Plaintiffs Casey Cunningham and other Cornell University employees sued Cornell University and other plan fiduciaries in the Southern District of New York, alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA) for causing retirement plans to engage in prohibited transactions with service providers. The District Court dismissed the prohibited-transaction claim, the Second Circuit affirmed on different grounds, and Plaintiffs appealed to the Supreme Court.
Factual Overview
Petitioners represent a class of current and former Cornell University employees who participated in two defined-contribution retirement plans from 2010 to 2016. Cornell is the named administrator for these plans, and Cornell employees maintain individual investment accounts within them, the value of which is determined by market performance minus expenses, including fees paid to service providers.
In 2011, Cornell retained the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA) and Fidelity Investments Inc. (Fidelity) to offer investment options and serve as recordkeepers for the plans. Cornell compensated these companies with fees from a set portion of plan assets.
In 2017, Petitioners sued Cornell and other plan fiduciaries, alleging that respondents violated ERISA § 1106(a)(1)(C) by causing the plans to engage in prohibited transactions for recordkeeping services with TIAA and Fidelity, which are parties in interest under ERISA. Petitioners claimed the plans paid substantially more than reasonable recordkeeping fees – between $115 to $200 per participant annually versus a reasonable fee of approximately $35 per participant.
The District Court dismissed the prohibited-transaction claim, finding that plaintiffs needed to allege “some evidence of self-dealing or other disloyal conduct.” The Second Circuit affirmed but on different grounds, holding that § 1108(b)(2)(A)’s exemption for necessary and reasonable transactions is “incorporated into § 1106(a)’s prohibitions,” thus requiring plaintiffs to plead that a transaction was “unnecessary or involved unreasonable compensation” to survive a motion to dismiss.
Legal Analysis
Elements of a Prohibited Transaction Claim
The Supreme Court held that § 1106(a)(1)(C) contains three elements: it prohibits fiduciaries from (1) causing a plan to engage in a transaction (2) that the fiduciary knows or should know constitutes a direct or indirect furnishing of goods, services, or facilities (3) between the plan and a party in interest. The Court found that § 1106(a)(1)(C)’s bar is categorical, with no internal exception for necessary or reasonably compensated transactions. Accordingly, plaintiffs need only plausibly allege these three elements to state a claim.
Statutory Structure and Burden of Proof
The Court determined that the exemptions set forth in § 1108 do not impose additional pleading requirements for § 1106(a)(1) claims. The Court relied on the “general rule of statutory construction that the burden of proving justification or exemption under a special exception to the prohibitions of a statute generally rests on one who claims its benefits.” Because Congress structured ERISA with prohibited transactions in § 1106 and exemptions separately in § 1108, the Court held that the exemptions are affirmative defenses that must be pleaded and proved by defendants.
The Court analogized to its decision in Meacham v. Knolls Atomic Power Laboratory, which held that exemptions to the Age Discrimination in Employment Act’s general prohibitions were affirmative defenses because they were in a separate statutory provision that expressly referred to the prohibited conduct. Like those exemptions, § 1108 is “written in the orthodox format of an affirmative defense” separate from the prohibitions.
Rejection of Alternative Interpretations
The Court rejected respondents’ argument that § 1106(a)’s opening phrase “except as provided in section 1108” incorporates § 1108 exemptions as elements of § 1106(a) violations. This reading would ignore that Congress wrote the exemptions in a separate section labeled “Exemptions from prohibited transactions.” The Court also noted that respondents’ interpretation would illogically require plaintiffs to plead and disprove not just the § 1108(b)(2)(A) exemption but all 21 statutory exemptions and hundreds of regulatory exemptions.
The Court dismissed respondents’ reliance on United States v. Cook, explaining that Cook established “a rule of criminal pleading” based on constitutional considerations not present in the civil context. Even in criminal cases, the settled rule is that a pleading need not negate the matter of an exception made by a distinct clause.
Addressing Practical Concerns
The Court acknowledged respondents’ concerns about meritless litigation but concluded these concerns cannot overcome the statutory text and structure. The Court pointed to various tools available to district courts to screen out meritless claims, including: requiring plaintiffs to file a reply addressing exemptions under Federal Rule of Civil Procedure 7(a), dismissing claims that fail to identify a concrete injury under Article III, limiting discovery, imposing Rule 11 sanctions, and ordering cost shifting under § 1132(g)(1).
Justice Alito’s Concurrence
Justice Alito, joined by Justices Thomas and Kavanaugh, concurred with the Court’s opinion on the straightforward basis that § 1108 sets out affirmative defenses, and black letter law establishes that plaintiffs need not plead affirmative defenses. However, Justice Alito expressed concern about the practical implications of this ruling, noting that ERISA plan administrators almost always need to employ outside firms, which automatically become “parties in interest” under ERISA. This means plaintiffs can easily survive a motion to dismiss by simply alleging that administrators did something they are practically bound to do.
Justice Alito supported the Court’s suggested safeguards, particularly the option for district courts to require plaintiffs to file a reply to an answer that raises § 1108 exemptions as affirmative defenses. He encouraged district courts to use this and other safeguards to achieve “the prompt disposition of insubstantial claims,” while expressing uncertainty about whether these measures will adequately address the problem resulting from current pleading rules.
The Supreme Court reversed the judgment of the Second Circuit and remanded the case for further proceedings consistent with its opinion.
Schrag on Law 