On October 4, 2024, the Supreme Court granted certiorari in a class-action lawsuit filed by employees of Cornell University (“Cornell”), alleging mismanagement of their retirement funds. The case presents an opportunity for the Court to address a Circuit split concerning the elements required to bring a “prohibited transactions” claim under ERISA.
The Employee Retirement Income Security Act of 1974 (“ERISA”) is the federal law governing private industry retirement plans, with Section 1106(a)(1)(C) specifically prohibiting certain transactions between retirement plans and interested parties. However, Section 1108 provides exemptions for specific transactions, and the Supreme Court will review whether plaintiffs must disprove these exemptions or if defendants must prove their applicability under the statutory framework.
Plaintiffs originally alleged that Cornell violated its fiduciary duties by: (1) permitting excessive fees; and (2) offering imprudent investment options in the employees’ 403(b) plan. The case was dismissed in 2017 by the District Court for the Southern District of New York, which concluded that Plaintiffs had not sufficiently alleged that the exemptions under Section 1108 did not apply. On appeal, the Second Circuit upheld the dismissal, placing the burden of proving that any prohibited transaction exemption was inapplicable on Plaintiffs.
Plaintiffs petitioned for certiorari on March 11, 2024, arguing that the lower courts misapplied ERISA by improperly shifting the responsibility to negate the availability of Section 1108 exemptions to the plaintiffs. Cornell University, in its opposition filed on July 22, 2024, contended that the Second Circuit’s decision was consistent with precedent and ERISA’s statutory framework.
The resolution of similar cases has caused a split among federal Circuit courts. While the Eighth and Ninth Circuits place the burden on defendants to prove that a transaction falls within an exemption, the Third, Seventh, and Tenth Circuits hold that plaintiffs must show that no exemptions apply, contending that such an interpretation would place an unreasonable burden on fiduciaries paying for essential services. The Supreme Court’s decision is expected to resolve this conflict and clarify the fiduciary standards governing ERISA prohibited transactions.
The outcome of this case will have significant implications for millions of individuals that participate in retirement plans nationwide. The Supreme Court’s decision is expected to clarify the allocation of the burden of proof in ERISA prohibited transactions claims and could have widespread consequences for fiduciary responsibilities under the statute.
Updates to this blog will be provided as the case progresses. The case caption is Cunningham et al. v. Cornell University et al., case number 23-1007, in the United States Supreme Court.
The legal team at Miller Shah LLP has significant experience representing ERISA matters. If you have any questions regarding this subject or this post, please contact Alec Berin (ajberin@millershah.com) or Jonathan Dilger (jadilger@millershah.com). The firm can also be reached toll-free at (866) 540-5505.
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