The Supreme Court recently granted certiorari in Cunningham v. Cornell University to address the pleading standard for prohibited transactions under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1106(a)(1)(C).
Section 1106(a) generally bars fiduciaries from causing a plan to engage in transactions involving “a party in interest,” subject to an enumerated list of exceptions in Section 1108. 29 U.S.C. § 1106(a)(1)(C). ERISA defines a “party in interest” of an employee-benefit plan to include “a person providing services to such plan.” 29 U.S.C. § 1002(14)(B). Putting these provisions together, if they are read literally, ERISA may be read to prohibit payments by a plan to any entity providing it with any services, unless the transaction satisfies one of Section 1108’s exceptions, such as the exception for services “necessary” to the plan for which “reasonable compensation” is paid, 29 U.S.C. § 1108(b)(2)(A).
In Cunningham, the plaintiffs alleged that Cornell University violated Section 1106(a) by causing its plans to engage in transactions with two investment providers that also served as the plans’ recordkeepers: Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (“TIAA”) and Fidelity Investments, Inc. Both TIAA and Fidelity received recordkeeping fees through a revenue sharing model. 86 F.4th 961 (2d Cir. 2023).
In a unanimous opinion authored by Chief Judge Livingston, the Second Circuit affirmed the dismissal of the plaintiffs’ claim. The court first noted a circuit split on the interpretation of Section 1106(a)—the Third, Seventh, and Tenth Circuits have declined to read Section 1106(a) literally because doing so would prohibit fiduciaries from paying third parties to perform essential services in support of a plan. In contrast, the Eighth and Ninth Circuits have adopted a literal reading of Section 1106(a), and the Eighth Circuit permitted plaintiffs to proceed past the pleadings stage based on claims challenging transactions between plans and all types of “parties in interest.”
The Second Circuit held that “to plead a violation of § 1106(a)(1)(C), a complaint must plausibly allege that a fiduciary has caused the plan to engage in a transaction that constitutes the ‘furnishing of services between the plan and a party in interest’ where that transaction was unnecessary or involved unreasonable compensation.” 86 F.4th at 975 (quoting 29 U.S.C. § 1106(a)(1)(C)). In other words, the court held that Section 1106(a)’s prohibition on transactions with a “party in interest” and Section 1108’s exemptions must work together, and plaintiffs must affirmatively plead that Section 1108’s exemptions do not apply in order to survive a motion to dismiss. Id. at 976–77. Because Section 1106(a) is so broad on its face, ERISA “places greater weight on the § 1108 exemptions” to limit the statute’s applicability to transactions “that actually present a risk of harm to the plan and raise the sort of concerns implicated by the duty of loyalty.” Id. at 977. The Second Circuit concluded that the Cunningham plaintiffs failed to allege that Cornell’s transactions with TIAA and Fidelity were “unnecessary or that the compensation was unreasonable” and their claims were therefore dismissed. Id. at 978.
In their petition for certiorari, the plaintiffs argued that the Supreme Court should resolve the circuit split and that it should reverse the Second Circuit’s decision in favor of the approach taken by the Eighth and Ninth Circuits. In their view, plaintiffs need only allege that a plan engaged in a transaction with a “party in interest” in violation of Section 1106(a) to state a claim and survive a motion to dismiss. They argued the Second Circuit’s approach is (1) contrary to ERISA’s text, (2) contrary to administrative guidance and the rules of statutory construction, and (3) inconsistent with principles of trust law. The case will be argued on January 22, 2025. We will continue to monitor the proceedings and will provide updates on Inside Class Actions.