Supreme Court Makes It Easier to Bring ERISA Claims Against Plans

In a unanimous decision, the U.S. Supreme Court on April 17 clarified that plaintiffs bringing prohibited transaction claims under the Employee Retirement Income Security Act (ERISA) do not have to satisfy additional pleading requirements. Reviving plaintiffs’ claims, the high court rejected concerns that its decision would result in a flood of litigation.

“This decision makes it easier for plaintiffs to plead prohibited transactions related to service provider contracts with plans, because all they need to plausibly allege is that plan fiduciaries caused the plan to enter into a transaction with a service provider for goods, services, or facilities,” said Joanne Roskey, an attorney with Miller & Chevalier in Washington, D.C. 

District courts have procedural tools at their disposal to dismiss meritless cases, such as ordering plaintiffs to file replies to defendants’ answers to complaints, Roskey noted. But, she added, “We may also hear more talk of having Congress enact a legislative fix to ERISA” to circumvent this decision.

Case Background

In Cunningham v. Cornell University, Cornell employees sued the university and other plan fiduciaries, alleging that they violated 29 U.S.C. Section 1106(a)(1)(C) by causing the plans to engage in prohibited transactions for recordkeeping services. “Because TIAA [Teachers Insurance and Annuity Association of America] and Fidelity are service providers and hence parties in interest,” they argued, “their furnishing of recordkeeping and administrative services to the plans is a prohibited transaction unless Cornell proves an exemption.”

The plans, the plaintiffs asserted, also paid TIAA and Fidelity more than a reasonable recordkeeping fee. They maintained a reasonable fee would be approximately $35 per participant per year but that the plans paid between $115 to $183 for one of its defined contribution retirement plans and $145 to $200 per participant for another defined contribution plan.

The district court dismissed the claims, holding that the plaintiffs failed to allege evidence of self-dealing or other disloyal conduct. The 2nd U.S. Circuit Court of Appeals affirmed but on different grounds, ruling that exemptions in Section 1108 of ERISA imposed additional pleading requirements. That means a plaintiff alleging a prohibited transaction must also maintain that the transaction was unnecessary or involved unreasonable compensation. The plaintiffs had not done so, the 2nd Circuit ruled.

Ruling Notes 3 Elements of Law

Reversing, the Supreme Court held that “plaintiffs need do no more than plead a violation of Section 1106(a)(1)(C).” 

This section contains three elements; Justice Sonia Sotomayor wrote for the court. 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 interests.  

“Section 1106(a)(1)(C)’s bar is categorical: Any transaction that satisfies its three elements is presumptively unlawful,” the Supreme Court said. Therefore, plaintiffs need only plausibly allege each of those elements of a prohibited-transaction claim.

More broadly, “when a statute has exemptions laid out apart from the prohibitions and the exemptions expressly refer to the prohibited conduct as such, the exemptions ordinarily constitute affirmative defenses that are entirely the responsibility of the party raising them,” justices said, citing a 2008 Supreme Court ruling in an Age Discrimination in Employment Act case (Meacham v. Knolls Atomic Power Laboratory).

In an ERISA case, if a defendant establishes that a Section 1108 exemption applies, the prohibited-transaction claim will fail, the Supreme Court added. “At the pleading stage, however, it suffices for a plaintiff plausibly to allege the three elements set forth in Section 1106(a)(1)(C),” the court emphasized. 

Concerns About Meritless Litigation

The defendants had argued that if the 2nd Circuit’s decision wasn’t upheld, there would be “an avalanche of meritless litigation,” the Supreme Court noted.

“ERISA plans, after all, often have thousands of participants and hold millions of dollars in assets,” the defendants attested. “The realities of modern trust administration therefore require fiduciaries to transact with service providers.”

If plaintiffs must plead only that a transaction barred by Section 1106(a)(1)(C)’s plain text occurred, the defendants argued, plaintiffs could too easily get past motions to dismiss and subject defendants to costly and time-intensive discovery. In litigation, discovery is the pretrial process where parties exchange information, evidence, and documents relevant to the case to prepare for trial and ensure transparency.

Such meritless litigation, the defendants said, would harm the administration of plans and force plan fiduciaries and sponsors to bear most of the associated costs.  

“These are serious concerns, but they cannot overcome the statutory text and structure,” the Supreme Court said. It went on to outline tools that district courts can use to screen out meritless claims before discovery and after.

Concurring in the decision, Justice Samuel Alito Jr. — joined by Justices Clarence Thomas and Brett Kavanaugh — said, “[T]his straightforward application of established rules has the potential to cause — and, indeed, I expect it will cause — untoward practical results.”

The administrator of an ERISA plan like the ones in this case will almost always find it necessary to employ outside firms to provide services that the plan needs, Alito noted. Their provision of services may become unlawful under Section 1106(a)(1)(C) unless a Section 1108 exemption applies. “The upshot is that all that a plaintiff must do in order to file a complaint that will get by a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is to allege that the administrator did something that, as a practical matter, it is bound to do,” Alito wrote.

Cornell set up a plan under which employees could invest in the TIAA America College Retirement Equities Fund and Fidelity funds, and then those companies provided recordkeeping services for their own funds, as they customarily do, Alito said. “There is nothing nefarious about any of that,” he wrote. 

“Yet under our decision, that is all that a plaintiff must plead to survive a motion to dismiss. And, in modern civil litigation, getting by a motion to dismiss is often the whole ballgame because of the cost of discovery. Defendants facing those costs often calculate that it is efficient to settle a case even though they are convinced that they would win if the litigation continued,” Alito cautioned.

The few plan participants named as plaintiffs and their attorneys then get a windfall, and the costs the administrator incurs are passed on to the other plan participants, Alito wrote. 

He encouraged district courts to use the tools at their disposal to weed out meritless claims.