The Supreme Court will hold oral arguments Jan. 22 in a legal showdown over who is responsible for proving — or disproving — allegations that contracts between sponsors and service providers are prohibited transactions that violate federal law.
Federal appeals courts differ on this responsibility for ERISA violations, said the petition to the Supreme Court filed by former participants in two Cornell University 403(b) plans, whose lawsuit was dismissed by a federal District Court. The ruling was upheld by a federal appeals court.
The university disagreed. These courts’ rulings were correct, and there isn’t a so-called circuit split among appeals courts on this issue, it wrote in response to a lawsuit now known as Cunningham et al. vs. Cornell University et al.
The university and its supporters said plaintiffs must prove to courts that actions by sponsors and service providers are prohibited transactions. The former participants and their supporters, including the Department of Labor, said ERISA places the burden on sponsors.
Among their various allegations, the former participants accused university fiduciaries of allowing excessive record-keeping fees, arguing that the contracts with two record keepers violated the prohibited transaction provisions of ERISA. The record keepers, TIAA-CREF and Fidelity Investments, are not parties in the case.
ERISA contains many examples of prohibited transactions, but it also offers an extensive list of exemptions.
Prohibited transactions include self-dealing by fiduciaries, improper contracts, and transactions that carry a high risk to plan assets because of contracts that transfer responsibilities reserved for fiduciaries to third parties.
ERISA’s exemptions include providing of investment advice, loans to plan participants, loans to employee stock ownership plans and contracts for life insurance or annuities.
Another issue is when judges should act on claims of prohibited transactions. The university and its supporters said the District Court and the appeals court got it right.
"Plaintiffs risk being shut out at the motion to dismiss stage only if they lack facts supporting an inference of wrongdoing — in which case courts should query why they are bringing the suit in the first place," said a Jan. 3 amicus brief from the U.S. Chamber of Commerce and the National Association of Manufacturers.
The former participants and their supporters say judges need to review more information before deciding. "A plaintiff's claims should not be prematurely dismissed due to the absence of facts that it cannot obtain," the DOL wrote in a Dec. 2 amicus brief.
Initially filed in August 2016, the lawsuit has attracted many of the biggest names in employment and retirement.
In addition to the DOL, the Pension Rights Center, AARP and the AARP Foundation support the ex-participants through amicus briefs submitted to the Supreme Court.
Other supporters of Cornell University via amicus briefs include the American Benefits Council, ERISA Industry Committee, SPARK Institute, the American Council on Education and 13 other higher education associations.
'Divorced from reality'
"Put simply, petitioners’ arguments are divorced from reality,” said the amicus brief by the Chamber of Commerce and NAM.
“Petitioners’ contrived concerns should not distract from the significant harm that their approach would cause to Congress’s carefully balanced framework,” they wrote. “While the last 15 years have already seen a surge of ERISA litigation, petitioners’ interpretation would open the door far wider to suits challenging countless lawful and routine plan transactions.”
Allegations that there will be “an explosion in meritless and burdensome litigation are overblown and unsupported,” said the Nov. 27 Pension Rights Center amicus brief.
A pro-Cornell University ruling by the Supreme Court will “result in an unjustified drain on the resources of American retirees and their families,” the Pension Rights Center wrote.
The former participants argued that the Cornell University plans had to prove to courts that their contracts with record keepers qualified as an exemption.
The Department of Labor agreed. “The exemptions … are defenses to liability that the defendant fiduciary must set up and prove,” the DOL wrote in its Dec. 2 amicus brief. “ERISA is most naturally read to place the burden of pleading and proving the (ERISA) exemptions on the defendant fiduciary.”
However, the university successfully argued at the lower courts that the former participants' legal claims had distorted ERISA guidelines.
“A contract for necessary plan services at a reasonable cost is not a prohibited transaction under ERISA,” Cornell University wrote in July 2024 to the Supreme Court following the former participants’ request for Supreme Court review.
“Petitioners did not allege that the transactions were prohibited because the fees were unreasonable,” the university wrote. “Instead, they took the view that pleading the mere fact of the recordkeeping contracts was sufficient to plead prohibited transactions under ERISA.”
'Wreak havoc'
Accepting the former participants’ argument “would wreak havoc on ordinary plan operations,” said a joint amicus brief filed Jan. 3 by the American Benefits Council, ERISA Industry Committee and the SPARK Institute.
“The threat of baseless litigation immune from dismissal would make some qualified individuals reluctant to serve as fiduciaries altogether,” they wrote. “Those who remained in their roles would be placed in an impossible position.”
The organizations speculated that litigation risk might prompt some employers to “simply decide to scrap their benefit plans altogether” if courts rule against sponsors.
If plaintiffs aren’t required to prove a “plausible claim” for a prohibited transaction when responding to motions to dismiss, this would allow the “opening up an easy line of attack against plan sponsors and fiduciaries simply for administering their plans the way Congress intended,” they wrote.
Cornell University also was supported in a Jan. 3 amicus brief by the American Council on Education and 13 other higher education associations.
Allowing the former participants to prevail would make higher education institutions and their plan administrators defendants in lawsuits “due to nothing more than offering an ERISA-covered retirement plan and engaging in the routine and unavoidable practice of contracting with third-party service providers for that plan,” the wrote.
“According to petitioners, these defendants cannot defeat meritless cases until summary judgment, even if there is absolutely no allegation the defendants did anything improper,” they wrote.
A motion for summary judgment is usually filed after the parties have completed discovery, giving a judge the opportunity to review details of a case. A motion to dismiss, usually requested soon after a complaint is filed, argues that the plaintiff has failed to state a claim.
For plan sponsors, winning a motion to dismiss is their first line of defense in ERISA cases because it is much cheaper than preparing for trial.
The Cornell University Retirement Plans for the Endowed Colleges at Ithaca had $2.8 billion in assets and the Cornell University Tax Deferred Annuity Plan had $2.2 billion in assets, both as of Dec. 31, 2023, according to the latest Form 5500s. Both plans are based in Ithaca, N.Y.