The Supreme Court Relieves ERISA Plaintiffs of a Pleading Requirement: What’s Next for ERISA Plan Fiduciaries?

On April 17, 2025, the U.S. Supreme Court issued a decision that dealt a blow to benefit plan fiduciaries nationwide. The Court unanimously held in Cunningham v. Cornell University¹ that a plaintiff asserting that a plan and service provider engaged in a prohibited transaction under the Employee Retirement Income Security Act (ERISA) is not required to plead facts negating the applicability of the prohibited transaction exemptions listed in another section of ERISA. Essentially, in response to the question of whether, to state a claim under 29 U.S.C. §1106, a plaintiff must plead that an ERISA prohibited transaction exemption does not apply to an alleged transaction between a plan and a service provider, the Court answered “no.” Thus, as the Court stated, “[a]t the pleading stage [] it suffices for a plaintiff plausibly to allege the three elements set forth in §1106(a)(1)(C)” – (1) that a plan engaged in a transaction, (2) involving the furnishing of goods, services, or facilities, (3) with a party in interest, which includes service providers. And the defendant fiduciaries therefore bear the burden of proving that an exemption applies to the alleged prohibited transaction. 

With this decision, the Court resolved a circuit split and reversed the Second Circuit’s previous decision dismissing the plaintiff’s prohibited transaction claim. The Second Circuit had held that, to survive a motion to dismiss on a prohibited transaction claim, the plaintiffs must plead that the service provider arrangement was either unnecessary or involved more than reasonable compensation. In other words, the Second Circuit required the plaintiffs to include the prohibited transaction exemptions in their pleadings. Prior to this decision, other circuits including the Eighth and Ninth Circuits, had not imposed those pleading requirements, while the Seventh Circuit required the plaintiffs to allege the additional elements to state a claim because a “literal reading” of 29 U.S.C. § 1106(a)(1)(C) would purportedly produce “results that are inconsistent with ERISA’s statutory purpose.”²

The implications of this decision, as Justice Alito discusses in his concurrence, is to prolong litigation because prohibited transaction claims may more readily survive a motion to dismiss. Consequently, litigation exposure and defense costs will increase, even where fiduciaries acted prudently and in compliance with ERISA.

ERISA’s Prohibited Transaction and Exemption Provisions 

The key sections of ERISA at issue in Cunningham are 29 U.S.C. sections 1106(a)(1)(C) and 1108(b)(2). Section 1106(a)(1)(C) prohibits fiduciaries from causing a plan to enter into transactions involving the furnishing of goods or services with a “party in interest”—a category that includes most plan service providers—and section 1108(b)(2), which sets forth a list of 21 exemptions for prohibited transactions. Pertinent here is the exemption for necessary services if no more than reasonable compensation is paid. Specifically, section 1108(b)(2)(A) provides that the prohibitions listed in section 1106 do not apply to “reasonable arrangements with a party in interest for . . . legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”

Second Circuit’s Decision

Cornell offers 403(b) retirement plans to eligible employees. These plans are similar to 401(k) plans, but they apply to tax-exempt entities. Cornell, as the named administrator of the Cornell University Retirement Plan for Employees of the Endowed Colleges at Ithaca and the Cornell University Tax Deferred Annuity Plan (collectively, the “Plans”), retained Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (“TIAA”) and Fidelity Investments, Inc. (“Fidelity”) to provide the Plans with investment products and recordkeeping services. Fidelity and TIAA were compensated with fees from the Plans’ assets. Participants in the Plans alleged that the Plans’ fiduciaries breached their fiduciary duties and that the payments made to the Plan’s recordkeepers constituted prohibited transactions under 29 U.S.C. §1106(a)(1)(C). 

In November 2023, the Second Circuit held that in order for the plaintiffs to survive dismissal of their prohibited transaction claim, they must affirmatively allege, along with the prohibited transaction elements contained with section 1106(a)(1)(C), that the arrangement was either unnecessary or involved more than reasonable compensation.³ As the Second Circuit reasoned, the exemptions in section 1108 are not “merely [] affirmative defenses to the conduct proscribed in §1106(a)” but are “incorporated into §1106(a)’s prohibitions.” 

The Second Circuit based its decision on:

• The structure of the prohibited transaction provisions, namely: the introductory clause of §1106(a) that says, “Except as provided in section 1108.”
• A criminal law interpretive principle that when a statute prohibits broad conduct and exempts a large portion of it, courts may treat the exemptions as definitional elements of the claim.
• Requiring the plaintiff to allege facts sufficient to show that the payments to service providers were unnecessary and or unreasonable would prevent “absurd results,” given nearly all ERISA plans engage service providers. 

The Supreme Court’s Unanimous Decision

All nine Justices of the Supreme Court joined in the decision authored by Justice Sotomayor reversing the Second Circuit. The Court held that the plaintiffs were not required to anticipate and plead the exemptions set forth in a different section of ERISA (i.e., section 1108) in making their prohibited transaction claim under section 1106(a)(1) because these exemptions are classic affirmative defenses. 

The Statutory Structure of Sections 1106 and 1108 Reflect that the Exemptions in 1108 are Affirmative Defenses

The Court stated that the text and structure of ERISA (as provided in the Court’s precedent) supports treating the prohibited transaction exemptions in section 1108 as affirmative defenses. The Court explained that while section 1106(a) sets out a categorical prohibition (i.e., prohibits service provider arrangements), section 1108 separately lists 21 exemptions for certain arrangements and authorizes the Department of Labor (DOL) to issue more. 

It rejected the plan fiduciaries’ argument that section 1106(a)(1)(C) incorporates as an element the exemption in section 1108(b)(2)(A) because section 1106(a) starts with “Except as provided in section 1108 of this title.” In reliance on its decision in Meacham v. Knolls Atomic Power Laboratory, 554 U. S. 84 (2008), the Court explained that “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.” (internal quotation marks and modifications omitted). 

The Court was also concerned about the fairness and information asymmetry of requiring the plaintiffs to plead and dispute all the prohibited transaction exemptions listed in §1108 and those promulgated by the DOL. Indeed, during oral argument in January, Justices Jackson and Sotomayor expressed concern with a rule that would require the plaintiffs to plead these exemptions given that it is the plan fiduciaries who have access to the information regarding whether an exemption applies. The Court also rejected any basis to single out the exemption for necessary and reasonable service provider arrangements from the other potential exemptions listed in section 1108.

Accordingly, the plaintiffs need only allege the three elements set forth in section 1106(a)(1)(C), and whether an exemption applies under section 1108 is a matter for the defendants to raise and prove as an affirmative defense.

Criminal Law Analogy Is Not Applicable in the ERISA Context

The Court rejected the Second Circuit’s application of criminal law interpretive principles to conclude that the exemptions listed in section 1108 are elements of a prohibited transaction claim under section 1106(a)(1)(C). Under this criminal law interpretive principle, when a statute is structured to provide sweeping prohibitions followed by sweeping exemptions (essentially clawing back most of the prohibited conduct), courts can treat the exemption as an element of the offense. 

The Court explained that the criminal law principles were rooted in constitutional concerns about fair notice to the defendant to be informed of every fact that is legally essential to the defendant’s potential punishment. These concerns do not apply to ERISA’s civil enforcement framework.

Procedural Safeguards Mitigate “Floodgates” Concerns

The Court acknowledged that its decision may result in many service provider arrangements falling within the scope of prohibited transaction claims at the pleading stage, but it identified multiple procedural tools that may limit these claims such as: 

• Federal Rule of Civil Procedure (“Rule”) 7(a)(7): Courts may require the plaintiffs to file a reply to an answer that raises an exemption as a defense.
• Constitutional (Article III) and Statutory Standing: Claims can still be dismissed where the plaintiffs fail to allege concrete harm or entitlement to relief. Although, as was raised during oral argument, it remains unclear if a showing that the service provider arrangement was unnecessary or unreasonable would be necessary to establish standing.
• Rule 11: Sanctions remain available to address improper or unsupported pleadings.
• ERISA Cost-Shifting Provision (§1132(g)): Courts may award fees and costs where appropriate.

The Concurrence: Deferring to Statutory Text and Black Letter Pleading Procedure

In the concurrence authored by Justice Alito (joined by Justices Thomas and Kavanaugh), while agreeing that the plaintiff should not have to plead affirmative defenses listed in section 1108 because “it would make no sense to require a complaint to anticipate and attempt to refute all the affirmative defenses that a defendant might raise,” the Justices acknowledged that this decision will cause “untoward practical results.” The concurrence further recognized that “in modern civil litigation, getting by a motion to dismiss is often the whole ball game because of the cost of discovery.”⁴ Consequently, the defendants – plan sponsors and fiduciaries – are left in a situation in which it may be more efficient to settle a case, including those in which the defendants would likely prevail should litigation continue. Indeed, the concurrence noted the explosion in settlements of excessive fees cases since 2016. This concurrence also reflected Justice Kavanaugh’s concerns during the oral argument about opening floodgates to litigation if merely alleging the existence of a service provider transaction is sufficient to get past a motion to dismiss. 

The concurrence in reviewing the Court’s suggested safeguards, stated that the “most promising” of all these safeguards is the use of Rule 7(a) – a rule that “the most ardent scholar of civil . . .  procedure has likely never heard of,” as noted during the oral argument.⁵ It urged district courts to “strongly consider” utilizing the procedure outlined in Rule 7(a) to achieve prompt dismissal of “insubstantial claims” and to mitigate costly discovery and motion practice. But as the concurrence stated “[w]hether these measures will be used in a way that adequately address the problem that results from our current pleading rules remains to be seen.”⁶

Implications for Employers and Plan Fiduciaries 

This decision has direct consequences for employers that sponsor ERISA plans as well as for the fiduciaries that administer and manage those plans. 

• Bar Lowered for Plaintiff’s to Move Past a Motion to Dismiss – Increasing the Risk and Cost of Further Litigation, Including Discovery. With this decision, the plaintiffs will be able to proceed with their claims by merely alleging a transaction with a service provider is a prohibited transaction.
• Increased Pressure to Settle Lawsuits. Once past the pleading stage, discovery costs and litigation risks may encourage fiduciaries to settle, even in defensible cases.
• Plan Fiduciaries Have the Burden to Justify Exemption. If a plan engages a service provider, fiduciaries must be prepared to demonstrate that the arrangement was necessary and the fees were reasonable, in accordance with the exemption in section 1108(b)(2)(A).

Next Steps for Employers

To ensure the ability to quickly dispel a prohibited transaction claim, plan fiduciaries should consider taking the following steps:

• Consider Paying Recordkeeping Costs: Assess the viability of the plan sponsor covering recordkeeping costs instead of the plan. This strategy has been implemented by several sponsors of large plans, as it incurs relatively modest expenses and effectively mitigates a common cause of action in breach of fiduciary duty complaints.
• Maintain Comprehensive Documentation: Document the necessity (i.e., usefulness) of the service provider arrangement and the rationale behind the fees (e.g., benchmarking, competitive quotes, requests for proposals, etc.).
• Review and Update Fiduciary Processes: Evaluate existing fiduciary processes for monitoring plan vendors, particularly those providing recordkeeping and administrative services, to ensure that vendor services and fees are reasonable and necessary.
• Strategize Defenses Early: The Court has highlighted several tools available to judges for managing weak claims, such as Rule 7(a)(7) replies, Rule 11 sanctions, and standing-based dismissals. Therefore, it is crucial for fiduciaries, in working with their ERISA counsel, to be prepared to articulate and demonstrate the applicability of an exemption at an early stage in the litigation.