The Supreme Court has clarified pleading standards for ERISA prohibited transaction claims with its ruling favoring plaintiffs in Cunningham v. Cornell University. The ruling settles a split in the district courts related to the requirements to allow a claim of an ERISA prohibited transaction to move forward.
At issue was whether a plaintiff’s claim could proceed based only on an allegation that a prohibited transaction existed or whether they must also allege that no exemption to the prohibited transaction rule applies. Several courts, like the one in Cornell, dismissed claims as insufficient where plaintiffs failed to include allegations of fraud or self-dealing by the fiduciary or that the services were unnecessary or overpriced. Other courts allowed cases to proceed simply because a prohibited transaction existed.
The unanimous Supreme Court decision favors the lower pleading standard, indicating that plaintiffs must only allege that a prohibited transaction resulted in injury. Justice Sotomayor’s opinion states that plaintiffs “must plausibly allege that a plan fiduciary engaged in a transaction proscribed therein, no more, no less.” The ruling means the plan fiduciary bears the burden of proving whether the prohibited transaction is subject to an exemption. Therefore, it is not the burden of the plaintiff to claim that an exemption does not apply, but rather the burden of the defendant to show that an exemption does apply.
The plaintiff-friendly ruling makes it easier for prohibited transaction claims to proceed and raises concerns about increased frivolous ERISA claims. The Supreme Court acknowledged that this is a real and legitimate concern, but leaves it to the lower courts to utilize the tools at their discretion to limit frivolous claims from proceeding.
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