Information Center

Cunningham v. Cornell

The Pension Rights Center filed a friend of the court brief with the Supreme Court in Cunningham v. Cornell University. The plaintiffs in the case allege that two Cornell University retirement plans were paying unreasonable levels of compensation to the plan’s recordkeeper. The plaintiffs argued that payment of these fees violated to separate sections of ERISA: the general fiduciary sections and the prohibited transaction sections. The Second Circuit Court of Appeals dismissed the prohibited transaction claims.

The prohibited transaction sections of ERISA prohibit fiduciaries from causing a plan to enter into certain transactions with a “party in interest.” A part in interest includes “service providers” and prohibited transactions include providing services to the plan.

This means that a plan would be prohibited from purchasing services, which would be an absurdity. But the prohibited transaction rules include exemptions—a fiduciary can cause the plan to enter into a contract for services under one of these exemptions, but only if the service is “necessary” and the compensation paid for the service “no more than reasonable.”

The question in Cunningham is what the plaintiff needs to say in their complaint to get by a motion to dismiss. Two circuit courts have said that under the statute, the plaintiff only has to plead that the plan entered into a contract for services and that the defendant, in answering the complaint, may raise as an affirmative defense that the services were necessary and that the price the plan paid for the services was no more than reasonable. But the Second Circuit said that the plaintiff had to plead the exemption, not the defendant, even though the relevant facts were in the defendant’s hands. Moreover, the Second Circuit said it was not sufficient for the plaintiff to plead that more than reasonable compensation was paid, which the plaintiff had. Instead, the the plaintiff had to plead facts that would demonstrate that the amount the plan paid was “so disproportionately large that they could not have been the product of arm’s-length bargaining.”

In our brief, we argued that the prohibited transactions should be treated as an affirmative defense, because that is consistent with the language of the statute, with trust law, and with ERISA’s legislative history.

We are grateful to John Nestico, of Schneider, Wallace, Cottrel Konecky LLP, who wrote the brief with assistance from our Acting Legal Director, Norman Stein.