The Supreme Court Clarifies Pleading Standards for ERISA Prohibited Transaction Claims
Client Alert | April 25, 2025
In Cunningham v. Cornell University, the Supreme Court held that “[P]laintiffs seeking to state a [prohibited transaction] claim must plausibly allege that a plan fiduciary engaged in a transaction proscribed therein, no more, no less.” However, the Court cautioned that “[t]o the extent future plaintiffs do bring barebones [prohibited transaction] suits, district courts can use existing tools at their disposal to screen out meritless claims before discovery.”
On April 17, 2025, the Supreme Court issued its decision in Cunningham v. Cornell University, which addresses the pleading requirements for prohibited transaction claims brought under the Employee Retirement Income Security Act of 1974 (ERISA). In Cunningham, the Court confronted the question of whether a plaintiff seeking to bring a claim must plead not only the elements of an ERISA Section 406 prohibited transaction, but also that the exemptions set forth in ERISA Section 408 do not apply. Justice Sotomayor, writing for a unanimous Court, answered this question in the negative, explaining that Section 408 “sets out affirmative defenses, so it is defendant fiduciaries who bear the burden of pleading and proving that a [Section 408] exemption applies to an otherwise prohibited transaction under [Section 406].”[1]
While confirming a relatively low bar for ERISA plaintiffs’ pleading requirements, the Court was also cognizant of the “serious concerns” raised by respondents that, under this standard, “plaintiffs could too easily get past the motion-to-dismiss stage and subject defendants to costly and time-intensive discovery.”[2] The Court emphasized that these concerns “cannot overcome the statutory text and structure” of ERISA but also noted various tools available to the district courts to “screen out meritless claims before discovery.”[3] In a concurring opinion, Justice Alito, with whom Justice Thomas and Justice Kavanaugh joined, encouraged district courts to “strongly consider” using these procedural “safeguards” “to achieve the prompt disposition of insubstantial claims.”[4]
Anticipating that plan sponsors and fiduciaries may have questions about the practical implications of the Court’s Cunningham decision, in this alert, we provide a brief overview of ERISA’s prohibited transaction framework, a summary of the background and key take-aways from the Cunningham decision, and a preview of what may be next for ERISA plan sponsors and fiduciaries after Cunningham.
Background on ERISA’s Prohibited Transaction Provisions
ERISA prohibits plan fiduciaries from causing a plan to enter into certain transactions with parties who may be in a position to exercise improper influence over the plan.[5] Specifically, Section 406 (29 U.S.C. § 1106) provides that, “[e]xcept as provided in [Section 408],” a fiduciary “shall not cause the plan to engage” in certain transactions with a “party in interest.” A “party in interest” is defined to include various entities that administer or support the administration of a plan, including the plan’s administrator, sponsor, officers, and other entities “providing services to [the] plan.”[6]
Examples of prohibited transactions identified in Section 406 include a direct or indirect: “sale or exchange, or leasing of any property between the plan and a party-in-interest;”[7] “lending of money or other extension of credit between the plan and a party-in-interest;”[8] and, “transfer to, or use by or for the benefit of a party in interest, of any assets of the plan.”[9]
The Cunningham case focused specifically on Section 406(a)(1)(C), which bars a plan fiduciary from “caus[ing] the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect . . . furnishing of goods, services, or facilities between the plan and a party in interest.”[10] As written, this provision, if construed broadly, could encompass many routine arms-length dealings between a plan and a third-party service provider (such as a third-party recordkeeper, claims administrator, investment manager, etc.) to the plan.[11]
Section 408 (29 U.S.C. § 1108), in turn, enumerates 21 exemptions to the prohibited transactions identified in Section 406. Section 408(b)(2)(A) exempts from Section 406 any transaction that involves “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefore.”[12]
The District Court’s and Second Circuit’s Decisions in Cunningham
The Cunningham lawsuit was brought in 2017 by a class of current and former employees of Cornell University who participated in the University’s defined-contribution retirement plans between 2010 and 2016.[13] During this time, Cornell contracted with two third-party service providers to provide recordkeeping services for the plans, which included tracking participants’ account balances and providing account statements, among other services.[14] Cornell compensated the recordkeepers using plan assets.[15] Plaintiffs sued Cornell and its plan fiduciaries alleging, among other claims, that defendants violated Section 406 by causing the plans to engage in prohibited transactions with the two service providers for recordkeeping services for the plans.[16]
Specifically, Plaintiffs claimed that the recordkeepers provided services to the plans and accordingly were “parties-in-interest” under ERISA, and that by allowing the recordkeepers to furnish services to the plans, Cornell engaged in prohibited transactions, unless it could prove an exemption.[17]
Cornell moved to dismiss plaintiffs’ prohibited transaction claims, and the district court granted the motion. The court held that a plaintiff, in addition to pleading the required elements of a prohibited transaction claim under Section 406, must also allege “some evidence of self-dealing or other disloyal conduct.”[18] The district court concluded that plaintiffs had not made that showing, and thus, dismissed their claim.
The Second Circuit affirmed, but on different grounds. The court rejected the district court’s conclusion that Section 406 “demand[s] allegations of ‘self-dealing or disloyal conduct.’”[19] But the court also noted that reading Section 406 in insolation would lead to “absurd results” because it “would appear to prohibit payments by a plan to any entity providing it with any services.”[20] The court held that plaintiffs must plead not only the elements of a prohibited transaction, but also that the applicable Section 408 exemption did not apply to the transaction.[21] And the court found that plaintiffs’ allegations failed to satisfy this standard.[22]
The Supreme Court Reverses and Remands
The Supreme Court granted certiorari in Cunningham to determine “whether a plaintiff can state a claim for relief by simply alleging that a plan fiduciary engaged in a transaction proscribed by [Section 406(a)(1)(C)], or whether a plaintiff must plead allegations that disprove the applicability of the [Section 408(b)(2)(A)] exemption.”[23] And, on April 17, 2025, in a unanimous decision, the Court concluded “that plaintiffs need do no more than plead a violation of [Section 406(a)(1)(C)], and [] therefore reverse[d].”[24]
The Court explained that Section 406(a)(1)(C) imposes a “categorical bar” on transactions that satisfy the three enumerated elements of that provision.[25] Accordingly, the Court held that, “under [Section 406(a)(1)(C)], plaintiffs need only plausibly allege each of those elements of a prohibited-transaction claim.”[26] In contrast, the Court found that Section 408’s exemptions are affirmative defenses because they are “set forth in a different part of the statute” and are “‘writ[ten] in the orthodox format of an affirmative defense.’”[27] Thus, the Court held, the Section 408 exemptions “must be pleaded and proved by the defendant who seeks to benefit from them.”[28]
Importantly, the Court also weighed Cornell’s assertion that “there will be an avalanche of meritless litigation” if plaintiffs need only plead the elements of Section 406 to state a prohibited transaction claim.[29] Although recognizing that Cornell raised “serious concerns” about “meritless litigation” that could “subject defendants to costly and time-intensive discovery,” the Court concluded that those concerns “cannot overcome the statutory text and structure.”[30]
Defendants are not without recourse, however. The Court explained that “district courts can use existing tools at their disposal to screen out meritless claims before discovery.”[31] These tools include invoking Federal Rule of Civil Procedure 7 to require that plaintiffs file a reply to a defendant’s answer and affirmative defenses that “‘put[s] forward specific, nonconclusory factual allegations’ showing the exemption does not apply.”[32] The Court also emphasized that “[d]istrict courts must also, consistent with Article III standing, dismiss suits that allege a prohibited transaction occurred but fail to identify an injury.”[33] And courts also “retain discretionary authority” to expedite or limit discovery to mitigate unnecessary costs and to impose Rule 11 sanctions against parties and counsel who lack a good faith basis for their claims.[34] The Court also recognized ERISA’s cost shifting provision that “gives district courts an additional tool to ward off meritless litigation.”[35]
In a concurring opinion, Justice Alito (joined by Justice Thomas and Justice Kavanaugh) recognized that the Court’s “straightforward application of established rules has the potential to cause . . . untoward practical results.”[36] Justice Alito noted that administrators of ERISA plans will “almost always find it necessary to employ outside firms to provide services the plan needs,” and because those firms become “parties in interest” under ERISA, their service to the plans are unlawful under Section 406, unless one of the exemptions in Section 408 applies.[37] The “upshot” Justice Alito explained, is that “all a plaintiff must do in order to file a complaint that will get by a motion to dismiss under Federal rule of Civil Procedure 12(b)(6) is to allege that the administrator did something that, as a practical matter, it is bound to do.”[38] And, “in modern civil litigation,” Justice Alito continued, “getting by a motion to dismiss is often the whole ball game because of the cost of discovery.”[39] Against this backdrop, Justice Alito encouraged district courts to “strongly consider” insisting that a plaintiff file a reply to an answer that raises one of the Section 408 exemptions as an affirmative defense “and employing the other safeguards that the Court describes” in its opinion to achieve “the prompt disposition of insubstantial claims.”[40]
What’s Next for Plan Sponsors and Fiduciaries
It remains to be seen whether the specter of an “avalanche of meritless litigation” will come to pass. For now, however, the Supreme Court has made clear that plaintiffs need only plausibly plead the three elements of a Section 406 prohibited transaction to survive a motion to dismiss. Plaintiffs need not also plead that a Section 408 exemption does not apply to their claims. As the Cunningham majority opinion and concurrence suggest, this standard may open the door to more claims against plan sponsors and fiduciaries.
Accordingly, sponsors and fiduciaries may want to consider reviewing their service provider agreements to assess whether the services their plans are receiving are necessary and the fees the plans are paying for those services are reasonable. Fiduciaries should also consider documenting their decision-making processes related to plan administration, particularly with respect to service provider selection and monitoring.
Additionally, the Court in Cunningham detailed a series of tools available to plan sponsors and fiduciaries to seek early dismissal of prohibited transaction claims, limit burdensome discovery, and shift the cost of litigating meritless claims to plaintiffs. The Court’s invocation of Rule 7(a)(7) as a potential solution for screening out meritless claims is particularly notable. This rarely used procedure may help defendants dispose of claims early, and without significant discovery. Specifically, Rule 7(a)(7) requires a party, “if the court orders” it, to file “a reply to an answer.”[41] Most commonly used in the context of qualified immunity, this procedure allows defendants subject to barebones claims to test whether plaintiffs can “put forward specific, nonconclusory factual allegations” that establish that an affirmative defense does not apply.[42] As the Supreme Court explained in Crawford-El v. Britton, the Rule 7(a)(7) reply mechanism, together with motions for a more definite statement under Rule 12(e), are the “two primary options” for resolving predicate issues like the application of an affirmative defense “prior to permitting discovery at all.”[43] However, even if a court ultimately decides that discovery is warranted, defendants could still pursue an order bifurcating discovery and potentially also an early dispositive motion targeting the claims. After Cunningham, these procedures may become part of a standard toolset for sponsors and fiduciaries defending prohibited transaction claims.
Finally, it is worth noting that the Cunningham decision does not purport to limit or otherwise relax the well-established pleading standards under Twombly and Iqbal. Thus, plaintiffs seeking to bring prohibited transaction claims must still allege facts that make the claims “‘plausible,’” not merely “‘conceivable.’”[44] The Court’s opinion also does not curtail its directive in Hughes v. Northwestern University that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”[45] Plan sponsors and fiduciaries targeted with prohibited transaction claims can and should draw on the Court’s language in Hughes to support dismissal of unmeritorious claims.
[1] Cunningham v. Cornell, No. 23-1007, 604 U.S. ___ (2025), Slip. Op. 1.
[2] Id. at 14.
[3] Id.
[4] Cunningham v. Cornell, No. 23-1007, 604 U.S. ___ (2025), Concurring Op. 3.
[5] 29 U.S.C. § 1106; see also Dept. of Labor, elaws – ERISA Fiduciary Advisor, Are some transactions prohibited? Is there a way to make them permissible?, available at https://webapps.dol.gov/elaws/ebsa/fiduciary/q4d.htm (last accessed Apr. 23, 2025).
[6] 29 U.S.C. § 1002(14).
[7] 29 U.S.C. § 1106(a)(1)(A).
[8] 29 U.S.C. § 1106(a)(1)(B).
[9] 29 U.S.C. § 1106(a)(1)(D).
[10] 29 U.S.C. § 1106(a)(1)(C).
[11] See Cunningham v. Cornell, No. 23-1007, 604 U.S. ___ (2025), Concurring Op. 1-2.
[12] 29 U.S.C. § 1108(b)(2)(A).
[13] Cunningham v. Cornell Univ., 86 F.4th 961, 969 (2d Cir. 2023).
[14] Id. at 970.
[15] Id.
[16] Id. at 970-71.
[17] Id. at 973.
[18] Cunningham v. Cornell Univ., 2017 WL 4358769, at *10 (S.D.N.Y. Sept. 29, 2017).
[19] Cunningham, 86 F.4th at 975.
[20] Id. at 973.
[21] Id. at 975.
[22] Id. at 978–70 (quoting Jones v. Harris Assoc. L.P., 559 U.S. 335, 346 (2010)).
[23] Cunningham v. Cornell, No. 23-1007, 604 U.S. ___ (2025), Slip Op. 6.
[24] Id.
[25] Id.
[26] Id.
[27] Id. at 6, 8 (quoting Meacham v. Knolls Atomic Power Lab’y, 554 U.S. 84, 102 (2008)).
[28] Id. at 8.
[29] Id. at 13.
[30] Id. at 14.
[31] Id.
[32] Id. (quoting Crawford-El v. Britton, 523 U.S. 574, 598 (1998)).
[33] Id. at 15.
[34] Id.
[35] Id.
[36] Cunningham v. Cornell, No. 23-1007, 604 U.S. ___ (2025), Concurring Op. 1.
[37] Id.
[38] Id. at 2.
[39] Id.
[40] Id. at 3 (quoting Crawford-El, 523 U.S. at 597).
[41] Fed. R. Civ. P. 7(a)(7).
[42] Crawford-El, 523 U.S. at 598 (quoting Siegert v. Gilley, 500 U.S. 226, 236 (1991) (Kennedy, J., concurring)).
[43] Id.
[44] See Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007)).
[45] Hughes v. Nw. Univ., 595 U.S. 170, 177 (2022).
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