On April 17, 2025, the Supreme Court issued its opinion in Cunningham v. Cornell University, No. 23-1007, 604 U.S. ___ (2025), a case addressing the pleading standard for prohibited-transaction claims under § 406(a) of the Employee Retirement Income Security Act of 1974 (ERISA).  Section 406(a) proscribes certain transactions between plans and “parties in interest” absent a statutory exemption enumerated under ERISA § 408.  The core question on appeal was whether plaintiffs must allege, as an element of a prohibited-transaction claim under § 406(a), that an exemption under § 408 does not render the challenged transaction lawful.

In a decision that is expected to have wide-ranging implications, the Court held that exemptions under § 408 provide affirmative defenses to liability under § 406(a).  Consequently, plaintiffs need not allege that any of the exemptions set forth in § 408 are unavailable to state a plausible claim for relief.  Rather, the burden falls on plan fiduciary defendants to plead and prove that an exemption under § 408 nullifies a plaintiff’s claim.

The Court recognized that its decision in Cunningham could make it more difficult for defendants to secure the dismissal of prohibited-transaction claims by invoking a statutory exemption.  If so, plan sponsors (and other fiduciaries) could be forced to engage in costly discovery defending transactions that ERISA expressly permits, effectively penalizing them for providing valuable and necessary services to participants.

Provided below is a more detailed discussion of Cunningham, divided into three parts.  The first part briefly discusses the legal framework governing prohibited-transaction claims.  The second part summarizes the Court’s analysis.  The third part concludes with an overview of potential mitigation strategies.

Legal Framework

Acting as a “supplement[]” to the fiduciary duty of loyalty, § 406(a) “categorically bar[s] certain transactions” between an employee benefit plan and a party in interest.  See Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241–42 (2000) (citing Comm’r v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160 (1993)).^[1]  ERISA refers to transactions triggering this statutory bar as “prohibited transactions.”

Read in isolation, the ban on prohibited transactions under § 406(a) would make it nearly impossible for plans to function:  Plan administrators generally would be unable to hire third parties, like recordkeepers, to provide necessary services.  See ERISA § 3(14)(B) (defining “party in interest” to include “a person providing services to [a] plan”).  Without those arrangements, modern employee benefit plans would be unable to provide essential services to participants, like daily valuations for participant-directed accounts under § 401(k) plans and other defined contribution plans.

Section 408 seeks to avoid this untenable result by authorizing various types of transactions between plans and parties-in-interest, including “[c]ontracting or making reasonable arrangements with a party in interest for office space, legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”  Id. § 408(b)(2)(A).  Vast swaths of ordinary and necessary arrangements between plans and service providers rely on this exemption to avoid the blanket ban on third-party service providers under § 406(a).

The Court’s Decision

The plaintiffs in Cunningham were Cornell University employees who participated in defined contribution plans sponsored by the university.  The plans hired two vendors to provide recordkeeping and investment services for their respective platforms of funds.  In exchange, the vendors charged the plans fees based on a percentage of plan assets.

The plaintiffs brought several claims challenging these arrangements, including a prohibited-transaction claim alleging that the defendants violated § 406(a) by causing the plans to pay excessive fees to service providers.  At the motion-to-dismiss stage, the district court held that the plaintiffs failed to state a plausible claim for relief because they did not allege “evidence of self-dealing or other disloyal conduct” by the defendants.  See Cunningham v. Cornell Univ., No. 16-cv-6525, 2017 WL 4358769, at *10 (S.D.N.Y. Sept. 29, 2017), aff’d 86 F.4th 961 (2d Cir. 2023), rev’d and remanded, 604 U.S. ___ (2025).

The Second Circuit affirmed but supplied a different rationale:  Noting that § 406(a) proscribes transactions “[e]xcept as provided in [§ 408],” (emphasis added), and that reading § 406(a) “in isolation from its exemptions . . . would encompass a vast array of routine transactions the prohibition of which cannot be consistent with t[he] statutory purpose” of ERISA, the Second Circuit held that “the exemptions set out in [§ 408]—including, most pertinently, the exemption for ‘reasonable compensation’ paid for ‘necessary’ services—are incorporated directly into [§ 406(a)’s] definition of prohibited transactions.”  Cunningham v. Cornell University, 86 F.4th 961, 975–76 (2d Cir. 2023), (quoting ERISA § 408(b)(2)(A)) (other citations omitted), rev’d and remanded, 604 U.S. ___ (2025).  Thus, according the Second Circuit, exemptions under § 408 should be read not as affirmative defenses but as additional pleading requirements that plaintiffs must satisfy to state a claim.  And the district court properly dismissed the complaint because the plaintiffs in Cunningham did not “allege in the first instance that the transactions were unnecessary or that the compensation was unreasonable.”  Id. at 978.

The Supreme Court unanimously reversed.  Looking to ERISA’s text, the Court noted that “when a statute has exemptions laid out apart from the prohibitions”—which is the case with § 408—those exemptions ordinarily constitute affirmative defenses.  Slip op. 7 (quoting Meacham v. Knolls Atomic Power Lab’y, 554 U.S. 84, 91 (2008)).  The Court also recognized the general rule that the burden of proving an exemption to a statute generally rests on the party who stands to benefit from that exemption—here, the defendant fiduciaries who would otherwise be subject to a prohibited-transaction claim under § 406(a).  See id.  Thus, the Court held that “[t]he exemptions set forth in a different part of the statute, [§ 408], do not impose additional pleading requirements to make out a [§ 406(a)(1)] claim.”  Cunningham, slip op. at 6.  So “plaintiffs need do no more than plead a violation of [§ 406(a)(1)(C)]” to state a plausible claim for relief.  Id.  And exemptions under § 408 are affirmative defenses that “must be pleaded and proved by the defendant who seeks to benefit from them.”  Id. at 8 (citing Taylor v. Sturgell, 553 U.S. 880, 907 (2008)).

In a concurring opinion, Justice Alito—joined by Justices Thomas and Kavanaugh—agreed with the Majority’s analysis but bemoaned the “untoward practical results” that could flow from treating exemptions under § 408 as affirmative defenses.  Concurrence from slip op. 1 (Alito, J., concurring).  Noting that administrators of modern ERISA plans “will almost always find it necessary to employ outside firms to provide services that the plan needs,” the concurrence warns that the “upshot” of Cunningham could be “that all a plaintiff must do in order to file a complaint that will get by a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is to allege that the administrator did something that, as a practical matter, it [was] bound to do.”  Id. at 1–2.

Possible Mitigation Strategies

As the Court recognized, treating all exemptions under § 408—including the exemption for necessary services provided on reasonable terms—risks opening the floodgates to meritless claims challenging ordinary plan business.  Cunningham does, however, endorse five tools that courts can use to screen flawed claims challenging ordinary plan business:

• Article III Standing:  Plaintiffs always “must demonstrate” (1) concrete and particularized injury, (2) causation, and (3) redressability “[t]o establish standing [to sue] under Article III of the Constitution.”  Thole v. U.S. Bank N.A., 590 U.S. 538, 540 (2020).  And “[d]istrict courts must . . ., consistent with Article III standing, dismiss suits that allege a prohibited transaction occurred but fail to identify an injury.”  Cunningham, slip op. 15 (citing Thole, 590 U.S. at 544).  Many (if not most) claims challenging ordinary service-provider arrangements will fail to satisfy the strictures of standing, as it is difficult to identify any harm that flows from a plan’s purchase of ordinary and necessary services on reasonable terms.  Defendants may be able to rely on that failing (or another standing-related defect) to secure dismissal of claims for lack of jurisdiction under Federal Rule of Civil Procedure 12(b)(1) where the plaintiff relies on barebones allegations challenging ordinary plan business.
• Reply to Answer: Under Federal Rule of Civil Procedure 7(a)(7), a district court may “order” a plaintiff to file “a reply to an answer.”  “[I]f a fiduciary believes an exemption applies to bar a plaintiff’s suit and files an answer showing as much,” district courts may order a reply and “dismiss the suits of those plaintiffs who” fail to “‘put forward specific, nonconclusory factual allegations’ showing the exemption does not apply.”  Cunningham, slip op. 14–15 (cleaned up) (quoting Crawford-El v. Britton, 523 U.S. 574, 598 (1998)).

• Sanctions:  Federal Rule of Civil Procedure 11 empowers courts to sanction attorneys and unrepresented parties who falsely certify that their claims are nonfrivolous.  “[I]n 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.”  Cunningham, slip op. at 15.  The threat of sanctions may deter plaintiffs and their counsel from filing frivolous claims challenging ordinary plan business.

• Discovery Limitations:  District courts have broad discretion to control discovery.  “For [§ 406(a)] claims that do proceed past the motion to dismiss stage,” courts can exercise that discretion to “expedite or limit discovery as necessary to mitigate unnecessary costs.”  Id.  Defendants may wish to seek the court’s permission to file an early motion for summary judgment when the record is bereft of evidence that the underlying transaction did not involve the plan’s purchase of necessary services on reasonable terms.

• Fee-Shifting: ERISA § 502(g)(1) grants courts discretion to “allow a reasonable attorney’s fee and costs of action to either party.”  Fee-shifting might deter meritless prohibited-transaction claims, see Cunningham, slip op. at 15, though the deterrent effect will be dulled if plaintiffs lack sufficient assets to compensate defendants for substantial costs involved in responding to discovery.

*          *          *          *          *

It is difficult to forecast how Cunningham will play out.  Treating § 408 exemptions as affirmative defenses might make it easier for weak prohibited-transaction claims to proceed to discovery, forcing plan sponsors (and other fiduciaries) to waste resources on costly discovery defending ordinary plan business.  On the other hand, the existing tools that the Court identified should enable courts to weed out meritless claims and, when necessary, quickly reach the merits through expedited or limited discovery. 

Time will tell whether Cunningham has unleashed a flood of frivolous claims, or a more reasonable equilibrium will prevail.  If the upshot is a material increase to frivolous litigation, however, the damage might not be limited to plan fiduciary defendants.  While the initial burden of paying increased legal fees likely will fall on fiduciaries (and their insurers), the true cost could be borne by employees in the form of higher fees and reduced benefits, as employers and other fiduciaries will need to account for increased litigation risk defending against weak or frivolous claims.  This result may seem at odds with ERISA’s goal of “protect[ing] . . . the interests of participants in employee benefit plans and their beneficiaries.”  Cunningham, slip op. 2 (quoting ERISA § 2(b)).  Yet post-Cunningham, employers and other constituencies may need to pursue legislative fixes to avoid that counterintuitive and destructive result.

---

[1] A related statutory provision, ERISA § 406(b), proscribes certain transactions between plans and fiduciaries.  Exemptions under § 408 apply with equal force to those transactions.  See, e.g., id. § 408(b) (“The prohibitions provided in [§ 406] shall not apply to any of the following transactions[.]”).