The U.S. Supreme Court recently issued a unanimous opinion that cited Restatement of the Law Second, Trusts § 171 in resolving a dispute under the Employee Retirement Income Security Act.
In Cunningham v. Cornell University, No. 23-1007 (Apr. 17, 2025), current and former employees of a university, who participated in defined-contribution retirement plans offered by the university, filed a class action against the university and other plan fiduciaries, challenging certain fees that the university paid from a set portion of plan assets to two service providers it had hired to offer investment options to plan participants and serve as recordkeepers for the plans. Specifically, the employees claimed that the fees were unreasonably high, and that the university’s payment of the fees to the service providers violated the Employee Retirement Income Security Act (ERISA) of 1974, 29 U.S.C. § 1106(a)(1)(C), which prohibits ERISA plan fiduciaries from causing the plan to engage in a transaction if the fiduciary “knows or should know that such transaction constitutes a direct or indirect … furnishing of goods, services, or facilities between the plan and a party in interest.”
The U.S. District Court for the Southern District of New York granted the university’s motion to dismiss the employees’ prohibited-transaction claim, holding that, in addition to pleading the elements of a claim under 29 U.S.C. § 1106(a)(1)(C), the employees also had to allege “some evidence of self-dealing or other disloyal conduct” by the university, and the employees had failed to do so.
After the employees appealed, the U.S. Court of Appeals for the Second Circuit affirmed on different grounds, concluding that 29 U.S.C. § 1106 had to be read in connection with another provision of ERISA, 29 U.S.C. § 1108(b)(2)(A), which exempts from § 1106 any transaction that involves “[c]ontracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.” The Second Circuit reasoned that the employees had not alleged that the fees were unnecessary, and that the employees failed to allege sufficient facts suggesting that the fees were “so disproportionately large,” in light of the relative quality of the services provided, “that they could not have been the product of arm’s-length bargaining.”
Noting that the Second Circuit’s decision created a circuit split—because the U.S. Court of Appeals for the Eighth Circuit’s decision in Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 600-602 (8th Cir. 2009), held that no additional pleading requirements beyond 29 U.S.C. § 1106(a)(1) applied to prohibited-transaction claims—the U.S. Supreme Court granted certiorari to resolve the split.
In a unanimous opinion, the Supreme Court agreed with the Eighth Circuit and with the employees in this action, and reversed the Second Circuit’s decision, holding that, to state a prohibited-transaction claim under 29 U.S.C. § 1106, plaintiff plan participants are not required to plead and prove that an exemption under 29 U.S.C. § 1108 does not apply to a transaction between a plan and a party in interest; rather, 29 U.S.C. § 1108 set forth affirmative defenses, and defendant fiduciaries bear the burden of pleading and proving that an exemption under 29 U.S.C. § 1108 applied to a transaction that was otherwise prohibited under 29 U.S.C. § 1106.
Associate Justice Sonia Sotomayor delivered the opinion for the Court, reasoning, in part, that the text and structure of ERISA established that fiduciaries bore the burden of pleading and proving any exemptions under 29 U.S.C. § 1108. Noting that common-law trust principles could in some instances help inform the Court’s interpretation of ERISA, Justice Sotomayor pointed out that, while the Court’s opinion did not rest on the common law, the common law of trusts was consistent with the Court’s holding. The Court explained that, while Restatement of the Law Second, Trusts § 171 provided that a trustee was “under a duty to the beneficiary not to delegate to others the doing of acts which the trustee can reasonably be required personally to perform,” a trustee could nonetheless delegate certain duties to an agency if the trustee could show “that the agent’s employment was necessary, that the trustee entered into a reasonable contract of employment with the agent, and that the agent rendered services to the trust.” The Court stressed that, under the common law, the burden was on the trustee to make the showing that the delegation was necessary and reasonable.
Read the full opinion here.