PLANSPONSOR - November/December 2024 - 39

INSIDE ANGLE
SCOTUS to Decide
Ruling will determine how the courts treat prohibited transaction pleadings
R
egardless of the type of legal claim involved, courts routinely
struggle with the appropriate standard to apply at
the pleading stage of a case. This is no different in the
context of the Employee Retirement Income Security Act and is
an issue that courts have struggled with for years. Setting the
pleading standard too low exposes fiduciaries to litigation risk
and potentially discourages offering benefit plans. On the other
hand, setting it too high could result in a lack of access to the
courts for aggrieved parties.
However, the fear of litigation risk has
been all too much of a reality for those in the
ERISA space, as plaintiffs have filed hundreds
of complaints challenging 401(k) plan fees. In
filing these complaints, plaintiffs' strategy is
often to survive the motion to dismiss at the
pleading stage to leverage the prospect of expensive
discovery to extract settlements.
The Supreme Court's impending ruling
compensation is paid therefor. "
The district court held that plaintiffs must allege that a
... the
impending
ruling ... is
poised to
on the pleading standards for prohibited transaction
claims under ERISA, following the
grant of a writ of certiorari in Cunningham v.
Cornell University, is poised to significantly reshape the ERISA
litigation landscape. The potential implications of this landmark
case are outlined below.
prohibited transaction occurred and that no exemption was available.
The court reasoned that the two statutory provisions are
intended to work together and should be evaluated simultaneously.
The practical effect of that decision is that plaintiffs would
need to plead with some degree of specificity that fees were
unreasonable, not just state that the transaction had occurred.
This would be an additional hurdle that plaintiffs
could find challenging to overcome.
The 2nd Circuit affirmed the district court's
significantly
reshape the
ERISA litigation
landscape.
decision on appeal. In doing so, it joined the 3rd,
7th and 10th Circuits in requiring plaintiffs to
allege something more than the mere existence
of a transaction between a plan and a service
provider when making claims about prohibited
transactions. But the 8th and 9th Circuits have
held that plaintiffs need only allege that a transaction
took place and need not allege that it was
for more than reasonable compensation.
Background
In Cunningham v. Cornell University, plaintiffs in a 403(b) defined
contribution plan brought claims against plan fiduciaries
alleging multiple violations of ERISA. One of those claims was
that the fiduciaries engaged in a prohibited transaction violating
ERISA Section 406(a) when they caused the plan to pay fees to
the plan recordkeepers. The plaintiffs' complaint did not include
facts about whether the arrangement was covered by an exemption
under ERISA Section 408.
The district court dismissed those prohibited transaction
claims because the plaintiffs had failed to plead the absence of
one of the exemptions under ERISA Section 408. That section
provides several exemptions to what would otherwise be prohibited
transactions. The most common exemption relied upon is
Section 408(b)(2), which allows for " [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
When the Court Weighs In
For the Supreme Court to grant the plaintiffs' petition for a writ
of certiorari means it will hear the case. Conventional wisdom
would suggest that the court granted the writ because it is ready
to resolve the circuit split and provide guidance on the standard
to be applied when courts evaluate ERISA PT claims.
If the court were to side with the 2nd, 3rd, 7th and 10th
Circuits, plaintiffs might have difficulty surviving a motion
to dismiss prohibited transaction claim. This is because they
would need to specify why an exemption does not apply, which
we would expect could be difficult for plaintiffs to do.
On the other hand, if the court were to side with the 8th
and 9th Circuits, then plaintiffs might find it easier to survive
a motion to dismiss using the current strategy of filing a barebones
complaint with little to no detail regarding whether an
exemption applies. Thus, all eyes will be on the Supreme Court
next year for this highly anticipated decision.
George Sepsakos, a principal in Groom Law Group,
Chartered, in Washington, represents clients on a broad
range of Employee Retirement Income Security Act, federal
tax and securities law matters.
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