In Cunningham et al. v. Cornell University et al., the plaintiffs, a class of over 30,000 current and former Cornell University employees enrolled in two 403(b) retirement plans, alleged violations of the Employee Retirement Income Security Act of 1974 (ERISA). The plaintiffs, led by Casey Cunningham, claimed that Cornell University and its fiduciaries breached their fiduciary duties under ERISA by mismanaging the retirement plans, which held nearly $3.4 billion in net assets.
They alleged Cornell engaged in prohibited transactions – (ERISA § 1106(a)(1)(C)) – by paying excessive fees to the plans’ service providers, specifically Teachers Insurance and Annuity Association of America (TIAA-CREF) and Fidelity Investments, for record keeping and investment management services. These payments were alleged to violate ERISA’s prohibition on transactions between the plan and a “party in interest” (e.g., service providers), as the fees were deemed unreasonable and not justified by the services provided.
The plaintiffs argued that merely alleging a transaction with a party in interest was sufficient to state a claim under ERISA § 1106(a)(1)(C), and that exemptions under § 1108(b)(2) (allowing reasonable and necessary services) were affirmative defenses that Cornell had to prove.
Cornell University, along with its appointed fiduciaries, denied the allegations and argued that the plaintiffs failed to meet the legal threshold for their claims.
Cornell maintained that the plaintiffs’ allegations were insufficient to state a claim under ERISA § 1106(a)(1)(C). They argued that plaintiffs needed to plead specific facts showing that the transactions were unnecessary or involved unreasonable compensation, not just that a transaction occurred with a party in interest.
The university contended that ERISA § 1106(a) must be read in conjunction with § 1108 exemptions, which permit reasonable and necessary transactions (e.g., for recordkeeping services). Cornell argued that these exemptions are integral to the claim’s elements, not merely affirmative defenses.
They asserted that the recordkeeping services provided by TIAA-CREF and Fidelity were standard, necessary for plan operations, and that the fees were not excessive when viewed in the context of the services’ quality and market st
The lawsuit was filed in 2016 in the U.S. District Court for the Southern District of New York, which dismissed the prohibited transaction claims and granted summary judgment to Cornell on most fiduciary duty claims, finding that the plaintiffs failed to show loss or provide sufficient evidence of imprudence.
The Second Circuit affirmed in 2023, holding that plaintiffs must plead that the transactions were unnecessary or involved unreasonable compensation to survive a motion to dismiss, effectively incorporating § 1108 exemptions into the pleading requirements for § 1106(a) claims.
The Supreme Court granted certiorari to resolve a circuit split on the pleading standard for prohibited transaction claims, with the plaintiffs arguing that the Second Circuit’s approach improperly shifted the burden to them to negate exemptions, while Cornell defended the ruling as necessary to prevent baseless lawsuits.
On April 17, 2025, the Supreme Court unanimously reversed the Second Circuit (U.S. Supreme Court, No. 23-1007, decided April 17, 2025), holding that to state a claim under ERISA § 1106(a)(1)(C), plaintiffs need only allege the elements of the provision itself (i.e., a transaction with a party in interest) without addressing potential § 1108 exemptions. The Court clarified that § 1108 exemptions are affirmative defenses, which defendants must raise and prove. The case was remanded for further proceedings consistent with this ruling.