WASHINGTON — The U.S. Supreme Court recently overturned a lower court’s decision regarding a lawsuit brought by employees of Cornell University. These employees contend that the university’s retirement plan involved paying excessively high recordkeeping fees. This pivotal ruling allows the plaintiffs to proceed with their claims, potentially setting a significant precedent in employee retirement plan litigation.
In a unanimous decision, the justices clarified a crucial aspect of the Employee Retirement Income Security Act (ERISA), asserting that plaintiffs are not required to demonstrate that exceptions to ERISA’s rules on prohibited transactions are inapplicable in their cases. This shifts the burden of proof substantially from the plaintiffs to the defendants – the fiduciaries managing these plans.
The origins of the lawsuit trace back to 2016 when law firm Schlichter Bogard & Denton filed the case on behalf of around 28,000 Cornell employees. The complaint highlighted concerns about the university’s 403(b) retirement plans, citing that an excessive number of investment options and multiple recordkeepers led to unreasonably high fees.
Justice Sonia Sotomayor, delivering the opinion of the court, noted that ERISA Section 1108 lists certain exemptions and positions the responsibility on the plan fiduciaries to justify these exemptions. This statement intends to ease the burden on plaintiffs, focusing on whether the actual transactions contravene ERISA’s standards.
Previously, the 2nd Circuit Court of Appeals had affirmed a ruling by the U.S. District Court for the Southern District of New York that dismissed the lawsuit, concluding the plaintiffs had not sufficiently proven the fees were unreasonable. This perspective aligned with previous decisions by several other circuit courts, though contrasting rulings in the 8th and 9th circuits spurred the Supreme Court review.
During the Supreme Court hearings, debate centered on whether simply alleging a “prohibited transaction” satisfied the requirement to withstand a motion to dismiss. The defense for Cornell argued this would lead to unnecessary and costly litigation, burdening courts and leading possibly to forced settlements of baseless lawsuits.
In responding to these concerns, the court emphasized that district courts possess mechanisms to sift through potentially frivolous lawsuits. Justice Sotomayor stated that if a fiduciary believes an exemption justifies barring a plaintiff’s suit and subsequently files an appropriate answer, courts can under Federal Rule of Procedure 7 insist that plaintiffs submit specific, substantial factual allegations to show the exemption does not apply.
Additionally, the ruling noted that if courts believe a plaintiff has not adequately shown an injury or harm from the alleged prohibited transaction, the case should be dismissed based on lack of standing under Article III.
The decision also saw a concurring opinion from Justices Samuel Alito, Clarence Thomas, and Brett Kavanaugh, further discussing the implications of Rule 7 and its potential to alleviate meritless litigation.
Observers, such as Blake Crohan from ERISA litigation at Alston & Bird, suggested that the court’s emphasis on Rule 7 indicates it could become a more frequently employed tool in defending these cases.
“In Cunningham vs. Cornell, the Supreme Court acknowledges the scope for litigation this decision potentially opens,” said Tom Christina, Executive Director of the ERIC Legal Center. He noted that while the decision poses challenges, the stipulated judicial checks are intended to protect plan sponsors and beneficiaries from undue legal battles.
Cornell University did not immediately respond to requests for comment regarding the Supreme Court’s decision.
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