Cornell 403(b) Transaction Complaint to Get SCOTUS Review

The U.S. Supreme Court has agreed to hear a case brought by Cornell University retirement plan participants looking to address the burden of proof for prohibited transactions between plan sponsors and service providers under the Employee Retirement income Security Act.

Cunningham v. Cornell University was originally filed in 2016 by law firm Schlichter Bogard on behalf of 28,000 Cornell University employees, accusing the school’s retirement plans of paying excessive recordkeeping fees in part by keeping too many investment options and working with multiple recordkeepers. The U.S. District Court for the Southern District of New York dismissed most of the claims, except a challenge to the plan’s use of TIAA-CREF Lifecycle Funds, which Cornell settled for $225,000 in 2020.

On appeal, the case made it to the U.S. 2nd Circuit Court of Appeals, which in November 2023, affirmed the lower court’s dismissal and found that the plaintiffs did not “plausibly allege that the services were unnecessary or involved unreasonable compensation … thus supporting an inference of disloyalty.”

That decision aligns in part with decisions in the 3rd, 7th and 10th Circuits, while conflicting with decisions made in the 8th and 9th Circuits. The latter courts found, based on a stricter reading of ERISA, that prohibited transaction cases can proceed as long as plaintiffs can allege such a transaction took place.

The Supreme Court has decided to review and address the Cornell case in light of these varied lower court rulings, according to its October docket. According to that filing, the court will review “whether a plaintiff can state a claim by alleging that a plan fiduciary engaged in a transaction constituting a furnishing of goods, services, or facilities between the plan and a party in interest … or whether a plaintiff must plead and prove additional elements and facts not contained in the provision’s text.”

Lindsey Camp, an ERISA litigation partner in Holland & Knight LLP, says the Supreme Court agreed to hear the case “because it raises an important issue regarding the pleading requirements associated with prohibited transaction claims and whether a plaintiff has to allege any imprudent conduct associated with the allegedly prohibited transaction in the complaint.”

Key to the court’s analysis, she says, “will be whether the Court finds that the exemptions to the prohibited transaction rules are incorporated by reference into the definition of a prohibited transaction.”

Another Look

The workers in Cunningham v. Cornell argued in their petition to the Supreme Court that the 8th and 9th Circuits read ERISA correctly. Department of Labor regulations “provide that ‘a service relationship between a plan and a service provider’—i.e., the very situation at issue here—‘would constitute a prohibited transaction,’” the plaintiffs wrote.

They go on to argue that the onus should be on the plan sponsor and providers, not the plaintiffs, to prove that appropriate vetting and decisions were made in the best interest of participants.

“These include disclosure requirements, description of administration and recordkeeping services, and certain other reporting and monitoring obligations—all information generally residing with the fiduciary and service provider, rather than the plaintiff,” the plaintiffs wrote.

The Cornell lawsuit will be the third case brought by Schlichter Bogard, considered the pioneer in defined contribution litigation, to be heard by the Supreme Court in the past 10 years. In this first two cases, Tibble v. Edison and Hughes v. Northwestern University, the court ruled at least in part favorably toward the retirement plan participants.

The Supreme Court signaled in April that it was interested in Cunningham case when it asked Cornell to respond to some questions about its petition, according to the court docket.

Three-Way Split

Attorney Camp sees a three-way split among the circuit courts as to the pleading standards for claims alleging violations of ERISA Section 406(a)(1)(C), which prohibits a plan fiduciary from “engag[ing] in a transaction, if he knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest.”

The most forgiving standard only requires a plaintiff to allege that the plan fiduciary engaged in a transaction with a service provider. This standard was adopted by the 9th Circuit in Bugielski v. AT&T Services Inc., and the 8th Circuit in Braden v. Wal-Mart Stores Inc. Defendants in Bugielski v. AT&T have also filed a petition to be heard by the Supreme Court, but that petition remains pending.

In the second category, Camp notes that decisions by the 3rd, 7th, and 10th Circuits require plaintiffs to plead the existence of a transaction with a plan service provider along with an additional requirement that the transaction benefits a “party of interest” (3rd Circuit), involves a pre-existing relationship (10th Circuit) or includes self-dealing (7th Circuit). All of these put more onus on the plaintiffs.

Third, the 2nd Circuit—in the Cornell case—requires a plaintiff to assert that a fiduciary has caused the plan to engage in a transaction that was unnecessary or involved unreasonable compensation. This approach is the most favorable to the defendant and requires the plaintiff to allege some form of harm to the plan.

“The defense bar, plan sponsors, and plan fiduciaries are hopeful that the Supreme Court will agree with the 2nd Circuit’s interpretation of ERISA §§ 406 and 408 and its decision,” Camp says. In that case, “a plaintiff alleging a prohibited transaction under ERISA § 406 must do more than merely allege facts that the transaction meets the technical elements of a party-in-interest transaction; he will also be required to plausibly allege facts showing that ERISA § 408’s statutory exemptions do not apply.”

If the Supreme Court were to adopt the pleading standards of the 8th and 9th Circuit, Camp believes it will make agreements with plan service providers and plan sponsors “presumptively unlawful and invite protracted and expensive litigation against fiduciaries who procure plan services, despite a lack of alleged harm or improper conduct.”

Mayer Brown LLP is representing Cornell in the case; the law firm did not respond to a request for comment on the Supreme Court hearing the case.

The Supreme Court has not yet set oral arguments for the case; it generally makes rulings in late June or early July before its summer recess.