If the retirement industry was hoping to gauge Supreme Court justices’ consensus from the oral arguments in an ERISA case debate over prohibited transactions, the justices themselves didn’t offer a consensus on a law that many find challenging.
“There’s some concern about why on earth Congress would have structured it that way,” said Justice Amy Coney Barrett, during the Jan. 22 hearing on Cunningham et al vs. Cornell University et al., a case that has significant implications for the entire retirement industry.
For Barrett and other justices, the structure of ERISA law, with one section describing prohibited transactions and another section outlining exemptions, represents a challenge to reconcile as well as the many other exemptions provided by the Department of Labor.
“This isn't that easy a case in my mind,” said Justice Sonia Sotomayor.
Former workers in two university 403(b) retirement plans accused Cornell University and its fiduciaries of violating ERISA’s prohibited transaction rules through their contracts with two record keepers due to allegedly excessive allegedly fees.
A federal district court and a federal appeals court rejected the claim of prohibited transactions. The initial lawsuit was filed in August 2016.
The justices were asked to determine whether plaintiffs must prove prohibited transactions or sponsors must prove exemptions. They also were asked whether making a prohibited transaction allegation was sufficient for lower court judges to reject defendants’ motion to dismiss, or whether participants had to provide more facts at this earliest stage in litigation.
“The problem in this case, which is either whatever we decide, someone's going to be potentially unfairly treated because… no plaintiff has a way of knowing what all the exemptions are and what potential exemptions the other side could pick,” Sotomayor said.
Prohibited transactions
Prohibited transactions include self-dealing by fiduciaries, improper contracts and transactions that carry a high risk to retirement plan assets because of contracts that transfer to third parties the responsibilities reserved for fiduciaries.
ERISA’s exemptions include providing investment advice, loans to plan participants, loans to employee stock ownership plans and contracts for life insurance or annuities.
The former participants’ petition to the Supreme Court said Cornell University didn’t provide enough information for them to make a plausible claim.
The only way to get sufficient information was through the discovery process, which takes place after a motion to dismiss is rejected, said the petition. It added that different appeals courts have issued different rulings on prohibited transactions.
Cornell University said the former participants had sufficient information sources to make their claim, warning that a pro-participant ruling would encourage more – and frivolous – ERISA lawsuits. Defendants in ERISA cases hope for dismissals to avoid the extra expenses of the discovery process.
“Based on the justices’ comments, I doubt that merely alleging an agreement between the plan and outside service provider will be sufficient to state a prohibited transaction claim,” said R. Blake Crohan, senior associate on the ERISA litigation team at Alston & Bird, which isn’t involved in the case.
“The court will likely issue a narrowly tailored opinion because of the potential spillover effect this case could have on the pleading standards in other cases involving statutes with exemptions to prohibitions,” Crohan added.
The justices’ questions “signaled an interest in determining how they might decide who bears the burden of showing that an exemption… applies,” said Lynn Dudley, senior vice president, global retirement and compensation policy for the American Benefits Council. Her organization filed an amicus brief supporting Cornell University.
“It also seemed based on the questions that we might see a split in the court (because) there was a tension between concern over a potential explosion in litigation and making it easier for plaintiffs,” Dudley said.
Convincing lower court judges of prohibited-transaction claims is too difficult for plaintiffs because they lack sufficient data, said Louis Lopez, vice president of litigation of the AARP Foundation.
“Courts have applied different legal standards, many requiring detailed information—often inaccessible—when filing claims, creating an unreasonably high bar that discourages legitimate cases,” he said. “AARP and the AARP Foundation call on the court to establish a clear and fairer burden of proof, ensuring retirees can safeguard their financial stability.”
AARP and the AARP Foundation filed an amicus brief supporting the former participants in Cornell's retirement plan.
Several attorneys at Goodwin Procter said they couldn’t predict how the justices would rule, noting that some, including Brett M. Kavanaugh and Samuel A. Alito Jr. appeared to support Cornell University. (“It does to me seem nuts,” said Kavanaugh, commenting on the former participants’ legal argument).
They noted some justices seemed to be searching for a middle ground between motion-to-dismiss guidelines and a full-fledged discovery process.
The attorneys spoke during a firm-sponsored webinar Jan. 23.
“An expedited discovery is the worst possible choice,” said Jaime A. Santos, partner and co-chair of appellate and Supreme Court litigation, because that would require less time to conduct a detailed legal analysis. Her law firm filed an amicus brief on behalf of the U.S. Chamber of Commerce and the National Association of Manufacturers supporting Cornell University.