Abigail Frisch Vice: Sure. So the main provision here is Section 1106 of ERISA, which requires the plan fiduciary, who owes a duty of loyalty to plan participants, to abstain from certain types of transactions. And the transaction type relevant here is with a “party in interest.” And that corresponds to plan insiders and service providers. But the catch is that Section 1106 begins with the language, “except as provided in Section 1108.” And that section provides a long list of exempted transactions and also authorizes hundreds of regulatory exemptions. The exemption relevant here authorizes reasonable arrangements with a party in interest for necessary services so long as compensation is reasonable.
Kannon Shanmugam: Now, ERISA cases typically involve disputes between employees and the employer who administers their retirement plan. This case is no different, but the twist is that the employer was an Ivy League university.
Abigail Frisch Vice: That's right. The Ivy League university at issue is Cornell University. So the petitioners are current and former employees of Cornell, and the respondent is Cornell University in its capacity as the administrator of those plans. So Cornell here retained TIAA and Fidelity to offer investment options to their plan participants, which meant TIAA and Fidelity were service providers. They also provided corresponding record keeping services in the form of tracking account balances and providing statements. And so petitioners sued Cornell over those services, claiming that it was a prohibited transaction to hire TIAA and Fidelity for record keeping when they also provided services.
Kannon Shanmugam: Now, the plaintiffs went 0 for 2 in the lower courts in this case.
Abigail Frisch Vice: That's right. The district court dismissed the complaint and the Second Circuit affirmed. The Second Circuit reasoned it would be absurd for Congress to have written a statute that prohibits seemingly any payment to any entity that provides the plan with service. And accordingly, the court concluded that a plaintiff would need to plead that a party in interest transaction was unnecessary or unreasonable to survive a motion to dismiss. And that holding was in conflict with the holding of the Eighth Circuit, which is why the Supreme Court granted certiorari to review the judgment.
Kannon Shanmugam: Now, in my experience, while plaintiffs sometimes win and defendants sometimes win in the Supreme Court in ERISA cases, the one thing you can usually be sure of is that the Court's decision will be unanimous. And that proved to be the case here.
Abigail Frisch Vice: That was definitely the case here. The Court presented a united front. Justice Sotomayor wrote the opinion, and reversed the Second Circuit, relying on statutory text and structure. And in terms of text, the Court relied on three elements that were articulated in Section 1106. First, that there's a transaction. Second, for the provision of services. Three, with a party in interest. And the Court said that that's all a plaintiff needs to plead for purposes of surviving a motion to dismiss because the exemptions in Section 1108 are in a separate provision with a separate title. And the Court's statutory interpretation precedents tell us that that kind of arrangement creates an affirmative defense, which puts the burden on the defendants.
And in terms of structure, Section 1106 creates a categorical bar such that it wouldn't make any sense for plaintiffs to need to preemptively plead around all 21 statutory exemptions and the hundreds of regulatory exemptions corresponding to Section 1108. And beyond that, the Court observed that you wouldn't expect a plaintiff to possess the kind of information they would need to do that, given that, at least with respect to this transaction, a plaintiff would need to be able to say whether the transaction was reasonable or necessary.
The Court acknowledged that this interpretation would potentially allow meritless litigation to proceed to discovery, which could pressure defendants into settling meritless claims. And perhaps for that reason, the Court took pains to emphasize a number of safety valves. One that was raised by the government is in the form of Federal Rule of Civil Procedure 7, and that provides that when defendants file an answer showing that an exemption bars the suit, the district court can require the plaintiff to file a reply with specific non-conclusory factual allegations showing that the exemption doesn't apply. Beyond that, the Court pointed out that Article III standing could justify a Rule 12(b)(1) motion to dismiss if the plaintiffs alleged a prohibited transaction that didn't correspond to any kind of injury, and also flagged that courts can limit discovery, or impose Rule 11 sanctions, or shift costs, if that's appropriate.
Kannon Shanmugam: So Abby, this seems like a fairly significant decision in terms of its practical implications. What is this going to mean for ERISA plaintiffs going forward?
Abigail Frisch Vice: It means that life is a little bit easier for ERISA plaintiffs perhaps going forward. Like you said, it's a broad decision in the sense both that, a lot of people are subject to employer-sponsored benefit plans in some way, and it's a pretty broad interpretation that causes a potential claim for any payment to any service provider. It's one of the things that I think perhaps inspired Justice Kavanaugh at oral argument to say, “this seems nuts.” So, you know, perhaps that results in broader liability for plan administrators and then correspondingly passing higher fees along. But the safety valves are potentially a meaningful option here for defendants. In particular, Rule 7 seems quite accessible.
Kannon Shanmugam: So if nothing else, we may be seeing more replies to answers in federal courts in the coming years.
Abigail Frisch Vice: That's right.
Kannon Shanmugam: Well, thank you very much, Abby, for summarizing the Court's decision. And if you have any questions about the decision, please feel free to reach out either to Abby or to me. And that brings us to the end of today's episode. We hope you enjoyed it.
For more information about Paul, Weiss's Supreme Court and Appellate Litigation Practice, please visit us at our website, paulweiss.com. And please subscribe to “Court Briefs” wherever you listen to your podcasts. And we'll be back again soon with another episode. But until then, thank you for joining us and take care.
