Corey Rosen
Could a New Supreme Court Decision Make It Easier to Sue ESOPs?
ESOP legal experts suspect that the recent unanimous Supreme Court decision in Cunningham v. Cornell University, No. 23-1007 (U.S. Apr. 17, 2025) will make it easier for plaintiffs to file lawsuits against ESOP fiduciaries. The issue in Cornell related to ERISA’s prohibited transaction provisions and the many statutory exemptions. Under ERISA, fiduciaries are prohibited from causing plans to engage in transactions with parties in interest, subject to exemptions, including the adequate consideration exemption that authorizes ESOP stock transactions in employer stock. The question in Cornell was whether plaintiffs could adequately plead a violation of ERISA’s prohibited transaction provisions by simply stating that a transaction with a party in interest occurred, or whether plaintiffs must also plead that an exemption does not apply. Federal circuit courts have been split on this question, with some holding that plaintiffs had to plead facts to plausibly state that an exemption did not apply and others holding that plaintiffs do not have to address the exemptions. In Allen v. GreatBanc (7th Cir. 2016), the Seventh Circuit held that the plaintiffs stated a plausible breach of ERISA’s prohibited transaction provisions merely by alleging that the ESOP’s stock value dropped after the sale, that the ESOP transaction was financed by the seller, and that the loan’s interest rate was high. The Seventh Circuit did not require the plaintiffs to plead the absence of any prohibited transaction exemptions.
The Cornell case involved a different type of plan (401(k)) and a prohibited transaction exemption that permits fiduciaries to cause a plan to contract with a party in interest for recordkeeping services. In a unanimous ruling, the Supreme Court said that the pleading standard for a violation of ERISA’s prohibited transaction provisions is simply that a prohibited transaction plausibly occurred, and that the prohibited transaction exemptions are affirmative defenses that plaintiffs have no burden to plead around.
This pleading standard will make it easier for plaintiffs to get past the first stage of court proceedings. A number of the justices were sympathetic to the obvious potential for meritless litigation and an increase in the volume of cases under ERISA, but the Court held that ERISA was clear on the parties’ burdens. The Court did, however, suggest various options that lower courts might use to try to discourage or punish meritless lawsuits. Most notably, this includes Federal Rule of Procedure 7, which says courts can “insist that a plaintiff file a reply putting forward specific, nonconclusory factual allegations” showing that an exemption does not apply.
Some judges, including those on the Supreme Court, have expressed frustration at the number of ERISA cases being filed. Absent lower courts finding a way to dispose of meritless lawsuits quickly, the only remedy will now be for Congress to consider amending ERISA.
The new Cornell ruling will primarily affect fiduciaries who cause ERISA plans to engage in transactions, meaning those with the discretionary authority to bind the plans to transactions. This includes ESOP trustees but likely not board members, sellers, or executives, all of whom can rely on other defenses at the early stage of litigation.
Reviewed by Griffin O’Gara of Krieg DeVault.
Richard Pearl of Faegre Drinker provided useful input for this blog post.
