SCOTUS hears Cornell case with potential consequences for retirement plan litigation

The US Supreme Court heard oral arguments Wednesday in a long-running lawsuit against Cornell University – and the forthcoming decision could make it significantly easier or harder for plaintiffs to bring certain class actions claims against retirement plan fiduciaries.

That all comes down to interpretating two statutes and their connections with a list of numerous exemptions for prohibited transactions that involve hiring service providers, such as record keepers for defined-contribution plans.

The petitioners to the court are seeking to reverse a 2023 decision in the US Court of Appeals for the Secord Circuit, which affirmed a lower court’s dismissal of a prohibited transaction claim connected to the plan’s arrangement with record keepers TIAA and Fidelity. The case, filed in 2016, was one in a deluge of litigation against elite colleges and universities over fees in their 403(b) plans, with many of the cases, including the one against Cornell, brought by law firm Schlichter Bogard. Cornell in 2020 settled the one claim in that lawsuit that wasn’t dismissed, and that claim involved the selection of the target-date series in the plan. The claim currently before the court centers on the choice of record keepers that were paid at least in part by revenue sharing from proprietary funds within the plan.

Lower courts have not agreed on whether a plan fiduciary’s hiring of a service provider – a prohibited transaction that can be covered by the exemptions – is sufficient for claims to survive a motion to dismiss. Supporters, including the US Chamber of Commerce, which recently filed an amicus brief in the case, have argued that allowing such claims to proceed to discovery, putting the burden of proof on the defendants, could open the floodgates for frivolous lawsuits. Because discovery tends to be a long and expensive process, surviving a motion to dismiss can be a way for plaintiffs to secure settlements, even in cases that defendants feel they would win.

“Your theory means, I think, or at least the other side says that it's a prohibited transaction just to have recordkeeping services,” Justice Brett Kavanaugh said to the petitioner’s attorney, Xiao Wang. “And that seems nuts, right? That's what they say. And it does to me seem nuts too.”

Record keeping services are ubiquitous for defined-contribution plans, he noted.

“You have to have them. So, it’s an automatic ticket. Pass go, go immediately to discovery, summary judgment, huge expense…. This expanded litigation threat would be near limitless because every college and university relies on third-party service providers.”

The court sought an answer to Congress’ intent in drafting the statutes as written, which does not necessarily make clear whether exemptions apply to different parts of the law. But the justices also questioned whether lower courts already have the means of deterring “bare bones” lawsuits.

Discovery, or at least limited discovery, can be necessary for plaintiffs alleging prohibited transactions, due to the “information asymmetry” between plan fiduciaries and participants – that is, plans have access to the contracts and arrangements with record keepers, but workers participating in the plan may not.

“And [for] some of the exemptions, it would be really, really hard for us to determine that the plaintiff has to plead them, because they don't have the information, correct?” Justice Ketanji Brown Jackson asked.

It isn’t clear that a decision will be made along political lines, and the justices acknowledged the need for clarification in how claims are brought.

“This isn't that easy a case, in my mind,” Justice Sonia Sotomayor said, citing the circuitous relationship between one statute and 21 potential exemptions, along with dozens of others passed by the Department of Labor.

“How will [a plaintiff] know which exemptions are pertinent or not?” Sotomayor said to Wang. “Whatever we decide, someone's going to be potentially unfairly treated because … no plaintiff has a way of knowing what all the exemptions are and what potential exemptions the other side could pick.”

Congress was intentional in identifying arrangements that should be exempt from falling into the prohibited transactions category, said Yaira Dubin, assistant to the Solicitor General, in an argument supporting the petitioner.

“In that context, it makes perfect sense to put the burden on the fiduciary to show that the transaction was justified and reasonable,” Dubin said. “The fiduciary is the one who enters into the transaction. The fiduciary is the one who has the information about the transaction. And the fiduciary is the one who's charged under trust law with ensuring that these transactions are an appropriate use of people's retirement money.”

But merely citing the existence of a transaction, without obvious wrongdoing, should not allow claims to survive a motion to dismiss, the respondents said.

“It automatically opens the door to expansive discovery. The cost is disproportionately borne by defendants. It would force settlements of meritless litigation. It has in some of these university cases. The ultimate result would be to hurt plan participants and beneficiaries,” said the respondents’ attorney, Nicole Saharsky. “And it just doesn't make any sense to read this statute as allowing a cause of action to go forward with no allegation of wrongdoing.”