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Supreme Court wrestles with who must plead ERISA exemptions in prohibited-transaction suits
Summary
At oral argument in Cunningham v. Cornell University, advocates and justices disputed whether plaintiffs must negate ERISA exemptions at the pleading stage or whether fiduciaries bear that burden, a question with implications for retirement-plan litigation and discovery costs.
At oral argument in Cunningham v. Cornell University, the Supreme Court debated whether plaintiffs bringing prohibited-transaction claims under the Employee Retirement Income Security Act (ERISA) must plead facts negating statutory exemptions in 29 U.S.C. §1108(b), or whether those exemptions are affirmative defenses that fiduciaries must plead and prove.
The issue matters because it shapes who must shoulder early litigation tasks and the scope of discovery in suits alleging improper plan transactions. Petitioners argued that the statutory exemptions are affirmative defenses and that defendants should bear the burden of pleading them; opponents warned that allowing bare-bones complaints to proceed would spawn costly, wide-ranging discovery that would strain plans and institutions.
Mister Wang, counsel for the petitioners, told the court that “when Congress enacted ERISA, it identified a number of prohibited transactions and codified that understanding in 29 U.S.C. section 1106,” and argued the Second Circuit erred by requiring plaintiffs to negate exemptions before discovery. Wang said the statute’s structure and precedents, including Harris Trust, support treating the exemptions as defenses and letting plaintiffs plead prohibited transactions to obtain discovery: “...we ask this court to reverse the judgment of the second circuit.”
Justice Brett Kavanaugh pressed the petitioner on a practical risk the respondents and amici raised, calling the petitioners’ theory “nuts” and asking whether simply alleging a routine record‑keeping contract would automatically trigger discovery. Wang responded that plaintiffs need only plead enough to make a claim plausible, and that district courts have tools — limited discovery, expedited summary judgment, or Rule 7 answer-and-reply practice — to weed out truly baseless suits.
The United States, represented by Miss Dubin, urged a different reading for service‑provider transactions. Dubin acknowledged that service providers are one of nine categories of parties in interest and said the statute’s “text and structure” counsel in favor of requiring some showing that fees were unnecessary or unreasonable for the claim to proceed. She warned that the “theoretical concern” about floodgates of litigation, while not yet fully realized, is a real practical problem courts should address when evaluating pleadings.
Respondents’ counsel, Mister Hartske, told the court that section 1106(a) covers a broad swath of routine, often beneficial conduct and that reading petitioners’ view to allow suits based solely on the existence of a service‑provider contract would be “intolerable.” Hartske said courts should require plaintiffs to plead unreasonable or unnecessary fees as part of the claim and noted that, in practice, the university cases cited have proceeded through long discovery without prevailing on the merits.
Several justices pressed both sides on how a plausible‑complaint standard (Twombly/Iqbal) intersects with the exemptions. Justice Sonia Sotomayor highlighted information asymmetries, asking how a plaintiff could know which exemption a defendant might invoke given Department of Labor rules and a long list of §1108(b) exemptions. Justice Clarence Thomas and others questioned whether pleading an §1106 violation alone suffices for standing or whether an allegation of excessive fees is needed to show injury.
Both sides told the court that district courts possess procedural tools — pleading tests, Rule 7 reply practice, limited discovery, expedited motions for summary judgment, fee‑shifting sanctions, and Rule 11 sanctions — that can curb frivolous suits. Petitioners emphasized that courts already apply plausibility review to prevent “box‑1” bare‑bones complaints from proceeding; respondents countered that those guardrails have not consistently prevented years of discovery in university litigation.
The argument covered statutory interpretation, trust‑law background, and practical litigation management. Counsel cited several precedents and tools in support of their positions, including Harris Trust, Twombly, Iqbal, and Rule 7 practice. The arguments concluded with petitioner rebuttal and the justices’ remaining questions.
The case was submitted and awaits the court’s decision.
