On Friday, Oct. 4, the Supreme Court (SCOTUS) agreed to hear a petition from workers at Cornell University that centers on a circuit split of how plan participants can challenge relationships between plans and their service providers and the interpretation of ERISA’s prohibited transaction rules. The original case was a 2023 decision from the Second Circuit. It established a new standard for what ERISA plan participants must follow to show that the relationship between the plan and its service provider violates ERISA prohibited transaction rules. TheSecond Circuit held that for a prohibited transaction claim based on compensation to a plan’s services provider, a plaintiff must include an allegation that the services provided were unnecessary or that the compensation was unreasonable.
The Circuit Split and Potential Impact
SCOTUS’ decision to review the case is due to a circuit split regarding pleading standards for prohibited transaction claims. The Eigth and Ninth Circuit’s approaches are the most lenient, allowing cases to proceed as long as the plaintiff has alleged that the transactions occurred between a plan and the service provided. The approach does not require any additional allegation of harm or improper conduct and focuses solely on whether a transaction meets the technical elements of ERISA prohibited transaction rules. The Third,, Seventh and Tenth Circuit’s approaches are a middle ground standard that places a greater burden on the plaintiff by requiring the plaintiff to show not only that a transaction took place but also that it benefited the services provided involved a pre-existing relationship, or included some form of self-dealing.
Lastly is the Second Circuit’s approach that prompted the SCOTUS review. The SecondCircuit places the greatest burden of proof on the plaintiff in comparison to the other circuits and requires that the plaintiff allege that the services provided were unnecessary or that the compensation was unreasonable.
Cornell argues that the Second Circuit’s ruling is sound and emphasizes that the plaintiff should not be allowed to proceed to discovery without first establishing some basis for suspicion of wrongdoing. Should SCOTUS uphold the Second Circuit’s pleading standard, it would establish a higher threshold for plaintiffs to meet, which would likely limit future prohibited transaction litigation.
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