U.S. Supreme Court Holds Unanimously that ERISA Plaintiffs Need Only Plausibly Allege Elements of Prohibited-Transaction Claim Without Addressing Affirmative Defenses

In Cunningham v. Cornell Univ., No. 23-1007, —S.Ct.—-, 2025 WL 1128943 (U.S. Apr. 17, 2025), the U.S. Supreme Court addressed the pleading standards for claims under the Employee Retirement Income Security Act of 1974 (ERISA), specifically focusing on prohibited transaction claims under 29 U.S.C. § 1106(a)(1)(C). The Court’s decision, delivered by Justice Sonia Sotomayor, clarified that plaintiffs need only plausibly allege the elements of a prohibited transaction claim without addressing affirmative defenses related to statutory exemptions under § 1108.

This class action was brought by participants in retirement plans administered by Cornell University against the university and its fiduciaries, alleging they engaged in prohibited transactions by paying excessive fees for recordkeeping services in violation of ERISA. The district court dismissed the prohibited-transaction claim, and the Second Circuit affirmed, requiring plaintiffs to plead that no exemptions under § 1108 applied. The Supreme Court granted certiorari to resolve a circuit split, particularly contrasting the Second Circuit’s approach with the Eighth Circuit’s, which does not impose additional pleading requirements for § 1106(a) claims.

The Court held that under § 1106(a)(1)(C), plaintiffs must plausibly allege three elements: (1) a fiduciary caused the plan to engage in a transaction, (2) the fiduciary knew or should have known that the transaction involved furnishing goods or services, and (3) the transaction was between the plan and a party in interest. This provision is categorical and does not inherently exclude transactions involving necessary or reasonable compensation.

The Court emphasized that the exemptions in § 1108 constitute affirmative defenses. Drawing on precedent from Meacham v. Knolls Atomic Power Lab’y, 554 U.S. 84, 96, 128 S. Ct. 2395, 2403, 171 L. Ed. 2d 283 (2008), the Court reiterated that when exemptions are structurally separate from prohibitions, they are treated as affirmative defenses. Therefore, the burden of pleading and proving these exemptions falls on defendants, not plaintiffs. Plaintiffs are not required to preemptively disprove these exemptions in their complaints.

Justice Sotomayor’s opinion underscored that statutory structure and precedent firmly place the burden of establishing exemptions on defendants. Citing Meacham, the Court noted that Congress’ choice to delineate prohibitions and exemptions separately indicates an intent for exemptions to be affirmative defenses. This interpretation aligns with the principle that plaintiffs need not anticipate and negate affirmative defenses in their pleadings.

Respondents argued that the language “[e]xcept as provided in section 1108” in § 1106(a) implies that exemptions are elements of a § 1106 claim, mandating plaintiffs to plead their inapplicability. The Court rejected this, noting that such a reading would require plaintiffs to address all 21 statutory exemptions and numerous regulatory exemptions, which would be impractical and contrary to statutory intent.

The Court dismissed reliance on United States v. Cook, 84 U.S. 168, 21 L. Ed. 538 (1872), clarifying that its rule on exceptions pertained to criminal pleadings and did not apply to civil ERISA claims. Moreover, practical concerns about meritless litigation were insufficient to alter statutory interpretation, as district courts possess mechanisms to manage insubstantial claims, such as requiring plaintiffs to respond to affirmative defenses or imposing Rule 11 sanctions.

The Supreme Court reversed the Second Circuit’s decision, holding that ERISA plaintiffs need only allege the elements of a prohibited transaction under § 1106(a)(1)(C) without addressing § 1108 exemptions. This decision simplifies the pleading standard for prohibited transaction claims and places the onus on defendants to assert and prove exemptions. The ruling aligns with established pleading norms and ensures that plaintiffs can pursue ERISA claims without the undue burden of preemptively addressing complex statutory exemptions. This decision is pivotal for attorneys navigating ERISA litigation, as it clarifies the strategic approach to pleading and defending against prohibited transaction claims.