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Cunningham v. Cornell University
The Employee Retirement Income Security Act of 1974 prohibits plan fiduciaries from causing a plan to engage in certain transactions with parties in interest. A separate provision, Section 1108(b)(2)(A), exempts from these prohibitions any transaction that involves “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”
The question presented is whether, to state a claim under Section 1106, a plaintiff must plead that Section 1108(b)(2)(A) doesn’t apply to an alleged prohibited transaction.
Petitioners represent a class of current and former Cornell University employees who participated in two defined-contribution retirement plans from 2010 to 2016. In 2017, they sued Cornell and other plan fiduciaries for allegedly causing the plans to engage in prohibited transactions for recordkeeping services with the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund and Fidelity Investments Inc., in violation of Section 1106(a)(1)(C).
Petitioners claimed the plans paid these service providers substantially more than reasonable recordkeeping fees. The district court dismissed the prohibited-transaction claim, and the 2nd Circuit Court of Appeals affirmed. The 2nd Circuit held that Section 1108(b)(2)(A) is incorporated into Section 1106(a)’s prohibitions, requiring plaintiffs to plead that a transaction was “unnecessary or involved unreasonable compensation” to survive a motion to dismiss.
The U.S. Supreme Court held that, to state a claim under Section 1106(a)(1)(C), a plaintiff need only plausibly allege the elements contained in that provision itself, without addressing potential Section 1108 exemptions.
The high court explained that Section 1106(a)(1)(C) contains three elements: It prohibits fiduciaries from “caus[ing a] plan to engage in a transaction” the fiduciary “knows or should know … constitutes a direct or indirect … furnishing of goods, services, or facilities” “between the plan and a party in interest.” The court found its bar is categorical and doesn’t remove from its scope transactions that were necessary or involved reasonable compensation.
It also found exemptions in Section 1108 don’t impose additional pleading requirements for Section 1106(a)(1) claims. The Supreme Court noted that when a statute has “exemptions laid out apart from the prohibitions,” and the exemptions “expressly refe[r] to the prohibited conduct as such,” the exemptions ordinarily constitute “affirmative defense[s]” that are “entirely the responsibility of the party raising” them.
Like the exemptions at issue in Meacham v. Knolls Atomic Power Laboratory, the Section 1108 exemptions are structured as affirmative defenses that must be pleaded and proved by defendants who seek to benefit from them.
The court found respondents’ contrary arguments unpersuasive. First, the “[e]xcept as provided in section 1108” language in Section 1106(a) does not incorporate Section 1108 exemptions as elements of Section 1106(a) violations. The high court found that reading ignores that Congress wrote the Section 1108 exemptions “in the orthodox format of an affirmative defense” separate from the prohibitions. The U.S. Supreme Court explained that the headings of the sections, “Prohibited transactions” for Section 1106 and “Exemptions from prohibited transactions” for Section 1108, confirm this understanding.
The high court also noted that the respondents failed to explain why some but not all Section 1108 exemptions should be treated as elements of Section 1106(a) claims. It also noted that requiring plaintiffs to plead and disprove all potentially relevant Section 1108 exemptions would be impractical, given that there are 21 statutory exemptions and hundreds of regulatory exemptions.
The U.S. Supreme Court also found respondents’ reliance on United States v. Cook was misplaced. The court clarified that Cook established “a rule of criminal pleading” based on constitutional considerations not present in the civil context.
Finally, the high court noted that respondents’ practical concerns about meritless litigation cannot overcome the statutory text and structure. District courts have various tools at their disposal 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 Section 1132(g)(1).
The U.S. Supreme Court reversed the lower court’s ruling and remanded the case.
Justice Sonia Sotomayor delivered the opinion for a unanimous court. Justice Samuel Alito Jr. filed a concurring opinion, in which Justices Clarence Thomas and Brett Kavanaugh joined.