Cunningham v. Cornell University

LII note: The U.S Supreme Court has now decided Cunningham v. Cornell University

Issues

Must a plan fiduciary establish that services were necessary and paid for at a reasonable cost as an affirmative defense to a 29 U.S.C. § 1106(a)(1)(C) prohibited transaction claim, or must a plaintiff plead and prove that services were unnecessary or unreasonably costly as an element of their prohibited transaction claim?

Oral argument:
January 22, 2025
Court below:
United States Court of Appeals for the Second Circuit

This case asks the Supreme Court to decide whether an employee can state a claim that their employer violated the Employee Retirement Income Security Act (“ERISA”) by alleging that the employer had third parties such as accountants, auditors, and financial managers provide services for their employee retirement plan. If yes, the burden of proof lies on employer defendants to establish that such services were necessary for the operation of the plan and paid for at reasonable cost if they wish to avoid liability. If no, a plaintiff alleging only that a prohibited transaction was entered into cannot survive a motion to dismiss. Casey Cunningham and other Cornell University Employees (“Cunningham”) stress that § 1106(a)(1)(C) of ERISA prohibits all transactions between plan fiduciaries such as employers and parties in interest such as service providers, regardless of whether other sections of ERISA create exemptions, so a plaintiff should not have to plead anything more than that such a prohibited transaction took place — at least to state a claim and survive a motion to dismiss. Cornell counters that common sense and other sections of ERISA — one of which § 1106(a) itself refers to — show that ERISA cannot mean even to presumptively prohibit transactions between plan fiduciaries such as employers and service providers such as accountants, auditors, and financial managers. The outcome of this case will resolve a split between the Courts of Appeals and determine how easily employee beneficiaries of retirement plans will be able to sue their employers for suspected mismanagement of those plans.

Questions as Framed for the Court by the Parties

Whether a plaintiff can state a claim by alleging that a plan fiduciary engaged in a transaction constituting a furnishing of goods, services, or facilities between the plan and a party in interest, as proscribed by 29 U.S.C. § 1106(a)(1)(C), or whether a plaintiff must plead and prove additional elements and facts not contained in the provision’s text.

Facts

Editor’s Note: The staff of the Legal Information Institute, including the students who wrote and edited this Preview, are employees of Cornell University.

In 1974, the federal government passed 29 U.S.C. § 1001 , known as the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards on administrators of tax-exempt private pension plans and creates a means for beneficiaries of pension plans to sue if those standards have been violated. Two of those minimum standards are set by 29 U.S.C §§ 1104 and 1106 . ERISA places upon pension plan administrators—or fiduciaries —the duty of prudence , which requires those fiduciaries to act with the care and skill of a person similarly positioned as the fiduciary. Additionally, ERISA requires that fiduciaries act in the interest of the plan beneficiaries; this is known as the duty of loyalty . It enhances that duty of loyalty by barring certain types of transactions altogether.

In this case, the Cunningham Petitioners (“Cunningham”) are a class of Cornell University (“Cornell”) employees who were enrolled in two types of defined-contribution savings plans provided by Cornell, called 403(b) plans, from 2010 to 2016. The two plans were dubbed the Cornell University Retirement Plan for Employees of the Endowed Colleges at Ithaca (“Retirement Plan”) and the Cornell University Tax Deferred Annuity Plan (“TDA Plan”). By 2016, “the Retirement Plan had over 19,000 participants and nearly $2 billion in net assets,” while “the TDA Plan had over 11,000 participants and $1.34 billion in net assets.” Cornell University delegated the administration of the plans to Cornell University Vice President of Human Resources Marry G. Opperman and the Retirement Plan Oversight Committee (“RPOC”). RPOC then retained CapFinancial Partners, LLC Financial Advisors (“CAPTRUST”) as an investment advisor and plan administrator.

In 2017, Cunningham sued Cornell, Opperman, RPOC, and CAPTRUST (collectively, “Cornell”) for violating the duties of prudence and loyalty in the United States District Court for the Southern District of New York . Specifically, Cunningham alleged that these fiduciaries breached their duties by engaging in prohibited transactions, offering poorly performing financial products to beneficiaries, and failing to monitor investments and recordkeeping fees. The petitioners also alleged that Cornell failed to monitor the other fiduciaries. The District Court dismissed several of Cunningham’s claims for failing to allege that fiduciaries had breached their duty of loyalty and their duty of prudence relating to prohibited transactions and several other claims. . Cornell won on more claims at the summary judgment stage, including the duty of prudence claim relating to recordkeeping fees because Petitioners failed to present evidence that they suffered a loss.

The United States Court of Appeals for the Second Circuit affirmed all the District Court’s rulings. The Second Circuit held that for a complaint that claims a fiduciary had engaged in a prohibited transaction to survive the motion to dismiss stage the plaintiff must plausibly allege that the “transaction was unnecessary or involved unreasonable compensation.”

On March 11, 2024, plaintiffs petitioned the Supreme Court of the United States to hear this case. The Supreme Court granted certiorari on October 4, 2024.

Analysis

TEXTUAL CONSIDERATIONS

Section 1106(a)(1)(C) of the Employee Retirement Income Security Act (“ERISA”) prohibits plan fiduciaries — employers — from transacting for the “furnishing of goods services, or facilities between the plan and a party in interest ,” which includes where an employer hires accountants, auditors, and financial managers to service an employee retirement plan, “except as provided in section 1108 of this title.” Section 1108(b)(2)(A) in turn exempts such service transactions that are for services necessary for the plan and paid for at reasonable cost. Cunningham stresses that, because § 1106(a)(1)(C)’s plain language prohibits plan fiduciaries from transacting for services, to require a plaintiff alleging a prohibited transaction claim to plead and prove that the services also were unnecessary or unreasonably costly would be to “graft[] additional atextual pleading requirements” onto the claim. Moreover, Cunningham insists that United States v. Dickson held as a “general rule of law” that where a statute includes a special exception — such as § 1108(b)(2)(A)’s for necessary and reasonable services — it is up to a defendant to establish that exception as an affirmative defense . Nor, Cunningham argues, does § 1106’s “except as provided in § 1108” incorporate § 1108’s exceptions as elements : that clause just indicates that § 1108 provides exemptions, and the default rule is that exemptions are affirmative defenses. Bolstering the point, Cunningham cites lower court decisions holding that “except as otherwise provided” clauses establish affirmative defenses — the Eighth Circuit, for instance, held that the “except as provided” clause in 18 U.S.C. § 922(o) , which prohibits machinegun possession except where such possession is by or under the United States’s authority, establishes only an affirmative defense — and claims that no decisions support a reading of “except as provided” as incorporating an element.

Cornell concedes that § 1106(a)(1)(C)’s language can be read to flatly prohibit plan fiduciaries from transacting with service providers; however, Cornell contests whether such “grammatical sense” resolves the question of whether a prohibited transaction claim has any additional elements a plaintiff must plead. Instead, Cornell characterizes the issue as whether the exception for necessary and reasonable services must be incorporated as an element of a prohibited transaction claim to “accurately define the wrongful conduct” that ERISA seeks to prohibit. This inquiry, Cornell urges, is context-specific, and whether an exception is set out in a different section of a statute is not dispositive. And because ERISA elsewhere expressly permits — even requires — plan fiduciaries to transact for services such as auditing, it hardly contemplates service transactions as wrongful conduct, Cornell argues. Prior caselaw, Cornell contends, addressed whether defendants have the burden of establishing affirmative defenses, not whether an exception was an affirmative defense or element. Cornell also attempts to rebut Cunningham’s contention that no decision reads an “except as provided” clause as creating an element. To that end, Cornell cites Supreme Court and lower court decisions treating substantively identical language — such as “except as authorized by this subchapter” and “except as otherwise provided in this section” — as adding elements to a claim. And to the extent more decisions have found exceptions to be affirmative defenses, Cornell says, that is only because most enacting prohibitions are narrower than § 1106(a)(1)’s and not because of any “thumb on the interpretive scale.”

CONTEXTUAL CONSIDERATIONS

Cunningham argues that other ERISA provisions, caselaw, general trust law, and government practice support its position that necessity and reasonableness are affirmative defenses. Cunningham notes that, while § 1106(a), which proscribes a series of third-party transactions, contains its “except as provided” clause, § 1106(b), which proscribes a series of self-dealing transactions, contains no such clause. This difference, Cunningham argues, indicates that Congress meant to provide in § 1108 defenses to § 1106(a) violations, but no defenses for § 1106(b) violations given that self-dealing transactions are less likely to be licit. Cunningham also asserts that, for the Supreme Court, § 1106’s point is to create bright-line rules proscribing certain categories of transactions likely to injure pension plans. In this light, Cunningham contends, to require a plaintiff to plead and prove that a service transaction was unnecessary or unreasonable to state a prohibited transaction claim would undermine that purpose. Cunningham also claims a long-standing principle of trust law holds that fiduciaries generally have much more information than beneficiaries regarding the operation of a trust. And this principle, Cunningham contends, supports putting the burden of proof on defendants to show that a transaction was necessary and for reasonable compensation — defendants, as the fiduciaries, are the ones with the information to show as much. Meanwhile, plaintiffs are unlikely to have the information necessary to plead sufficient facts to plausibly show that services were unnecessary or unreasonably costly, Cunningham asserts. Finally, Cunningham stresses that the Department of Labor, which holds primary authority for enforcing ERISA, has interpreted any service transaction to constitute a prohibited transaction in its guidance, regulations, and litigation positions.


Cornell contends that the absence of an “except as provided” clause in § 1106(b) proves that § 1106(a)’s clause incorporates elements. This holds, Cornell argues, because the § 1108 exceptions are affirmative defenses to a § 1106(b) violation, contrary to Cunningham’s assertion. Specifically, Cornell notes that the Secretary of Labor is authorized to grant exemptions to § 1106(a) and § 1106(b) and that § 1108(b) by its terms provides exceptions to “[t]he prohibitions provided in section 1106 of this title” — not just § 1106(a). And if § 1108 provides affirmative defenses to all § 1106(b) violations, then the “except as provided” clause in § 1106(a) is superfluous unless it incorporates § 1108(b)’s exceptions as elements. Concerning the caselaw, Cornell asserts that Cunningham’s version of § 1106(a)(1)(C) would hardly “supplement” fiduciary duties, as the Supreme Court has said prohibited transaction provisions are supposed to do, but instead “swallow them up altogether.” Cornell uses this case as an example, noting that Cunningham brought both duty of prudence claims and prohibited transaction claims on the same basic set of facts — the former claim was dismissed, the latter survived. Touching on general trust law too, Cornell first doubts whether trust law principles are of use in this context, noting that the “Court has warned that often ‘trust law does not tell the entire story.’” In the alternative, Cornell contends that trust law supports the idea that plaintiffs must allege some kind of actual wrongdoing to state a prohibited transaction claim. The duty of loyalty is violated in third-party transactions where the transaction betrays a conflict of interest, but not all third-party transactions are conflicted, and traditionally a plaintiff must show such conflict, Cornell claims. Lastly, Cornell casts doubt on whether the Department of Labor’s positions are relevant to a pleading-standard question, and Cornell urges that the government is not owed deference in any event.

Discussion

POSSIBILITY OF MORE LITIGATION WITH LOWER PLEADING STANDARDS

Cornell argues that if the Court takes Cunningham’s position, then any pension plan beneficiary could sue its plan administrators for retaining outside service providers for routine services such as recordkeeping. This, Cornell contends, would be an absurd result that Congress surely did not intend when writing and passing ERISA. In support of Cornell, the Chamber of Commerce of the United States (CoC) and the National Association of Manufacturers (NAM) argue that defined-contribution plans cannot operate without service providers, but under Cunningham’s reading of the case all plans with service providers could be subjected to a lawsuit. CoC and NAM contend that allowing these lawsuits to proceed would open up all fiduciaries to discovery , without plaintiffs making a plausible case for a breach of fiduciary duty. Per CoC and NAM, these meritless lawsuits would allow plaintiffs to proceed not just in the case of service providers under ERISA defined-contribution plans, but also in participant loans, which help first-time homebuyers afford to buy a home, and Employee Stock Ownership Plans.

In support of Cunningham, the Pension Rights Center (“PRC”) counters that Cunningham’s reading would not lead to a dramatic increase in meritless lawsuits. Those meritless claims can be defeated, PRC argues, by the defendant pleading an affirmative defense that the transactions they engaged in were exempted . In addition to arguments of statutory support, PRC posits that this burden shifting to defendants makes sense because the plan fiduciary has control over the relevant facts that a plaintiff would need to make a more detailed claim. Also in support of Cunningham, the United States adds that fear of an increase in litigation and discovery costs is not a legitimate reason for a Court to depart from statutory text. The United States contends that merely claiming a fiduciary retained recordkeeping services could not be enough for plaintiffs claim to survive a motion to dismiss if a court can come up with an explanation for why the fiduciary retained these services that would exempt the fiduciary from an ERISA violation.

IMPACT ON RETIREMENT ACCOUNT RETURNS

In support of Cunningham, AARP and AARP Foundation (“AARP”) argue that the Second Circuit’s ruling would increase the pleading standard for beneficiaries of retirement plans. This, AARP posits, will lead to a lessening of the robust requirements placed on fiduciaries that ensure those beneficiaries are protected. According to AARP, with fewer protections against fee increases, those relying on retirement income could see a significant decrease in their returns. AARP contends that these protections are especially important because the majority of retirement funds are now in defined contribution plans, which participants tend to rely on for income more heavily than other investment devices. AARP argues that because the percentage of retired Americans is increasing, these protections are now more important than ever.

In support of Cornell, the American Benefits Council (ABC), the ERISA Industry Committee, and the Spark Institute counter that the increase in litigation would increase the cost of plan administration, which would lead to lower returns for plan beneficiaries. ABC, the ERISA Industry Committee, and the Spark Institute contend that in fear of being sued, fiduciaries could choose to eliminate several services, like outside recordkeeping services, which are often utilized by fiduciaries to increase returns for beneficiaries. Further, Cornell posits, that courts might hold that it is imprudent to perform recordkeeping as part of the fiduciary’s internal administration of the plan because an outside service provider could perform recordkeeping duties more efficiently. Cornell argues that this puts fiduciaries in the unwinnable position of risking a lawsuit against the fiduciary for using an outside service provider and for not using an outside service provider. Ultimately, Cornell argues, employers may find that they do not want to risk litigation costs and choose not to offer retirement plans to employees, hurting those employees who the ERISA safeguards were meant to protect.

Conclusion

Authors


Written by: Andrew W. Carpenter and Domnick Q. Raimondo

Edited by: Alex Strohl

Additional Resources