The U.S. Supreme Court is set to hear an appeal in Cunningham v. Cornell University later this month, and several retirement industry groups are, in an effort to curb frivolous lawsuits, urging the high court to uphold the U.S. 2nd Circuit Court of Appeals’ decision.

The ERISA Industry Committee, the American Benefits Council and the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute published an amicus brief on January 3 in support of the 2nd Circuit’s ruling that the mere existence of a “prohibited transaction” is not sufficient for a complaint to continue and that the plaintiff must also allege that statutory exemptions to those rules do not apply.

Cunningham v. Cornell was originally filed in 2016 by law firm Schlichter Bogard 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 on the investment menu and by working with multiple recordkeepers.

The plans offered approximately 300 investment options and incurred investment management and recordkeeping fees from TIAA-CREF and Fidelity Investments. Mayer Brown LLP is representing Cornell in the case.

Case History

The U.S. District Court for the Southern District of New York dismissed most of the claims in September 2017. On appeal, the case was heard by the 2nd Circuit, 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.”

While this decision aligned with decisions made by appeals courts for the 3rd, 7th and 10th Circuits, decisions in the 8th and 9th circuits conflicted. The Supreme Court decided to address and review Cunningham in light of these split lower court rulings. The hearing is scheduled for January 22.

Industry Groups Support 2nd Circuit

In their amicus brief, the industry groups explain that the 2nd Circuit’s ruling required plaintiffs to make a claim beyond alleging “prohibited transactions” and that they must prove that the services provided to the plan were unnecessary or involved unreasonable compensation. The groups argue that the ruling maintains the goals of the Employee Retirement Income Security Act, which include avoiding administrative complications and litigation exposure that would “unduly discourage employers from offering welfare benefits plans in the first place.”

Tom Christina, executive director of the ERIC Legal Center, said in a statement: “Most ERISA benefit plans obtain services like recordkeeping that are executed by professionals who help keep the trains of plan administration on track. But in a world where merely hiring these experts opens the door to litigation, plan sponsors would become targets of meritless lawsuits. If every transaction can be the subject of a suit, then plans will be mired in litigation, which harms participants. And if plans are less likely to engage the expertise of service providers, that could also harm participants. Nobody profits from this type of system—except the lawyers, of course.”

The industry groups emphasized that few, if any, retirement plans could function without the assistance of a recordkeeper, an investment consultant or investment managers. As a result, their brief argues that adoption of the “bare bones pleading rule” urged by petitioners would make it difficult for plan fiduciaries to avoid litigation exposure.

“Petitioner’s rule would wreak havoc on ordinary plan operations,” the amicus brief states. “The threat of baseless litigation immune from dismissal would make some qualified individuals reluctant to serve as fiduciaries altogether.”

Potential for Precedent

Allie Itami, a partner in Lathrop GPM LLP, which is not involved in the litigation, says the Supreme Court has the potential—if it reverses the 2nd Circuit—to set a national precedent that alleging a prohibited transaction, such as the provision of services by a party in interest, is sufficient to avoid a motion to dismiss. She adds that if such a more plaintiff-friendly pleading standard is adopted, service providers might need to add a portion of the cost of discovery to their service pricing, resulting in higher costs to plan sponsors.

“If, as a result of this case, a plaintiff is not required to plead more than the existence of prohibited transaction, such as facts that go to whether an exemption applies, it could be easier to avoid early dismissal in those jurisdictions that previously did impose such [a] requirement,” she says.

Itami says this increased risk of prolonged litigation might need to be priced into offering services, if it results in service providers being sued. Alternatively, she says, it might result in increased fiduciary insurance costs if more plans are being sued.

The amicus brief also points out that, if the Supreme Court does not uphold the 2nd Circuit’s decision, plan sponsors with limited resources to devote to employee benefits may, in order to ensure an adequate reserve to pay the costs of litigation, opt to reduce matching contributions or decline to pay plan administrative costs they would otherwise cover.