US Supreme Court in Cornell case adopts higher bar to dismiss ERISA claims

By Daniel Wiessner

April 17 (Reuters) - The U.S. Supreme Court on Thursday revived a class action by 28,000 Cornell University employees accusing the Ivy League school's retirement plans of paying excessive fees for recordkeeping and other services.

The court in a unanimous decision penned by Justice Sonia Sotomayor said that plaintiffs in such lawsuits have no obligation to allege that exemptions from the federal law governing employee benefit plans do not apply, because the exemptions are affirmative defenses that must be raised by plans themselves when they move to dismiss lawsuits, resolving a circuit split on the issue.

The justices reversed a ruling by the New York-based 2nd U.S. Circuit Court of Appeals that had dismissed the class action filed against Cornell in 2016.

The 2nd Circuit had agreed with Cornell and three other federal appeals courts that the plaintiffs were required to plead in their lawsuit that the school did not qualify for any statutory exemptions under the Employee Retirement Income Security Act of 1974. At least two other appeals courts have said that plans have the burden of raising exemptions and proving they apply.

ERISA prohibits benefit plans from engaging in transactions with third parties that could cause a conflict of interest or financial harm to participants. A separate provision exempts transactions for necessary services, such as office space and legal and accounting services, "if no more than reasonable compensation is paid."

Sotomayor wrote that 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."

Cornell, its lawyers and lawyers for the plaintiffs did not immediately respond to requests for comment.

Justice Samuel Alito concurred with the decision but wrote separately to warn that it could result in more meritless ERISA lawsuits surviving motions to dismiss, exposing benefit plans to the costs of discovery and trial.

"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," he wrote. Alito was joined by Justices Clarence Thomas and Brett Kavanaugh.

The plaintiffs who sued Cornell in 2016 claimed the retirement plans engaged in prohibited transactions for recordkeeping and administrative services and paid excessive fees. Cornell claimed that the costs were exempt from ERISA's ban on third-party transactions and the fees paid by the plans were reasonable.

The lawsuit was one of roughly two dozen that were filed beginning in 2016 to accuse colleges and universities of violating ERISA by failing to adequately monitor retirement plans, drop underperforming investments or limit fees.

In a 2022 decision involving Northwestern University, the justices unanimously ruled that offering workers a broad range of choices for their retirement investments does not shield employers from claims that specific options are imprudent because they come with high fees.

Duke, Columbia, the University of Southern California and Washington University in St. Louis have paid as much as $13 million to settle ERISA cases in recent years, while denying wrongdoing.

The case is Cunningham v. Cornell University, U.S. Supreme Court, No. 23-1007.

For the plaintiffs: Xiao Wang of the University of Virginia School of Law Supreme Court Litigation Clinic

For Cornell: Michael Scodro of Mayer Brown

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