Petitioners represent a class of current and former Cornell employees who participated in Cornell Defined-Contribution Retirement Plans, alleging that the plan fiduciaries violated §1106(a)(1)(C) by causing the plans to engage in prohibited transactions for recordkeeping services. The District Court dismissed, on the basis that the plaintiffs had failed to allege some evidence of self-dealing or other disloyal conduct.  The U.S. Second Circuit affirmed the dismissal, but on slightly different grounds. The Court of Appeal found that, although the language of §1106(a)(1) cannot be read to demand explicit allegations of self-dealing or disloyal conduct, Section 1106(a)(1)(C), if read in isolation, would appear to prohibit payments by a plan to any entity providing it with any services, (an absurd result); and, hence, at least some of the §1108 exemptions — particularly, the exemption for reasonable and necessary transactions codified in §1108(b)(2)(A) — must be incorporated into §1106(a)’s prohibitions, such that a plaintiff must affirmatively plead that the transaction was unnecessary and/or involved unreasonable compensation.

The U.S. Supreme Court granted cert and reversed, determining that the exemptions set forth in a different part of the statute, (i.e. Section 1108), do not impose additional pleading requirements to make out a Section 1106 prohibited transaction claim.

The Court went on to note that, where future plaintiffs do bring barebones §1106(a)(1)(C) complaints, district courts “can use existing tools at their disposal to screen out meritless claims before discovery. For instance, if a fiduciary believes an exemption applies to bar a plaintiff ’s suit and files an answer showing as much, Federal Rule of Civil Procedure 7 empowers district courts to insist that the plaintiff file a reply putting forward specific, nonconclusory factual allegations showing the exemption does not apply. Lower courts may then dismiss the suits of those plaintiffs who cannot plausibly do so. District courts must also, consistent with Article III standing, dismiss suits that allege a prohibited transaction occurred but fail to identify an injury. For §1106(a)(1)(C) claims that do proceed past the motion to dismiss stage, moreover, district courts retain discretionary authority to expedite or limit discovery as necessary to mitigate unnecessary costs. Additionally, in cases where an exemption obviously applies, and a plaintiff and his counsel lack a good-faith basis to believe otherwise, Rule 11 may permit a district court to impose sanctions against them. Lastly, it bears mention that ERISA itself gives district courts an additional tool to ward off meritless litigation: cost shifting. District courts therefore have available a variety of means to address the concerns raised by respondents and the court below.”

 

Cunningham v. Cornell University, No.23-1007, 2025 WL 1128943 (April 17, 2025)