Cunningham v. Cornell University

This case involves a class action brought by current and former Cornell University employees who participated in the university's 403(b) retirement plans from 2010 to 2016.In 2017, plaintiffs sued Cornell and other plan fiduciaries, alleging that the plans engaged in prohibited transactions under ERISA Section 406(a)(1)(C) by paying excessive recordkeeping fees to service providers TIAA and Fidelity Investments.The district court dismissed the claim, and the Second Circuit affirmed, holding that plaintiffs must plead that the transaction was unnecessary or involved unreasonable compensation.The U.S. Supreme Court granted certiorari to resolve a circuit split on the proper pleading standard.

The Supreme Court unanimously reversed the Second Circuit's decision and remanded the case.Justice Sotomayor delivered the unanimous opinion, with Justice Alito filing a concurring opinion joined by Justices Thomas and Kavanaugh.The Court held that to state a claim under §1106(a)(1)(C), a plaintiff need only plausibly allege the elements contained in that provision itself, without addressing potential §1108 exemptions, as §1108 sets out affirmative defenses for which defendants bear the burden of pleading and proving.

The central dispute is whether a plaintiff bringing a prohibited transaction claim under ERISA §406(a)(1)(C) must plead that the statutory exemption under §408(b)(2)(A) does not apply—i.e., that the services were unnecessary or involved unreasonable compensation—or whether the exemption is an affirmative defense that defendants must plead and prove.

The decision significantly lowers the pleading standard for ERISA prohibited transaction claims, making it easier for plan participants to survive motions to dismiss and proceed to discovery.This is expected to trigger a new wave of excessive fee litigation against retirement plan sponsors and fiduciaries.The ruling resolves a longstanding circuit split but raises concerns about potentially meritless claims proceeding into costly discovery, though the Court suggested tools for lower courts to screen such claims.