SCOTUS Lowers the Bar for ERISA Fee Litigation
This decision makes it easier for retirement plan participants to bring ERISA excessive fee suits past the pleading stage.
The Supreme Court’s recent decision in Cunningham v. Cornell University (No. 23-1014) marks a significant shift for ERISA litigation, making it easier for retirement plan participants to bring excessive fee prohibited transaction claims against plan fiduciaries.
In a unanimous April 2025 ruling, the Court reversed a Second Circuit decision that had adopted a strict pleading standard for prohibited transaction claims, resolving a circuit split and opening the door to additional ERISA class actions.
If you litigate ERISA cases, this decision offers a green light to pursue cases that previously may have faced a risk of dismissal at the starting line.
Background: Excessive Fees and the Road to the Supreme Court
The case arose from allegations by Cornell University employees that the school’s 403(b) retirement plans paid excessive fees to recordkeepers Fidelity and TIAA. Under ERISA, transactions between a plan and a “party in interest” (such as a recordkeeper) are broadly prohibited unless they satisfy certain exemptions: for example, if the services are necessary and the fees are reasonable, as outlined in Section 408 of the statute.
The district court dismissed the prohibited transaction claims, and the Second Circuit affirmed, holding that the plaintiffs were required not only to allege that Cornell engaged in a prohibited transaction but also to plead facts showing that the reasonable fee and necessary services exemption did not apply.
This interpretation of ERISA placed the burden on plaintiffs to negate potential Section 408 defenses before even reaching discovery, a standard not required by other courts of appeals, including the Eighth and Ninth Circuits.
The Supreme Court’s Ruling: Simplified Pleading Standards
Writing for a unanimous Court, Justice Sotomayor rejected the Second Circuit’s heightened pleading requirement. The Court held that to adequately plead a prohibited transaction, a plaintiff need only allege the existence of a prohibited transaction - specifically, that a fiduciary caused the plan to engage in a transaction with a party in interest.
Whether the transaction qualifies for one of ERISA’s exemptions, such as the reasonable fee and necessary services defense, is an affirmative defense to be pleaded and proven by the defendant, not something plaintiffs must disprove in their complaint to state a claim. The Court emphasized that forcing participants to plead around exemptions would be illogical and inconsistent with both statutory structure and basic principles of pleading.
As Justice Sotomayor wrote for the court:
“Cornell’s proposed approach would require plaintiffs to plead and dispute myriad exceptions before knowing which of them the defendant will seek to invoke. That would be especially illogical here, where several of the exemptions turn on facts one would expect to be in the fiduciary’s possession.”
The ruling resolves a split between circuits that had required plaintiffs to negate exemptions at the pleading stage (like the Second Circuit) and those that did not (like the Eighth and Ninth Circuits). The decision creates a nationwide standard, lowering the bar for plaintiffs to get their ERISA prohibited transaction claims past the motion to dismiss stage.
What This Means for ERISA Fee Litigation
ERISA excessive fee prohibited transaction claims now are more likely to survive past the pleading stage. Here’s what you need to know about the implications:
1. Prohibited Transaction Claims Now Have a Clearer Path
The ruling removes the need for plaintiffs to preemptively guess and plead facts about which exemption a defendant might assert. Alleging that a plan engaged in a transaction with a party in interest, such as hiring a recordkeeper or investment manager, and paid fees for that service is now enough to state a prohibited transaction claim.
This change eliminates one of the biggest early hurdles in ERISA fee litigation, particularly for claims involving complex service arrangements where key details are often in the hands of the fiduciary, not the plan participants.
2. Fiduciaries Must Prepare for Discovery, Not Just Dismissal
Without the shield of early dismissal based on the applicability of potential Section 408 exemptions, fiduciaries will now have to rely on affirmative defenses at later stages of litigation. This will likely push more cases past the dismissal stage and into discovery.
It also means that the summary judgment stage, rather than the motion to dismiss stage, likely will become the new battleground for prohibited transaction claims.
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3. A Potential Rise in ERISA Class Actions
As reported by Law360, Andrew Holly, partner and head of the ERISA litigation practice at Dorsey & Whitney LLP, said: "I think it's going to lead to a modest uptick in risk of litigation, particularly in the Second Circuit.”
Employer-side attorneys have already warned that the ruling may encourage a new wave of ERISA litigation. The Court’s holding makes clear that simply alleging a plan’s relationship with a service provider may be enough to get a foot in the courtroom door, especially in jurisdictions like the Second Circuit, where these claims were previously easier to knock out.
While the extent of any increase in filings remains to be seen, plaintiff attorneys are well-positioned to revisit claims that they may have deemed too risky under the old standard.
4. Defense Counsel Will Turn to Other Procedural Safeguards
Although the Supreme Court adopted the lower pleading standard, it also pointed to several mechanisms available to defendants and courts to prevent meritless cases from proceeding into discovery:
- Federal Rule of Civil Procedure 7(a) Replies: Courts may require plaintiffs to respond to specific affirmative defenses (such as exemptions) once they are raised in the defendant’s answer.
- Standing Challenges: Plaintiffs still must plead concrete harm caused by the transaction, not just a technical violation.
- Rule 11 Sanctions: Meritless or bad-faith claims may still be subject to sanctions.
- Fee-Shifting: Courts may award attorneys’ fees to the prevailing party, which can deter frivolous suits.
Justice Alito emphasized this point in his concurrence, writing:
“To the extent future plaintiffs do bring barebones [Section 406] suits, district courts can use existing tools at their disposal to screen out meritless claims before discovery.”
In his concurrence, Justice Alito, joined by Justices Thomas and Kavanaugh, specifically endorsed the use of Rule 7(a) as “perhaps the most promising” procedural safeguard for handling these cases efficiently.
Building Stronger ERISA Cases with Darrow
The Supreme Court’s decision in Cunningham v. Cornell University lowers the procedural barriers for ERISA excessive fee prohibited transaction claims, but filing a complaint is only one part of the challenge. Litigating prohibited transactions and fiduciary breach cases requires strategy, data, and expertise.
At Darrow, we help bridge that gap, turning complex financial data into ready-to-litigate cases.
We’ve created legal intelligence technology that uncovers systemic patterns of fiduciary misconduct, cutting through layers of opacity to identify excessive fees, conflicted service provider relationships, and prohibited transactions that put retirement savings at risk.
Using advanced machine learning and anomaly detection algorithms, combined with deep legal expertise, we help plaintiff firms identify the strongest cases with clarity and confidence.
To date, Darrow has surfaced original ERISA cases worth a total of $7.5 billion in damages, empowering firms to hold fiduciaries accountable and restore financial justice to plan participants.
Beyond case discovery, Darrow partners with firms throughout the litigation process. We handle plaintiff identification and qualification through targeted campaigns and a rigorous vetting process. Our team of experienced attorneys offer professional legal consulting throughout the entire litigation process to ensure your strategy is sharp, your evidence is airtight, and your case remains strong through every stage of litigation, from initial filing to settlement or trial.
As the door opens wider for ERISA excessive fee litigation, let Darrow help you move forward with stronger claims, better evidence, and the right plaintiffs so you can pursue justice and drive meaningful reform where it’s needed most.
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