Supreme Court Revives Cornell 403(b) Plan Lawsuit

The U.S. Supreme Court on Thursday revived a lawsuit filed by Cornell University employees who accused plan fiduciaries of paying excessive recordkeeping fees, allowing workers another chance to challenge the university. 

In its unanimous opinion, the Supreme Court found that plaintiffs are not required to plead and prove that the myriad of exemptions to the Employee Retirement Income Security Act’s prohibited transaction rules do not apply to their case. 

As a result of the Supreme Court’s opinion, the judgement of the U.S. 2nd Circuit Court of Appeals’ decision is reversed, and the case is remanded for further proceedings.  

Justice Sonia Sotomayor delivered the opinion of the Court. 

Cunningham v. Cornell was originally filed in 2016 by law firm Schlichter Bogard LLP on behalf of 28,000 Cornell University employees, accusing the school’s 403(b) plans of paying excessive recordkeeping fees, in part by keeping too many investment options in the investment menu and by working with multiple recordkeepers. 

On appeal, the 2nd Circuit affirmed the U.S. District Court for the Southern District of New York’s decision to dismiss the case, finding that the plaintiffs did not provide enough evidence to show that fees were unreasonable. 

While the decision aligned with decisions made by appeals courts for the 3rd, 7th and 10th circuits, decisions in the 8th and 9th circuits conflicted, resulting in the review by the Supreme Court. 

The question presented to the Supreme Court was whether a plaintiff must plead more than a “prohibited transaction” in order to survive a motion to dismiss.   

“The answer is no,” the Supreme Court wrote in its opinion. “The Court holds that [ERISA section] 1108 sets out affirmative defenses, so it is defendant fiduciaries who bear the burden of pleading and proving that a 1108 exemption applies to an otherwise prohibited transaction.” 

During the hearing in January, attorneys for the plaintiffs had argued that hiring the firms Fidelity Investments and TIAA-CREF harmed the plan because the firms did not simply provide recordkeeping services to the plan, but bundled them with investment products, which had operating expenses that were then shared with the plan via revenue sharing. 

The plaintiff’s counselalso had argued that the plan fiduciary should have the burden of showing that a transaction is justified and reasonable, as the fiduciary has easier access to the contract with the recordkeeper.  

On the other hand, Cornell’s defense had argued that the plaintiff should bear the responsibility of proving that there were unnecessary or unreasonable fees, claiming that ERISA Section 1106 states that the burden is on the plaintiff to plead an exemption to the rule, which could include unreasonableness of fees.  

Cornell’s attorneys further stated if all plaintiffs need to do is argue the mere fact of a “prohibited transaction,” it opens the door to expensive discovery and could force settlements of “meritless litigation.”  

The Supreme Court also expressed concern that if all plaintiffs are required to do is allege that there was a prohibited transaction with the party of interest, and that is sufficient, there could be “an avalanche of litigation.” 

As a result, the high court’s decision pointed to several “tools” that district courts could use to screen out meritless litigation. In particular, Sotomayor wrote, if a fiduciary believes an exemption applies to bar a plaintiff’s suit and filed an answer showing as much, district courts can use Federal Rule of Procedure 7, which empowers district courts to “insist that a plaintiff file a reply putting forward specific, nonconclusionary factual allegations,” showing the exemption does not apply. Lower courts could then dismiss the suits of those plaintiffs who do not plausibly do so, Sotomayor wrote. 

The opinion also stated that under Article III standing, district courts must dismiss suits that allege a prohibited transaction occurred but fail to identify an injury. 

In addition to the main opinion in the case, Justices Samuel Alito, Clarence Thomas and Brett Kavanaugh also wrote a concurring opinion. 

In response to the Supreme Court’s decision, Blake Crohan, ERISA litigation attorney at Alston & Bird, notes that the three justices wrote that “perhaps the most promising of the safeguards” to meritless litigation is Rule 7. However, he says Rule 7 has not often been used in the past with these sorts of cases. 

“The court really seems to be suggesting that Rule 7 is a primary tool that can be used … in these cases,” Crohan says. “So I think the court has acknowledged that Rule 7 has not often been used in the past. It will be interesting to see how frequently it is used by defendants moving forward in these cases.” 

A Cornell spokesperson commented, “Cornell acknowledges the Supreme Court’s decision today on the technical pleading issue before it, and is confident that the evidence on the merits will continue to show that Cornell at all times operated its retirement plans in the best interests of all of its plan participants and beneficiaries.”