U.S. Supreme Court Clarifies ERISA Prohibited Transactions Claims
Cunningham v. Cornell University: Simplifying Pledging Requirements
The U.S. Supreme Court recently provided clarity on how plaintiffs can file claims under the Employee Retirement Income Security Act’s (ERISA) prohibited transactions provision. In a unanimous decision led by Justice Sonia Sotomayor, the court ruled that plaintiffs need merely to allege the elements contained in the provision itself, not to contend additionally that the transaction was unnecessary or involved unreasonable compensation.
Background of the Case
The case in focus, Cunningham v. Cornell University, emerged from allegations by a group of current and former employees at Cornell University. These employees, participating in defined-contribution retirement plans from 2010 to 2016, accused the university and other plan fiduciaries of engaging in prohibited transactions. The transactions involved recordkeeping services provided by the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA) and Fidelity Investments Inc.
Employees claimed that because TIAA and Fidelity were service providers, they were “parties of interest,” making their services prohibited transactions under ERISA. Moreover, they alleged these providers charged substantially high fees for their services. Initially dismissed by the 2nd Circuit Court for lacking additional proof, the case found its way to the Supreme Court.
Supreme Court’s Decision
Justice Sotomayor, representing a unanimous court, noted that the additional requirement enforced by the 2nd Circuit was drawn from an exemptions section of ERISA. This section identifies affirmative defenses that a defendant may utilize to counter a claim. At the pleading stage, the plaintiff is tasked solely with alleging a violation of the provision itself, without needing to address these extra requirements.
Concerns from the Bench
In a concurring opinion, Justices Samuel Alito, Clarence Thomas, and Brett Kavanaugh agreed with the interpretation but pointed out potential challenges for defendants. They acknowledged that ERISA plan administrators frequently need to engage outside firms for necessary services, making these firms parties of interest. Their provision of services becomes illegal unless an exemption applies.
The justices expressed concern with the high cost of discovery, noting that surviving a motion to dismiss is pivotal. Defendants, they said, often find settling more efficient, even if they believe they would prevail if litigation continued.
Implications for Employers and Legal Strategy
To handle these procedural complexities, the justices suggested a potential legal strategy: upon a defendant raising an exemption as an affirmative defense, a court may require a plaintiff to file a reply to this defense. While this approach is uncommon, it has previously been endorsed by the court.
The Supreme Court’s decision is expected to streamline the process for plaintiffs under ERISA, especially during the pleading stage, and may encourage more individuals to pursue claims. Employers and ERISA plan administrators should be prepared to engage in these legal strategies to address potential challenges associated with the ruling.
This article is inspired by content from HR Dive. It has been rephrased for originality. Images are credited to the original source.
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