the burden of pleading and proving. The Court rejected as “illogical” and contrary to Congress’s intent the fiduciaries’ textual arguments that ERISA § 406(a) incorporates ERISA § 408’s exemptions, thus rendering them elements a plaintiff must plead and prove. And it rejected the fiduciaries’ policy arguments as insufficient to overcome ERISA’s “statutory text and structure.”

Acknowledging the fiduciaries’ “serious concerns” that the Court’s reading of ERISA § 406 would open the floodgates to “meritless litigation,” the Court noted that other procedural mechanisms give courts tools “to screen out meritless claims before discovery.” In particular, the Court highlighted pleading procedures and standing requirements, district courts’ discretion to limit and expedite discovery, and courts’ authority to sanction litigants proceeding without a good-faith basis and to award defendants attorney’s fees and costs.

Justice Sotomayor delivered the Court’s unanimous opinion. Justice Alito filed a concurring opinion, in which Justices Thomas and Kavanaugh joined.