In a recent decision with potential implications for employee benefit plans across the United States, the Supreme Court unanimously held in Cunningham v. Cornell University that plaintiffs alleging a prohibited transaction under the Employee Retirement Income Security Act’s (ERISA) Section 406(a) bear no burden to demonstrate that the transaction does not fall within an exemption listed in Section 408. This decision reverses the prior ruling of the U.S. Court of Appeals for the Second Circuit, positioning Section 408’s exemptions as affirmative defenses that must be raised and proven by defendants.
The Supreme Court’s analysis in this case extends beyond the specific provision challenged, suggesting that plaintiffs need only allege engagement in a covered transaction with a “party in interest” under Section 406(a), sidestepping the need for initial exemption rebuttal. As such, there could be an increase in litigation targeting employee benefit plans and employee stock ownership plans (ESOPs), given ERISA’s broad definition of “party in interest.” This encompasses fiduciaries, counsel, and service providers affiliated with such plans, leaving many third-party transactions vulnerable to litigious inquiry.
Concerns have arisen that the decision may flood the legal system with lawsuits absent robust initial pleading requirements. The judiciary has been encouraged to utilize procedural tools—such as Rule 11 sanctions and expedited discovery—to manage potentially unmeritorious claims. However, the efficacy of these measures in minimizing costly litigation remains uncertain.
The ruling reignites calls for potential legislative adjustments to ERISA from Congress. Until then, legal practitioners defending benefit plans must prepare to assert applicable exemptions early in litigation and navigate the procedural safeguards endorsed by the Court. For further insights into how this ruling might affect litigation strategies, refer to the full article here.