By: HUB’s EB Compliance Team

In Cunningham v. Cornell, a Supreme Court case decided last month, the Court made it easier for plaintiffs to argue that every service provider hired by an ERISA plan is engaging in a prohibited transaction. This ruling could make it easier for plaintiffs to claim plan fiduciaries, including employers sponsoring an ERISA-covered health plan, are violating their fiduciary duties. However, the Court did signal to lower courts how they can weed out meritless litigation.

Background

To protect plan participants, ERISA sets out a list of prohibited transactions in its regulations. Engaging in such a prohibited transaction under ERISA can lead to tax penalties, Department of Labor investigations, and lawsuits for breach of fiduciary duty. One such prohibited transaction occurs when a plan engages a “party in interest” to provide goods, services or facilities to the plan. The problem: every service provider to a plan is a party in interest.

Read literally, this would mean a plan could never hire service providers. However, recognizing that plans will need to hire service providers, Congress added an exemption that allows plans to hire service providers for necessary services in exchange for reasonable compensation. In other words, hiring service providers is not prohibited as long as the services are necessary to operate the plan and the fees are reasonable.

This Case

Whether the services are “necessary” and whether compensation is “reasonable” is beyond the scope of this case, at least at this early stage. Instead, the question before the Court was a technical litigation issue. Put simply, if a plaintiff is suing a plan, plan sponsor, in court, does the plaintiff only have to allege the transaction was prohibited? Or do they also have to allege the services were unnecessary or the compensation was unreasonable? In other words, do they have to overcome the “exemption” Congress created first or is that something that plan fiduciary defendants need to prove as a defense?

A unanimous Court said the latter: fiduciaries must assert the exemption argument as a defense. Practically speaking, this ruling means a plaintiff needs only to claim that the plan is paying someone for services (which, as the Court acknowledged, virtually every plan does) to allege a prohibited transaction. Consequently, plaintiffs will have an easier time alleging ERISA claims against a plan and potentially getting past a “motion to dismiss”. A motion to dismiss effectively argues that there is no case exists, even if all the facts the plaintiff says are true. If the complaint can get past a motion to dismiss, the case moves on to the discovery phase of litigation, which can be both expensive and time-consuming. A case often settles once it gets to that stage, to avoid the cost of discovery.

Is There Hope?

The Court acknowledged that the possibility of “an avalanche of meritless litigation” was a serious concern, but this suggested lower courts had “existing tools” to try and screen out frivolous suits, such as:

  • Requiring plaintiffs to file a reply once the exemption defense is raised before the discovery phase, but is at the discretion of the court.
  • Ensuring claims include a concrete injury to the plaintiff. This is part of the concept of “standing” that often gets other cases dismissed. It effectively asks, “If you haven’t actually be injured, why are you in court?”
  • If a case gets past the motion to dismiss, then courts have the ability to expedite or limit discovery (again, at the court’s discretion), hopefully bringing down the cost of discovery.
  • If a court determines that the plaintiff and the plaintiff’s attorney have no good faith basis for their claim, the court could impose sanctions against the attorney (although this is unlikely).
  • Finally, ERISA allows a winning party to have its attorney’s fees paid by the losing party. If a plaintiff lacks a good faith basis for their claim, the fiduciary defendants could seek to get attorney’s fees from the plaintiff.

In a concurring opinion, Justices Alito, Thomas, and Kavanaugh urged lower courts to “strongly consider” using these options, including particularly the first one.

What Does this Mean for Employers?

While this was a retirement plan case, these same prohibited transaction rules apply to all ERISA plans. As a result, this ruling may make it easier for plaintiffs to pursue health plan lawsuits (like the one discussed here) and successfully survive motions to dismiss. If that is the case, this outcome will also lead to increased litigation, including in the health plan space.

Cunningham underscores the need for employers to focus on their fiduciary processes to make themselves less attractive defendants and to bolster any arguments they may have to defend themselves. As detailed in this article, the steps could include:

  • Delegating authority to benefits committees
  • Engaging in fiduciary training
  • Doing regular market checks/RFPs/RFIs for service providers
  • Understanding the plan documents
  • Pursuing fiduciary liability coverage.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.