The Court recognized that its holding might generate unnecessary litigation and costs for the defendant plan and suggested ways trial courts could minimize that burden.

The Court’s decision

ERISA bans transactions between a plan and its service providers. Recognizing that many of these transactions are necessary, ERISA then exempts certain transactions that, for example, are necessary and have a reasonable cost. The issue that the Supreme Court addressed in the Cunningham v. Cornell University decision is who has the burden to show that the exemption exists. Is it part of the plaintiffs’ initial claim that there is a violation of the prohibited transaction rules or is it a defense the defendant must show?

The Court held that whether exemption applies is an “affirmative defense” that the defendant must argue, and not something a plaintiff must plead to get to the next step of the case. The Court based its decision in Cunningham solely on the fact that the exemptions from a transaction being prohibited are in a separate section of ERISA from the ban on the transaction.

Normally, a defendant plan would make a motion to the court to dismiss the suit on the pleadings because the participants provided no claim that an exemption does not apply. However, if the burden is on the plan to prove that an exemption applies, the plaintiff can avoid having the case dismissed at the pleadings stage. Without dismissal, the next step is discovery, a costly process for the plan. Many plans decide it makes more sense to settle the case than to incur the cost of discovery — giving the plaintiffs a victory without ever having to prove the transaction was not exempt.

The Court recognized the likely result of its holding as generating needless litigation but felt bound by the statutory structure of ERISA. To address this, the Court suggested several approaches the trial court judge could take, including:

• Limiting discovery to whether an exemption applied
• Finding that the plaintiffs suffered no harm because of the exemption, and consequently the plaintiffs had no standing to bring the case
• Awarding the cost of litigation to the plan if the claim is found to be meritless because an exemption exists

What is likely to be the result of the decision?

This case will go back to the lower courts for action based on the Court’s decision. There are also numerous cases already brought, or ready to be brought, that will be affected by the Court’s decision.

The Court’s decision in this case could encourage even more litigation. On the other hand, the Court clearly suggests a path that trial courts can take to narrow the cases at the preliminary stage.

Note that this case involved prohibited transactions only. Many of the pending suits against plans involve fiduciary violations. Those lawsuits are not affected by the decision in Cunningham.

Plans should consult with their legal counsel about their specific issues.