Supreme Court Eases Pleading Standard for Prohibited Transaction Claims

On April 17, 2025, the Supreme Court issued a unanimous decision in Cunningham v. Cornell University, No. 23-1007, a defined contribution plan class action lawsuit, reversing the Second Circuit's decision affirming dismissal of the plaintiffs' claims and resolving a split among the circuits on the pleading standard in ERISA cases involving prohibited transaction claims under 29 U.S.C. § 1106. Justice Sonia Sotomayor's opinion held that a plaintiff asserting a prohibited transaction claim under 29 U.S.C. § 1106(a)(1)(C) "need only plausibly allege the elements" in § 1106(a)(1)(C) and is not required to plead that the exemptions under § 1108 are not applicable. 

To state a claim under § 1106(a)(1)(C), a plaintiff needs only to plead that a fiduciary (1) caused a plan to engage in a transaction, (2) that the fiduciary knows or should know constitutes a direct or indirect furnishing of goods, services, or facilities, (3) between the plan and a party in interest. This means that nearly any transaction involving a plan and a third party that is necessary to the operation of a plan is inherently in violation of ERISA — including recordkeepers, accountants and lawyers, among others. To facilitate these transactions, 29 U.S.C. § 1108(b)(2)(A) provides an exemption to allow for services that are necessary for the establishment or operation of a plan as long as no more than reasonable compensation is paid. 

Contrary to the position taken by the Second Circuit, the Court held that the exemptions under § 1108 are affirmative defenses that a defendant needs to prove applies. This decision reverses the Second Circuit's ruling that the exemption under § 1108 for reasonable and necessary items, services, or facilities was incorporated into § 1106, and that a plaintiff must plead that an exemption did not apply (e.g., more than reasonable compensation was paid). The Court's decision shifts the burden to defendants and eases the ability for a plaintiff to not just bring a prohibited transaction claim, but also to survive dismissal. While acknowledging the concerns raised by Cornell that placing the burden on defendants would increase meritless litigation by plaintiffs, the Court stated that there are other resources available to district courts to deter frivolous prohibited transaction lawsuits, including Rule 11 sanctions, the ability to expedite or limit discovery, and cost shifting under 29 U.S.C. § 1132(g)(1), or requiring plaintiff's to file a reply under Rule 7(a) when exemptions are raised by defendants.

Supreme Court Requests Government's Views in 401(k) Plan Dispute

On April 21, 2025, the Supreme Court invited the Solicitor General to file a brief in Pizarro v. The Home Depot, No. 24-620, which is pending the Court's decision on whether to grant certiorari.  

We have previously written about this case. The petition for certiorari challenges an August 8, 2024, decision by the Court of Appeals for the Eleventh Circuit affirming summary judgment in favor of Home Depot, Inc., and two of its 401(k) plan committees (collectively, Home Depot) and in doing so declining to adopt a burden-shifting framework in ERISA cases on the issue of loss causation on fiduciary duty claims. In this case, the plaintiffs brought claims that Home Depot failed to adequately monitor fees charged by the plan's financial advisors for investment advisory and managed account services and failed to prudently evaluate and remove certain allegedly underperforming plan investments. The Eleventh Circuit found that while there were genuine disputes of material fact as to whether the defendants complied with the ERISA duty of prudence, the plaintiffs failed to show that any such imprudence caused a financial loss. Of note, the Department of Labor (DOL) filed an amicus brief in February 2023 in the Eleventh Circuit in support of plaintiffs' argument that once an ERISA plaintiff proves a breach of the duty of prudence and a loss to the plan, it is the fiduciary's burden to prove that the loss was not caused by the breach. Home Depot argued that the Supreme Court should decline to take up this issue because the Eleventh Circuit was correct in requiring plaintiffs to prove loss causation in the first instance. 

There is a circuit split developing on this issue, with the First, Fourth, Fifth, and Eighth circuits adopting the burden-shifting approach, and the Tenth and Eleventh Circuits rejecting this defensive obligation on ERISA fiduciaries when the statute is silent on the issue. Whether the Trump administration reverses course from the position the government advocated in the 2023 amicus brief will be closely watched.

DOL Tells Court It Is "Reconsidering" ESG Investing Rule

On April 21, 2025, the DOL filed a motion for abeyance with the Fifth Circuit in Utah v. Chavez-DeRemer, No. 23-11097, pending the agency's "reconsideration of the challenged rule" at issue in the case. Utah v. Chavez-DeRemer concerns the legality of a 2022 DOL final rule permitting ERISA fiduciaries to consider environmental, social, and governance (ESG) factors that bear on financial risk and return and when selecting among financially equal investment options. As we recently covered, the district court upheld the 2022 rule in February, finding that it did not contravene the text of ERISA and therefore was not an unlawful exercise of agency authority under Loper Bright. The plaintiffs appealed the lower court decision and the Fifth Circuit granted the government's request to extend the deadlines for the parties to file supplemental briefs, so that new DOL personnel could familiarize themselves with the case.

In its most recent motion, the DOL requested that the court hold the appeal in abeyance while it determines how to proceed with the Biden-era rule. The motion states, "Now that its new leadership has had the requisite time to gain familiarity with the issues in this case, the Department has determined that it intends to reconsider the challenged rule, including by considering whether to rescind the rule." As the motion points out, if the 2022 rule is rescinded, there will be no need for further litigation. The plaintiffs opposed the government's motion but agreed to the government's request to extend the deadline for supplemental briefing until the court rules on whether to hold the appeal in abeyance.

If the DOL does rescind the 2022 rule, it may return to a prior 2020 rule that permitted consideration of non-pecuniary factors only in very constrained "tie-breaker" situations, and which required documentation of any such consideration.

In the News

Joanne commented in Law360 on the Cornell ruling and its impact on employer litigation risk, noting that the Court "went out of its way to endorse the Rule 7(a) mechanism when exemptions are raised as an affirmative defense," emphasizing a procedural path for addressing exemptions after a complaint is filed.

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