Supreme Court wrestles with who must plead ERISA exemptions in prohibited-transaction suits

Petitioners asked the Supreme Court on Wednesday to reverse an appellate ruling that dismissed a prohibited-transaction claim under the Employee Retirement Income Security Act after the court found plaintiffs had not pleaded enough facts to survive a motion to dismiss.

At argument, counsel for the petitioners, Mr. Wang, said Congress wrote the statute so that plaintiffs could plead a violation of 29 U.S.C. §1106 and defendants would use the exceptions in §1108 as affirmative defenses. "When Congress enacted ERISA, it identified a number of prohibited transactions and codified that understanding in 29 U.S.C. section 1106," Mr. Wang told the justices, and he urged the court to "reverse the judgment of the second circuit."

The case centers on whether routine service-provider arrangements that involve plan recordkeeping — the sort of contracts many employers and universities use — automatically survive a motion to dismiss simply because the arrangement exists, or whether plaintiffs must plead additional facts (for example, that fees were unreasonable or services unnecessary) to make a claim plausible at the pleading stage.

Why it matters: A ruling for petitioners would generally permit plaintiffs to plead a §1106 prohibited-transaction claim on the basis that a plan engaged a party in interest and then rely on discovery and §1108 defenses from defendants. A ruling for respondents would require more detailed factual allegations by plaintiffs at the outset and could reduce early-stage discovery and litigation costs for employers and recordkeepers.

What the advocates argued

Mr. Wang (petitioners) argued that the statutory structure and precedent instruct courts to treat the §1108 exemptions as defenses that defendants will prove, not elements plaintiffs must plead. He said plaintiffs may lack the transactional detail necessary to negate exemptions before discovery and that longstanding practice in some circuits reflects that burden allocation.

Responding, counsel arguing for the respondents — including Miss Dubin and Mr. Hartske at different points in argument — urged the opposite view. Miss Dubin said the text and structure of ERISA show the relevant exemptions in §1108 are what a plaintiff must allege in cases arising under §1106(a). "The text and structure of this statute demonstrate that the 21 exemptions in 1108(b) are the fiduciary's responsibility to plead," she told the court, arguing that requiring plaintiffs to plead unreasonableness or unnecessary services at the outset is necessary to prevent an onslaught of bare-bones suits that force discovery and settlements.

Practical concerns and procedural tools

Justices from across the bench pressed both sides about real-world effects. Several justices voiced concern that permitting a bare allegation of a service-provider transaction could produce burdensome discovery and incentivize settlements — an outcome described by some amici as a litigation threat to universities and other plan sponsors.

Other justices pushed back, asking whether district courts already have tools to police weak complaints. Mr. Wang and several justices discussed Rule 7 and mechanisms such as limited, targeted discovery, expedited motions for summary judgment, sanctions including Rule 11, and fee-shifting as existing guardrails lower courts can use to prevent abusive filings.

Justice Brett M. Kavanaugh asked directly whether the petitioners' theory was "nuts," quoting the respondent position that treating routine recordkeeping arrangements as automatic tickets beyond dismissal "seems nuts." Mr. Wang acknowledged the concern and said the plausibility framework and district-court discretion would prevent frivolous suits from proliferating.

The government and others

The solicitor-general's position (argued in the course of the argument by counsel identified in the transcript as Miss Dubin in one appearance and discussed by the bench) sought middle ground: the exemptions are generally the fiduciary's burden to justify, but district courts have discretion to manage pleadings and discovery and to require plaintiffs to provide more detail when an affirmative defense is plainly in play.

Record in the lower courts and factual posture

The dispute grew out of complaints against university retirement plans that alleged plan recordkeepers bundled recordkeeping with investment products and revenue sharing, resulting in higher expense ratios and recordkeeping fees. Counsel discussed multiple lawsuits filed by plaintiffs' firms against university plans since 2016; numbers were discussed in argument but contested by counsel on both sides as to how many such lawsuits exist.

What the justices considered next

Across the bench, justices debated whether recognition of plaintiff pleading obligations would constitute a sea change in civil pleading practice. Several asked whether adopting petitioners' reading would produce spillover effects across statutes that couple broad prohibitions with exceptions. Other justices sought clarity on how Twombly and Iqbal plausibility standards apply when an obvious affirmative defense is present on the face of a complaint.

The argument concluded with petitioners reiterating their request to reverse the Second Circuit and respondents urging affirmance and caution about unintended consequences. "The case is submitted," the court said at the close of argument.