Federal Judge Invokes Rare Rule to Rein In ERISA Fee Lawsuits

A federal judge in California invoked a little-used procedural rule last month to force plaintiffs in an ERISA prohibited transaction lawsuit to spell out their factual case before discovery begins—taking an approach recommended by the U.S. Supreme Court in Cunningham v. Cornell as an alternative way to filter out meritless complaints.

U.S. District Judge Daniel Calabretta’s December 2025 decision in Dalton et al. v. Freeman et al. follows the Supreme Court’s Cornell ruling that lowered the bar for pleading standards for Employee Retirement Income Security Act claims to survive motions to dismiss. By requiring a so-called “Rule 7” reply, Calabretta signaled that the plaintiffs may be required to do more than allege technical statutory violations before imposing on defendants the heavy burdens of discovery. The requirement could be used in other courts to counter the recent Supreme Court decision.

The legal complaint, originally filed in U.S. District Court for the Eastern District of California in May 2022, alleges that Alerus Financial engaged in a prohibited transaction under ERISA Section 408 by approving a transfer of plan assets involving a party in interest while acting as an employee stock ownership plan trustee. Calabretta noted that the plaintiffs adequately pleaded the basic elements of a prohibited transaction claim. However, he emphasized that ERISA’s statutory structure places exemptions in Section 408 as affirmative defenses, rather than elements plaintiffs must negate at the outset.

That structure, Calabretta wrote, creates a procedural gap: Plaintiffs can survive a motion to dismiss without addressing exemptions, potentially allowing weak cases to proceed into discovery. The Supreme Court highlighted that concern last year and pointed to Rule 7 replies as a way for district courts to screen out meritless claims before discovery costs mount.

Calabretta found that the Alerus Financial case fit within that framework. Alerus raised a detailed affirmative defense asserting that the transaction qualified for the adequate-consideration exemption. Without a reply, Calabretta wrote, there would be no mechanism to test whether the plaintiffs could offer “specific, nonconclusory factual allegations” showing the exemption does not apply.

Kent Mason, a partner in Davis & Harman LLP who represents employers in ERISA cases, describes the order as “a great, albeit small, development” in an area of law increasingly defined by high-volume litigation and settlement pressure.

Mason notes that in many ERISA fee and prohibited-transaction cases, surviving a motion to dismiss is effectively the plaintiffs’ primary objective, because discovery is so expensive that defendants face intense pressure to settle regardless of the merits. That dynamic, he said, has fueled what critics view as a cottage industry of marginal lawsuits.

While Mason cautions that Duncan v. Freeman is only one case, he suggests it could represent an early step toward a “more rational approach” to prohibited transaction litigation—one in which courts actively use procedural tools to distinguish viable claims from those lacking factual substance before allowing discovery to proceed.

Calabretta framed his order as a matter of procedural efficiency and factual clarity, adding that if the plaintiffs can meet the required standard in their reply, the case should then move promptly into discovery.

“This decision should not be read as a comment regarding the viability of plaintiffs’ prohibited transactions claim or defendant’s affirmative defense,” Calabretta wrote.