Division Between Jurisdictions Creates Questions Surrounding ERISA Claims

Current and former retirement plan members in two Cornell University 403(b) plans have asked the U.S. Supreme Court to revive their dismissed claims, which were brought in an August 2016 lawsuit.

The plaintiffs claim the university and its fiduciaries violated ERISA by conducting prohibited transactions, failing to remove poor-performing investments, charging high record-keeping fees, failing to monitor fees, and offering expensive mutual fund share classes when cheaper share classes were available.

A federal district judge either dismissed or granted summary judgment to the sponsor on all of the participants' claims but one. That claim was later settled. In November 2023, a federal appeals court reviewed the dismissed claims and upheld the district court's decision to dismiss. The plaintiffs now are seeking review by the U.S. Supreme Court.

According to the petition for certiorari filed in Cunningham et al. vs. Cornell University et al, plaintiffs have asked the justices to establish uniformity in how appeals courts and district courts interpret ERISA's guidelines on prohibited transactions and what sponsors must do to secure exemptions protecting themselves from liability. The petition said various courts disagree on whether an alleged prohibited transaction should be based on a strict reading of ERISA or whether a plaintiff "must plead and prove additional elements and facts not contained in the provision's text." The Cornell plaintiffs contend that prohibited transaction claims should be based on the former but argue that some appeals courts emphasize the latter, thus creating uncertainty and forming a basis for their certiorari petition. "Cornell University asks Supreme Court to support its ERISA practices" www.pionline.com (Mar. 18, 2024).

 

Commentary

 

The plaintiffs' prohibited transaction claim is premised on ERISA's 29 U.S.C. §1106(a), entitled "[t]ransactions between plan and party in interest," which provides, in relevant part:

Except as provided in section 1108 of this title:

 

(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if … such transaction constitutes a direct or indirect … (C) furnishing of goods, services, or facilities between the plan and a party in interest… 

 

ERISA defines a "party in interest" of an employee benefit plan to include "a person providing services to such plan." §1002(14)(B).

Section 1108, expressly referenced in §1106(a), and lists certain exemptions from prohibited transactions. One exemption is §1108(b)(2)(A), which permits "[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 therefor."

Reading §1106(a)(1)(C) in isolation would appear to prohibit payments by a plan to any entity providing it with any services. However, the Third, Tenth, and Seventh Circuits have declined to interpret in this manner to avoid absurd results. Two other circuits, the Eighth and Ninth, took a literal and expansive view, holding the §1108(b) exemptions are affirmative defenses and need not be addressed when examining the merits of a plaintiff's §1106 claim.

The Second Circuit in Cunningham v. Cornell followed in part the Eighth Circuit, though not its "affirmative defense" reasoning. The Second held: "As a matter of first impression that to state a claim for a prohibited transaction pursuant 29 U.S.C. §1106(a)(1)(C), it is not enough to allege that a fiduciary caused the plan to compensate a service provider for its services; rather, the complaint must plausibly allege that the services were unnecessary or involved unreasonable compensation … thus supporting an inference of disloyalty."

The difference in interpreting these two provisions is obvious between the various circuits that have addressed this issue. It remains to be seen if the U.S. Supreme Court will take up the case.

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