Cornell, the named administrator for two defined contribution retirement plans, retained two service providers to offer investment options to plan participants. These service providers also provided recordkeeping and administrative services to the plans. Plan participants sued Cornell and other plan fiduciaries, alleging that these arrangements for ancillary services constituted a prohibited transaction with parties in interest – i.e., the same service providers supplying investment management services. The defendants successfully moved to dismiss the complaint arguing that plaintiffs failed to plead the inapplicability of the exemptions to the prohibited transaction rule, and the 2nd Circuit affirmed.

The Supreme Court, however, disagreed. Delivering the opinion, Justice Sotomayor reasoned that “[t]here is a well-settled general rule of statutory construction that the burden of proving justification or exemption under a special exception to the prohibitions of a statute generally rests on one who claims its benefits.”

Therefore, the exemptions constitute affirmative defenses which must be raised by the defendants in response to the complaint and are “not something the plaintiff must anticipate and negate in her pleading.”

Defendants raised the concern that, if plaintiffs are required to simply plead an alleged prohibited transaction without disproving the applicability of an exemption, they “could too easily get past the motion-to-dismiss stage and subject defendants to costly and time-intensive discovery.” Justice Sotomayor acknowledged that these “are serious concerns but they cannot overcome the statutory text and structure.”

Further, she reasoned, district courts have the means to “screen out meritless claims before discovery” including:

• Federal Rule of Civil Procedure 7(a) which requires a plaintiff to reply to defendants’ answer which asserts affirmative defenses
• Dismissal for lack of standing
• Expediting or limiting discovery to reduce unnecessary costs
• Imposition of Rule 11 sanctions if “an exemption obviously applies, and a plaintiff and his counsel lack a good-faith basis to believe otherwise”
• Invoking ERISA’s cost-shifting provision

Justice Alito, writing a concurring opinion joined by Justices Thomas and Kavanaugh, agreed that plaintiffs are not required to plead affirmative defenses. Yet, he expressed concern that this ruling will cause “untoward practical results.” Referring specifically to the underlying case, Justice Alito commented that:

“Cornell set up a plan under which employees could invest in the [service providers’] funds, and then those companies provided the recordkeeping services for their own funds, as they customarily do. There is nothing nefarious about any of that. Yet under our decision that is all that a plaintiff must plead to survive a motion to dismiss. And, in modern civil litigation, getting by a motion to dismiss is often the whole ball game because of the cost of discovery. Defendants facing those costs often calculate that it is efficient to settle a case even though they are convinced that they would win if the litigation continued.”

Though the Supreme Court listed various potential safeguards to protect defendants against meritless litigation, Justice Alito cautioned that “whether these measures will be used in a way that adequately addresses the problem that results from our current pleading rules remains to be seen.”

The response to the Cornell decision from both legal defense and insurance commentators has been swift and negative.

For example, a major law firm stated:

“Routine use of third-party retirement plan service providers—a longstanding, prudent fiduciary practice—may now become an even more frequent litigation target, notwithstanding the already substantial volume of litigation in this space.”⁴

A large fiduciary liability insurance underwriter stated:

“Any hope that district judges will streamline ERISA cases is wishful thinking. In the meantime, plaintiff lawyers now have an easier way to plead excessive fee cases. This means more cases with unfair leverage to extract settlements against America’s plan sponsors.”⁵