A recent Supreme Court decision clarifies the rules that apply when cases alleging prohibited transactions are brought under ERISA. On April 17, 2025, the Court ruled 9-0 in Cunningham v. Cornell University that an ERISA prohibited transaction claim requires only a plausible allegation that a prohibited transaction occurred and need not address potential prohibited transaction exemptions (“PTE”). The Court also provided guidance to help lower courts avoid protracted litigation that could arise from prohibited transaction claims.
As background, ERISA designates most transactions between a plan and a “party in interest,” including a service provider, as a prohibited transaction, unless there is an exemption to it under law (a PTE). For example, there is a PTE that permits plans to pay providers for services that are necessary for the plan’s operations, provided no more than reasonable compensation is paid. Prior to the issuance of a decision in Cunningham, it was unclear whether a defendant needed to raise the PTE as an affirmative defense to shield the plan from liability even if the allegations are proven, or if the plaintiff had a burden to sufficiently allege in its complaint that the transaction is not exempt.
In the Cunningham case, the plaintiffs alleged that excessive fees were charged by service providers to Cornell University’s 401(k) plan, constituting a prohibited transaction. The Second Circuit held that PTEs were not merely affirmative defenses, but instead require the plaintiff to plausibly allege that service providers were paid more than reasonable compensation, thus falling outside the applicable PTE. This created a conflict with the Eighth Circuit, which had previously ruled that PTEs did not impose additional pleading burdens on plaintiffs.
The Supreme Court unanimously reversed the Second Circuit, holding that PTEs do not impose additional pleading requirements on plaintiffs. The Court relied upon its rules of statutory construction providing that when a law lays out exemptions apart from prohibitions and refers to the exemptions as such, then those exemptions are affirmative defenses. The Court noted that this was only a question of pleading standards and that, if a defendant proves a PTE, the prohibited transaction claim will ultimately fail on the merits.
The Court also addressed arguments that allowing a lawsuit whenever a service provider is compensated could result in “an avalanche of meritless litigation.” Although acknowledging these to be “serious concerns,” the Court held this could not override its interpretation of congressional intent. However, the Court noted that district courts have tools to screen meritless claims. In particular, the Court referenced a little-used procedure under the Federal Rules of Civil Procedure that permits courts to order a reply to an answer, which could be used when a PTE is raised as an affirmative defense to require that the plaintiff provide more specific allegations regarding why the PTE does not apply. The Court also noted additional ways that lower courts could screen meritless claims, including dismissing suits for lack of standing where a prohibited transaction is alleged without a corresponding injury; sanctioning counsel who allege prohibited transactions without a good faith basis to believe that a PTE does not apply; and awarding fees and costs under ERISA’s discretionary fee-shifting provision.
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