For years, I observed that federal courts were growing weary of cases involving fee litigation, but then the Supreme Court changed that perspective.
The Supreme Court issued a unanimous decision in Cunningham v. Cornell University, a landmark case concerning the management of retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA). This ruling significantly lowers the requirements for plaintiffs to file ERISA claims, potentially transforming the landscape of retirement plan litigation.
The case stemmed from a lawsuit involving 28,000 Cornell University employees who alleged that the university’s retirement plan fiduciaries engaged in prohibited transactions by paying excessive fees to service providers such as TIAA and Fidelity Investments. The plaintiffs argued that these arrangements violated ERISA’s prohibitions against certain transactions with interested parties. Lower courts had previously dismissed the case, requiring plaintiffs to address potential statutory exemptions under ERISA § 408 in their initial pleadings. However, the Supreme Court reversed this position.
Justice Sonia Sotomayor, writing for the Court, clarified that plaintiffs need only allege the elements of a prohibited transaction under ERISA § 406(a). Any exemptions under § 408 are considered affirmative defenses that defendants must assert and prove. This decision has resolved a division among federal appellate courts regarding the pleading requirements for ERISA claims. By shifting the burden of proving exemptions to the defendants, the ruling may lead to an increase in ERISA litigation, as plaintiffs encounter fewer obstacles at the early stages of a lawsuit.
Justice Samuel Alito, in a concurring opinion, acknowledged this possibility, noting that more claims might survive early dismissal, thereby increasing pressure on defendants to settle. The Cunningham decision highlights the Supreme Court’s commitment to ensuring that employees have a fair opportunity to challenge potential mismanagement of retirement plans. As the case returns to the lower courts for further proceedings, it sets a precedent that could influence how retirement plan fiduciaries manage and document their decision-making processes to withstand judicial scrutiny.
For employers and plan administrators, this ruling serves as a vital reminder of the importance of transparency and diligence in managing retirement plans. It also underscores the evolving legal standards governing fiduciary responsibilities under ERISA.
