The U.S. Supreme Court heard oral arguments in Cunningham v. Cornell University on Wednesday, with a decision set to resolve a split among circuit courts over pleading standards under the Employee Retirement Income Security Act.

Attorneys representing the petitioners argued in the hearing that the U.S. 2nd Circuit Court of Appeals’ decision to dismiss the case prior to discovery should be reversed, stating that the plaintiffs’ claim of a “prohibited transaction” was sufficient to survive a motion to dismiss.

Conversely, attorney Nicole Saharsky of Mayer Brown LLP, representing Cornell, argued that the 2nd Circuit made the right decision in ruling that the plaintiffs failed to plausibly allege that the recordkeeping services in question were “unnecessary or involved unreasonable compensation.”

Case Background

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 defined contribution retirement 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.

Petitioners’ Argument

Attorney Xiao Wang, of the University of Virginia School of Law Supreme Court Litigation Clinic, representing the petitioner, Casey Cunningham, argued that the injury in this case is that the retirement plan engaged with Fidelity Investments and TIAA-CREF, which are “parties in interest,” thus violating Section 1106(a)(1)(c) of the Employee Retirement Income Security Act of 1974. Wang said hiring the firms harmed the plan because TIAA and Fidelity 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.

Wang argued that this bundling resulted in Fidelity and TIAA pushing their own products, leading to “higher expense ratios and therefore greater recordkeeping fees.”

Justice Brett Kavanaugh questioned Wang’s argument, responding, “Your theory means … that it’s a prohibited transaction just to have recordkeeping services. I think that seems nuts.”

Kavanaugh also reiterated the concern made in amicus briefs filed by industry groups, like the American Benefits Council, that allowing plaintiffs to solely argue that a “prohibited transaction” has occurred could result in frivolous lawsuits and high costs to employers, including universities like Cornell. He noted that Schlichter Bogard has filed litigation against many universities’ retirement plans over the years, including lawsuits against Northwestern University, Columbia University, New York University, Cornell and others.

Wang argued that there are guardrails in place, such as fee shifting, standing and the “enormous expense” of bringing a lawsuit, that would deter excessive litigation.

“I think the best practical proof of this is that the 8th Circuit has embraced this rule for 15 years, and we don’t see any evidence of [excessive lawsuits] happening,” Wang said.

Who Bears the Burden?

The hearing also included debate about which party—the petitioner or the fiduciary—carries the burden of providing additional information about the reasonableness and necessity of fees.

Yaira Dubin, assistant to the U.S. solicitor general and also representing the petitioners, 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.

“The fiduciary is the one who enters into the transaction,” Dubin said. “The fiduciary is the one who has information about the transaction, and the fiduciary is the one who’s charged under trust law with ensuring that these transactions are an appropriate use of people’s retirement money.”

However, Saharsky, representing Cornell, said the plaintiff should bear the responsibility of proving that there were unnecessary or unreasonable fees. As per ERISA Section 1106, Saharsky argued, the burden is on the plaintiff to plead any of the exemptions to the rule, which could include unreasonableness of fees.

Cornell’s Defense

Saharsky added that the plaintiff only has to argue the one exemption that is relevant to the case.

“A case comes to a court [when] a plaintiff is challenging a particular transaction—either it’s a service provider contract or it’s buying a certain type of employer stock—and the different exemptions apply to different factual circumstances,” Saharsky said.

Saharsky also argued that the “guardrails” Wang referenced earlier in the hearing are not working in the district courts. She said there have been at least 24 lawsuits filed against university plans, and no courts have found that any of the plaintiffs have succeeded on the merits of their arguments.

“Under the petitioners’ view, all the plaintiff has to do is plead the mere fact of a transaction, no allegation of wrongful conduct,” Saharsky said. “It automatically opens the door to expensive discovery. The cost is disproportionately borne by defendants. It would force settlements of meritless litigation, … [and] the ultimate result would be to hurt plan participants and beneficiaries.”

More information about the case can be found on the Supreme Court’s website.