Cunningham v. Cornell Lawsuit: ERISA Prohibited Transaction Ruling

In Cunningham v. Cornell University, the Supreme Court ruled unanimously on April 17, 2025 that employees suing their retirement plan under ERISA’s prohibited-transaction rules do not have to disprove the statute’s exemptions in their complaint. They only have to allege that a prohibited transaction happened. The exemptions are affirmative defenses, meaning the employer has to raise and prove them. The 9–0 decision, written by Justice Sotomayor, reversed the Second Circuit and made it substantially easier for participants to survive a motion to dismiss in excessive-fee cases.¹

What the Lawsuit Was About

Casey Cunningham and a class of Cornell employees who participated in the university’s two defined-contribution retirement plans between 2010 and 2016 sued over the fees the plans paid for administrative services. The two plans held roughly $3.1 billion in assets and covered nearly 30,000 participants, with TIAA and Fidelity providing investment options and recordkeeping.²

The core allegation was that recordkeeping charges were far above market. Plaintiffs said a reasonable fee would be about $35 per participant per year. One plan, they alleged, paid between $115 and $183 per participant; the other paid between $145 and $200.¹ They attributed the inflated costs to Cornell’s use of multiple recordkeepers and to bundled arrangements in which recordkeeping was packaged with proprietary investment products that shared revenue back to the providers.³ The complaint also alleged that Cornell retained underperforming funds and offered higher-cost retail share classes when cheaper institutional versions were available.⁴

The Legal Question

The case turned on how two ERISA provisions fit together. Section 1106(a)(1)(C) prohibits a plan fiduciary from causing the plan to pay a “party in interest” — a category that includes service providers like TIAA and Fidelity — for services. Section 1108(b)(2)(A) then carves out an exemption for services that are necessary to the plan’s operation, as long as the compensation is “no more than reasonable.”⁵

Because every retirement plan pays outside firms for necessary services, essentially every plan engages in what the statute calls a prohibited transaction. Whether those transactions are lawful depends on whether the exemption applies. The Court had to decide who bears the burden of dealing with that exemption. The Second Circuit had held that plaintiffs must allege in their complaint that the services were unnecessary or the fees unreasonable, treating the exemption as effectively built into the prohibition.⁴ The Eighth Circuit disagreed, allowing claims to proceed on the elements of Section 1106 alone.⁶

What the Court Held

The Supreme Court sided with the Eighth Circuit’s approach. To state a claim under Section 1106(a)(1)(C), a plaintiff must plausibly allege three things: that a fiduciary caused the plan to enter into a transaction, that the fiduciary knew or should have known the transaction involved the furnishing of goods, services, or facilities, and that the transaction was between the plan and a party in interest. That is all. The Section 1108 exemptions are affirmative defenses that the employer must raise and prove.¹

The Court’s Reasoning

Justice Sotomayor grounded the ruling in statutory structure. Congress placed the prohibitions in one section and the exemptions in a separate section — what the Court called the “orthodox format of an affirmative defense.” The opinion drew on Meacham v. Knolls Atomic Power Laboratory for the principle that the burden of proving a statutory exemption falls on the party claiming its benefit.¹

The Court also pointed to practicality. ERISA contains 21 statutory exemptions, with more added by Department of Labor regulation. Requiring plaintiffs to anticipate and negate each one in an opening complaint would clash with ordinary pleading rules.¹

Alito’s Concurrence and the Guardrails

Justice Alito, joined by Justices Thomas and Kavanaugh, agreed the result followed from “black letter law” but warned it would likely produce “untoward practical results.” His worry was straightforward. Because every plan hires outside firms, and those firms become parties in interest, routine business arrangements technically qualify as prohibited transactions under the Court’s reading. Getting past a motion to dismiss, Alito noted, is often “the whole ball game” in ERISA litigation, since discovery is expensive and defendants frequently settle rather than pay to defend on the merits.¹

The majority acknowledged the concern and identified five tools trial courts can use to weed out weak cases: ordering a plaintiff to file a reply under Rule 7(a)(7) once a defendant raises an exemption; dismissing where the plaintiff cannot show a concrete injury sufficient for constitutional standing; limiting or targeting early discovery; imposing Rule 11 sanctions for frivolous claims; and shifting attorney’s fees under ERISA’s own fee-shifting provision. Alito singled out the Rule 7(a)(7) reply as the most promising, urging lower courts to “strongly consider” it as a way to force plaintiffs to substantiate their claims early.¹

What the Ruling Does Not Change

The decision addresses only Section 406 prohibited-transaction claims. It does not alter the pleading standard for Section 404 breach-of-fiduciary-duty claims, which remain governed by the more demanding, context-specific analysis from earlier decisions including Fifth Third Bancorp v. Dudenhoeffer and Hughes v. Northwestern University.⁷

What Has Happened Since

Lower courts are now working out where the new line falls. The pleading bar for prohibited-transaction claims has dropped, but other filters have proved meaningful.

Several courts have dismissed cases where plaintiffs could not establish that the service provider was a “party in interest” at the time of the transaction, including cases involving Kellogg Company, AT&T, and Verizon.⁸

Standing has done similar work. In Peeler v. Bayada Home Healthcare, a federal court in North Carolina dismissed prohibited-transaction claims in early 2026 after finding the plaintiff’s allegations of harm too speculative to meet Article III standing.⁸

At least one court has used the Rule 7(a)(7) mechanism the Supreme Court highlighted. In Dalton v. Freeman, a federal court in California ordered plaintiffs to file a reply to the defendant’s affirmative defenses containing “specific, nonconclusory factual allegations” explaining why the exemption did not apply. The plaintiffs filed the reply in January 2026 and the case moved into discovery.⁸ Whether courts adopt the reply as a routine feature of ERISA litigation or treat it as an unusual step is still unsettled, given limited precedent and the historically high bar for compelling such replies.⁹

The Cornell case itself was remanded to the Second Circuit. The allegations about what the plans paid TIAA and Fidelity have yet to be tried on the merits.

1
U.S. Supreme Court. Cunningham v. Cornell University, 604 U.S. ___
2
U.S. Supreme Court. Joint Appendix, Volume I, Cunningham v. Cornell University
3
PlanAdviser. Supreme Court Rules for Workers in Cornell 403(b) Plan Lawsuit
4
Justia. Cunningham v. Cornell University, No. 21-88 (2d Cir. 2023)
5
Cornell Law Institute. Cunningham v. Cornell University, No. 23-1007
6
Oyez. Cunningham v. Cornell University
7
Groom Law Group. Cunningham v. Cornell: Supreme Court Lowers Bar for ERISA 406 Claims
8
Trucker Huss. Prohibited Transactions Post-Cunningham v. Cornell University
9
Verrill Law. Preparing for Untoward Practical Results: Implications Following Cunningham v. Cornell University