Supreme Court Takes Up Circuit Split On How to Plead a Prohibited Transaction

On October 4, 2024, the U.S. Supreme Court granted a petition for a writ of certiorari in a case that hinges on diverging interpretations of pleadings standards under ERISA. Cunningham v. Cornell University, Nos. 21-88, 21-96, 21-114 (U.S. Oct. 4, 2024). ERISA contains a prohibited transaction prohibition, section 406(a)(1)(C), that bars a plan fiduciary from causing a plan to engage in a transaction that constitutes a direct or indirect "furnishing of goods, services, or facilities between the plan and a party in interest," unless permitted under an exemption contained in section 408. Section 408(b)(2) and its implementing regulations exempt certain transactions from ERISA's section 406(a) prohibited transaction provisions so long as the contract or arrangement is for necessary services and no more than "reasonable compensation" is paid. The issues the Court will take up is what must a plaintiff plead to state a claim under section 406(a)(1)(C) and whether the onus is on plaintiffs to negate, rather than on defendants to prove, exemptions to liability.

The petitioners, Cornell University retirement plan participants, argue that they sufficiently stated a prima facie section 406(a)(1)(C) violation by alleging that Cornell, the plan fiduciary, paid recordkeeping and administrative services fees to Teachers Insurance and Annuity Association of America College Retirement Equities Fund (TIAA) and Fidelity Investments Inc. (Fidelity) and that the burden should shift to Cornell to establish that the payments met the conditions for a section 408 exemption. Cornell successfully argued below to the Second Circuit that the plan participants failed to plausibly allege that the payments to TIAA and Fidelity were unreasonable and thus did not state a claim for a prohibited transaction.

Thus far, federal courts hearing this case have agreed with Cornell. In 2017, the District Court for the Southern District of New York (SDNY) dismissed the plan participants' prohibited transaction claim, finding that the allegations were insufficient because the petitioners did not allege the challenged transaction involved self-dealing or disloyalty by the fiduciary. The Second Circuit affirmed the dismissal, concluding that the section 406(b)(2) exemption is incorporated into section 406(a)'s prohibitions and that to plead a violation of section 406(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" (emphasis in original). The appellate court grounded its decision in the statute's text and structure, noting that the section 406(a) prohibitions begin with a reference to the section 408 exemptions. According to the Second Circuit, "[i]t is only by incorporating th[e] exemption into the prohibition set out in § [406(a)(1)(C)], and thus limiting its reach to unnecessary or unreasonable compensation, that the offensive conduct the statute discourages can 'be accurately and clearly described.'" 

The Second Circuit waded into a circuit split. The Eighth and Ninth Circuits embrace the expansive reading of section 406(a)(1)(C) put forward by the plan participants. They have held that the section 408(b)(2) exemption is an affirmative defense that has no bearing on whether the plaintiff sufficiently stated a claim. Braden v. Wal-Mart Stores, Inc., 588 F.3d 585 (8th Cir. 2009); Bugielski v. AT&T Servs., Inc., 76 F.4th 894 (9th Cir. 2023). The Third, Seventh, and Tenth Circuits disagree and instead support a narrower reading of the pleading standard. These courts go beyond the statute's text to require more of the pleadings, but what they require differs slightly. The Third requires a showing of intent to benefit a party in interest, Sweda v. Univ. of Penn., 923 F.3d 320 (3d Cir. 2019); the Seventh demands that the transaction look like self-dealing, Albert v. Oshkosh Corp., 47 F.4th 570 (7th Cir. 2022); and the Tenth needs some prior relationship to make the service provider a party in interest, Ramos v. Banner Health, 1 F.4th 769 (10th Cir. 2021). 

Also seeking clarity on the issue of section 406(a)(1)(C) pleading standards, the defendants in the Ninth Circuit's Buglieski filed a petition for a writ of certiorari in April 2024. On a slightly different issue, parties in D.L. Markham DDS, MSD, Inc. 401(K) Plan v. Variable Annuity Life Ins. Co., 88 F.4th 602 (5th Cir. 2023), petitioned for a writ of certiorari to determine the scope of a "party of interest" under section 406(a), but the Supreme Court declined that petition in May 2024. Cunningham provides the Court an important opportunity to clarify what must be plead to state a section 406(a)(1)(C) prohibited transaction and possibly section 406(a) violations generally. 

Tenth Circuit Rejects Standing on MHPAEA Claim Where Benefits Would Have Been Denied on Medical Necessity Grounds

Microsoft Corporation (Microsoft) and Premera Blue Cross (Premera) notched wins on several key issues in the Tenth Circuit last week in a case alleging wrongful denial of mental health benefits and parity violations, although the appellate court upheld awards of ERISA disclosure penalties and attorneys' fees in the plaintiffs' favor. M.S. v. Microsoft Corp., No. 22-4056 (10th Cir. Oct. 1, 2024). The court found that the plaintiffs lacked standing to sue under the Mental Health Parity and Addiction Equity Act (MHPAEA) where the plaintiffs would have suffered their alleged injury – the denial of benefits – even if the defendants had not violated MHPAEA. 

Plaintiff M.S. was an employee of Microsoft, which offered a group health plan administered by Premera. M.S.'s son began receiving behavioral, social, occupational, and language therapies at age five and was subsequently diagnosed with autism spectrum disorder, anxiety, and oppositional defiant disorder. He was a teenager in 2017 when his parents enrolled him in a residential treatment center in Utah. Premera denied the family's benefits claim, asserting that the residential treatment at that facility was not medically necessary based on plan terms and accepted medical standards. According to the decision, Premera identified the McKesson InterQual Criteria, a set of guidelines for evaluating medical necessity and appropriateness of healthcare services, as a source it relied upon when making its coverage decision.

After exhausting internal and external claim appeal mechanisms, the family sued, alleging that Microsoft and Premera improperly denied benefits under ERISA, violated ERISA's disclosure provisions by failing to produce certain documents, and applied disparate treatment limits to mental healthcare claims in violation of MHPAEA. The district court granted the defendants' motion for summary judgment on the denial of benefits claim and the plaintiffs did not appeal. On the other two claims, the district court granted summary judgment to the plaintiffs and Microsoft and Premera appealed.

The Tenth Circuit raised the issue of the plaintiffs' standing to bring a MHPAEA claim sua sponte. The court considered two possible injuries that could potentially confer standing and rejected both. First, "plaintiffs could be denied benefits under the Plan." But here, the denial of benefits was not traceable to the MHPAEA violation. The district court had found that Premera's use of the InterQual Criteria to evaluate residential mental health treatment coverage violated MHPAEA, but also had found that the treatment at issue was not medically necessary under the terms of Microsoft's plan and would have been denied even without use of the InterQual Criteria. The plaintiffs, therefore, could not claim a denial-of-benefits injury for standing purposes on their MHPAEA claim. 

Second, the court considered whether deprivation of notice of how claims are reviewed could count as a cognizable injury on the MHPAEA claim. The court could not find an authority that said, "a lack of notice of claim review procedures in violation of ERISA is, without more, an injury in fact." The Tenth Circuit noted that courts have excused notice violations in the past where the claimant was not prejudiced. Having found both theories of injury deficient, the court vacated the district court's summary judgment on the MHPAEA claim and remanded with instructions to the district court to dismiss that claim for lack of standing.

The unanimous three-judge panel also reversed the district court's finding that ERISA's disclosure requirements covered Skilled Nursing InterQual Criteria the plaintiffs had requested, holding those documents are not "other instruments" under which a plan is established or operated for purposes of ERISA section 104(b)(4). However, the court upheld the lower court's summary judgment finding that administrative service agreements (ASAs) are subject to the disclosure requirements. The defendants' failure to produce the requested ASA was enough to sustain the district court's award of penalties and legal fees and costs to the plaintiffs. 

Upcoming Speaking Engagements

Joanne will speak at the Health and Welfare Benefit Plans National Institute 2024 on October 17 and the 18th Annual Labor and Employment Law Conference on November 16.

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