The U.S. Supreme Court on April 17 issued a unanimous, pro-plaintiff decision that placed a greater burden on defendant defined contribution retirement plan sponsors to prove their transactions for services didn’t violate ERISA guidelines.
“The case is remanded for further proceedings consistent with this opinion,” the Supreme Court wrote.
The nine justices reversed previous decisions by the 2nd U.S. Circuit Court of Appeals, New York, and a U.S. federal district court in New York that said plaintiffs had to prove that retirement plan sponsors’ transactions with record keepers violated ERISA’s prohibited transactions guidelines.
The case was closely watched by the retirement industry, whose members told the court in amicus briefs that a pro-plaintiff decision would open the floodgates to ERISA litigation.
Industry representatives have said reversing the lower court decisions would make it easier for plaintiffs to survive motions to dismiss – the earliest stage in the legal process - thus increasing sponsors’ costs for defending their actions during the legal discovery process.
“It is defendant fiduciaries who bear the burden of pleading and proving that (an ERISA) exemption applies to an otherwise prohibited transaction,” Justice Sonia Sotomayor wrote for the court in the case of Cunningham et al. vs. Cornell University et al.
“The court today holds that plaintiffs seeking to state a (prohibited transaction) claim must plausibly allege that a plan fiduciary engaged in a transaction proscribed therein, no more, no less,” Sotomayor wrote. “Plaintiffs are not required to plead and prove that the myriad (ERISA) exemptions pose no barrier to ultimate relief."
ERISA contains a series of prohibited transactions, including self-dealing by fiduciaries, improper contracts and transactions, that carry a high risk to retirement plan assets due to contracts that transfer to third parties the responsibilities reserved for fiduciaries.
ERISA also contains a list of exemptions that include providing investment advice, loans to plan participants, loans to employee stock ownership plans and contracts for life insurance or annuities.
Sotomayor also rejected Cornell University’s contention that a pro-plaintiff decision would lead to an onslaught of meritless litigation. “District courts…have available a variety of means to address the concerns raised” by the university, she wrote.
Cornell University cited “serious concerns, but they cannot overcome the statutory text and structure,” she wrote. “To the extent future plaintiffs do bring barebones…suits, district courts can use existing tools at their disposal to screen out meritless claims before discovery."
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 fees. The initial lawsuit was filed in August 2016.
The allegations of excessive fees will now be heard by a federal district court in New York.
Cornell responds
A university spokeswoman, in an email, said Cornell acknowledges the Supreme Court’s decision “on the technical pleading issue before it.”
She added that the university “is confident that the evidence on the merits will continue to show that Cornell at all times operated its retirement plans in the best interests of all of its plan participants and beneficiaries.”
The former workers’ 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.
Cornell University responded that the former workers had sufficient information sources to make their claim, warning that a pro-participant ruling would encourage more – and frivolous – ERISA lawsuits.
In their appeal to the Supreme Court, the former workers asked the justices to solve a circuit split – differing opinions by different federal appeals courts on the issue of who is responsible for proving or disproving allegations of prohibited transactions.
The Supreme Court’s ruling “was based on a strict interpretation of ERISA,” Jerome Schlichter, the attorney for the plaintiffs, said in an interview.
“It’s a classic case of a conservative interpretation of what the statute says,” said Schlichter, founding and managing partner of plaintiffs firm Schlichter Bogard. “This isn’t legislating from the bench.”
The court’s placing the burden on sponsors to show their actions were exempt under ERISA “is a straightforward and clear decision,” he added. "I don’t see any ambiguity.”
