“Affirmative-Defense Allocation” under ERISA: Plaintiffs Need Not Plead §1108 Exemptions to State a §1106 Prohibited-Transaction Claim

1. Introduction

In Cunningham v. Cornell University, 604 U.S. ___ (2025), the United States Supreme Court unanimously clarified ERISA’s pleading landscape by holding that a plaintiff who sues a fiduciary for engaging in a prohibited transaction under 29 U.S.C. §1106(a)(1)(C) need only plead the three elements contained in that subsection. The Court rejected the Second Circuit’s view that the plaintiff must also negate the availability of the “reasonable and necessary services” exemption found in §1108(b)(2)(A). In doing so, the Court converted decades of lower-court uncertainty into a bright-line rule: all §1108 exemptions function as affirmative defenses, and the burden of pleading and proof rests completely on defendants who seek to invoke them.

The decision reshapes procedural strategy in ERISA litigation, realigns the statute with orthodox principles of pleading, and signals a broader judicial reluctance to graft additional elements onto Congress’s carefully structured prohibitions.

2. Summary of the Judgment

• Holding: To state a claim under §1106(a)(1)(C) a plaintiff must plausibly allege only (i) that a fiduciary caused the plan to engage in a transaction, (ii) that the fiduciary knew or should have known the transaction constituted the furnishing of goods, services, or facilities, and (iii) that the transaction was between the plan and a party-in-interest. Potential §1108 exemptions are not elements of the claim.
• Vote / Opinions: Opinion for a unanimous Court by Justice Sotomayor; concurrence by Justice Alito joined by Justices Thomas and Kavanaugh.
• Disposition: Second Circuit reversed; case remanded.
• Key Consequence: §1108 exemptions—including §1108(b)(2)(A)’s “reasonable compensation for necessary services” clause—are affirmative defenses that fiduciary defendants must plead and prove.

3. Analysis

3.1 Precedents Cited and Their Influence

• Meacham v. Knolls Atomic Power Laboratory, 554 U.S. 84 (2008) – The Court analogized ERISA’s structure to the Age Discrimination in Employment Act at issue in Meacham, where exemptions set in a separate section were deemed affirmative defenses. This parallel provided the doctrinal spine for today’s decision.
• FTC v. Morton Salt Co., 334 U.S. 37 (1948) – Reaffirmed the “general rule of statutory construction” that a party invoking a special exception bears the burden of pleading and proof.
• United States v. Detroit Timber & Lumber Co., 200 U.S. 321 (1906) – Cited for the proposition that syllabi are not part of the law, reinforcing the Court’s textual focus on statutory language.
• United States v. Cook, 17 Wall. 168 (1872) & Dixon v. United States, 548 U.S. 1 (2006) – The Court distinguished these criminal-pleading precedents, emphasizing that Cook’s rule is limited to indictments implicating constitutional notice concerns absent in civil ERISA cases.
• Harris Trust & Savings Bank v. Salomon Smith Barney Inc., 530 U.S. 238 (2000); Commissioner v. Keystone Consolidated Industries, 508 U.S. 152 (1993) – Both cases characterized §1106 as “categorical” or “per se” prohibitions, supporting the majority’s view that Congress purposefully separated prohibitions from exemptions.

3.2 The Court’s Legal Reasoning

1. Statutory Structure: The majority gave dispositive weight to Congress’s decision to place exemptions in §1108 under the heading “Exemptions from prohibited transactions” while prohibitions reside in §1106 under “Prohibited transactions.” That separation, coupled with the introductory phrase “Except as provided in section 1108,” signals that §1108 functions as a carve-out—not as an embedded element.
2. Affirmative-Defense Orthodoxy: Citing Rule 8(c) and Taylor v. Sturgell, the Court reiterated that exemptions laid out apart from prohibitions are classic affirmative defenses that defendants must raise. Plaintiffs have no obligation to “anticipate and negate” them in a complaint.
3. Practical & Fairness Concerns: Imposing on plaintiffs the duty to plead around 21 statutory exemptions and hundreds of regulatory class exemptions would be impractical and unfair—especially given that many facts relevant to exemptions reside uniquely with plan fiduciaries.
4. Rejection of the Second Circuit’s “Absurdity” Concern: The Court dismissed fears that literal application of §1106 would bar all service arrangements. Congress intentionally erected a categorical bar, but simultaneously created exemptions to be proved by fiducia­ries that wish to rely on them.
5. Judicial Tools to Curb Frivolous Suits: The Court identified Rule 7(a) replies, Article III standing inquiries, tailored discovery orders, Rule 11 sanctions, and ERISA’s fee-shifting provision (§1132(g)(1)) as mechanisms to screen out weak cases.

3.3 Potential Impact

• Pleading Stage: Plaintiffs in excessive-fee and service-provider suits can survive a Rule 12(b)(6) motion by alleging (i) plan–party-in-interest transactions for services, (ii) the fiduciary’s knowledge, and (iii) lack of exemption allegations. Complaints will grow leaner; motions to dismiss will focus on Article III injury and plausibility under Twombly/Iqbal.
• Defense Strategy: Fiduciaries and service providers must affirmatively plead relevant exemptions and be prepared for early, possibly targeted, discovery on reasonableness of compensation and necessity of services.
• Discovery Dynamics: Courts may increasingly order “reply pleadings” or phased discovery (e.g., exemption-focused first) to address the concurrence’s cost concerns. Expect more summary-judgment motions after limited exemption discovery.
• Litigation Volume: The decision is likely to fuel an uptick in prohibited-transaction suits, at least in the short term, because plaintiffs now face a lower pleading hurdle nationwide. Insurers and plan sponsors may revisit fiduciary-liability coverage and internal compliance reviews.
• Plan Governance & Contracting: Fiduciaries will tighten documentation of service-provider selection, benchmarking of fees, and oversight processes to create a robust evidentiary record for §1108 defenses.
• Regulatory Implications: The Department of Labor may issue guidance clarifying what constitutes “reasonable compensation” or “necessary services” to aid courts in exemption analyses.

4. Complex Concepts Simplified

• ERISA §1106(a)(1)(C): A per se bar on a fiduciary causing the plan to obtain goods or services from a “party in interest” (a category that includes service providers).
• “Party in Interest”: Insiders to the plan—employers, fiduciaries, service providers—whose transactions with the plan are closely scrutinized.
• §1108(b)(2)(A) Exemption: Allows necessary office, legal, accounting, or other services if the plan pays no more than “reasonable compensation.”
• Affirmative Defense: A legal argument that, if proved by the defendant, defeats or mitigates liability even if the plaintiff has proved all elements of the claim (e.g., self-defense in tort, statute of limitations, or here, statutory exemption).
• Rule 7(a) Reply: A court-ordered pleading that permits (or compels) the plaintiff to respond to an affirmative defense with specific factual allegations—used sparingly but endorsed by the Supreme Court to test merit early.
• Defined-Contribution Plan: Retirement plan where each participant has an individual account; their retirement benefits depend on contributions plus investment earnings minus expenses.

5. Conclusion

The Supreme Court’s decision in Cunningham v. Cornell University brings long-awaited clarity to ERISA litigation by aligning the statute’s pleading requirements with conventional principles of affirmative-defense allocation. By holding that §1108 exemptions sit wholly outside a plaintiff’s prima facie case, the Court streamlines access to judicial review of alleged fiduciary misconduct while preserving defendants’ opportunity to justify challenged transactions. Whether lower courts will effectively deploy the procedural tools highlighted by the Court—and whether fiduciaries will adapt their compliance practices rapidly enough—will determine how disruptive or stabilizing this precedent proves in practice. What is certain is that Cunningham will stand as a landmark authority on ERISA pleading, reshaping the strategic terrain for plan participants, fiduciaries, and service providers alike.