Earlier this month, on December 2, the House of Representatives Committee on Education and Workforce’s Subcommittee on Health, Employment, Labor, and Pensions (the Subcommittee) conducted a hearing titled “Pension Predators: Stopping Class Action Abuse Against Workers’ Retirement.” The much-needed hearing centered on congressional concerns about the rise of frivolous litigation that is being filed simply to survive a motion to dismiss and secure a quick settlement. As this blog has discussed on many prior occasions, this quick-hit litigation frequently yields large paydays for plaintiffs’ attorneys but rarely produces a meaningful award for individual participants after attorneys’ fees and other expenses are debited from the settlement funds.
During the hearing, the Subcommittee Chair specifically focused on a bill recently introduced by Congressman Randy Fine, a Republican from Florida, called the ERISA Litigation Reform Act (H.R. 6084), that would override the most troubling aspects of the Supreme Court’s decision in Cunningham v. Cornell. Disappointingly, as described below, optimism that such a solution could move forward on a bipartisan basis was dashed by the hearing. And without some bipartisanship in the Senate (at least 7 votes), legislation to fix the Cornell problem will not be enacted because legislation like this requires 60 votes in the Senate, and the Republican Party controls 53 seats.
As discussed below, we need to keep raising the profile of the baseless nature of so many of these suits, including, ironically enough, the Cornell suit itself.
Key Point #1: The Cornell decision created a must-fix problem for Congress.
As previously covered by the Fid Guru Blog (“The Cornell Supreme Court Decision Sanctions ERISA Fiduciary-Breach Lawsuits Without Proof of Wrongdoing”), in the Cornell case, the Supreme Court held that prohibited transaction exemptions – such as the exemption for reasonable service provider contracts – are affirmative defenses that cannot be considered in the context of a motion to dismiss. This means, in turn, that the mere allegation that a plan hired a service provider – which is a prohibited transaction – is enough to survive a motion to dismiss, provided that the complaint also simply says – without any supporting facts – that the service provider’s fees were too high. (The latter statement is needed to establish standing).
Obviously, unless something is done, the Cornell decision makes the law unworkable because it offers plaintiffs a free pass to discovery every time that a plan hires a service provider, and creates tremendous pressures for employers to settle. While the Supreme Court (especially the concurrence) seemed to recognize this flaw, it blamed Congress for this problem by saying that the statute compelled this result.
In recognition of this problem, the one remotely realistic solution offered by the Court would be for district courts to voluntarily institute the following approach:
- [I]f a fiduciary believes an exemption applies to bar a plaintiff ’s suit and files an answer showing as much, Federal Rule of Civil Procedure 7 empowers district courts to “insist that the plaintiff” file a reply “‘put[ting] forward specific, nonconclusory factual allegations’” showing the exemption does not apply.
The concurring opinion states that this is the most promising approach to try to avoid the clear problems facing ERISA plans under the Cornell opinion, and goes on to say:
- It does not appear that this is a commonly used procedure, but the Court has endorsed its use in the past. . . . District courts should strongly consider utilizing this option—and employing the other safeguards that the Court describes—to achieve ‘the prompt disposition of insubstantial claims.’ . . . Whether these measures will be used in a way that adequately addresses the problem that results from our current pleading rules remains to be seen.
In other words, under Cornell, our best hope is a completely voluntary tool that is rarely used by courts. Thus, contrary to some of the remarks offered during last week’s hearing, the Cornell decision is certainly not a “boon” to employers seeking to repel frivolous lawsuits. Moreover, even if recent filings and plaintiff victories stemming from the Cornell decision may only appear to be a trickle when compared to the tsunami of ERISA litigation otherwise facing employers, there is no doubt that litigation facilitated by the Cornell decision has already started to impact retirement plan sponsors and its harmful effects will only grow in the coming months and years if Congress fails to act.
Key Point #2: The ERISA Litigation Reform Act would override Cornell.
On November 18, Congressman Randy Fine, a Republican from Florida, introduced the “ERISA Litigation Reform Act,” or ELRA, in the House of Representatives. Very simply, this bill would override Cornell with respect to prohibited transactions (not involving a conflict of interest) based simply on the provision of services, goods, or facilities, or the transfers of assets, between a plan and a service provider.
In practical terms, if a plaintiff brings a prohibited transaction claim on the basis that a service provider’s fees were too high, under the bill, the “plaintiff has the burden of plausibly alleging and proving that the transaction” does not fall within ERISA’s reasonable compensation exemption (section 408(b)(2)). This means that the plaintiff must allege facts showing that the reasonable compensation exemption does not apply in order to survive a motion to dismiss.
The bill also overrides Cornell with respect to prohibited transactions involving the purchase or sale of qualified employer securities (such as employer stock). This means that the “plaintiff has the burden of plausibly alleging and proving that the transaction” does not fall within ERISA’s adequate compensation exemption (section 408(e)). The bill also generally stays discovery until after a motion to dismiss is ruled on.
Key Point #3: The recent House hearing signals partisan obstacles to ERISA litigation reform efforts.
During the House’s litigation reform hearing, the Republicans and three key witnesses presented their case for supporting ELRA as a solution to the unworkable result created by the Cornell case, while the Democrats and a fourth witness objected. It is unfortunate that support of and objections to this proposed bill were divided by party lines, because helping plan participants and retirees should be in the best interest of both political parties. In our view of this hearing, the objections did not reflect a full comprehension of just how harmful ERISA litigation has been to plans and participants. And as further discussed below, some decision makers are apparently struggling to distinguish baseless lawsuits from bona fide ERISA violations.
The critics of ELRA, for example, stated that this was another attack on participants’ rights and participants’ ability to defend the benefits that they have worked hard to earn. This was, in their view, an attempt to put corporate interests ahead of workers’ interest. And there were multiple discussions about how the Cornell decision only applied if the plan fiduciary engaged in a prohibited transaction, which the bill’s detractors believed were always harmful and disfavored by the law. In this regard, there was no recognition among the critics that the “prohibited transaction” at issue in Cornell was the very necessary and very beneficial act of hiring of a plan service provider, which every plan in the country does. At no point did the bill’s detractors meaningfully acknowledge that baseless ERISA litigation has been a drain on the system and siphoned dollars and resources away from employers who otherwise might use those resources to fund benefits.
The lockstep opposition during last week’s hearing was disappointing as it signals the reality that – even for a limited and commonsense fix that the entire Supreme Court virtually invited Congress to fix – there is not the type of bipartisan support that will be needed to override the head scratching consequences of Cornell. If Congress can’t agree that, in the absence of any showing of wrongdoing, ERISA permits retirement plans to hire service providers, what does this say about the chances for legislation impacting broader fee and performance claims?
Key Point #4: Key decisionmakers are not aware of the baseless suits being filed
Of all the exchanges during the recent House hearing, one particularly interesting exchange is especially worth noting. At one point, a member of the Subcommittee asked the witnesses for any examples of specific lawsuits that they believe were frivolous against plan sponsors.
One of the witnesses (Lynn Dudley, the Senior Vice President, Global Retirement & Compensation Policy for the American Benefits Council) had an excellent answer which highlighted an unfair court ruling which may now become more frequent following Cornell. Ms. Dudley referred the Subcommittee to the Second Circuit case of Collins v. Northeast Grocery, a completely frivolous suit that was dismissed last summer by the U.S. District Court for the Northern District of New York, based in part on the plaintiffs’ failure to allege “any specific factual allegations” concerning how the fees charged to the plan were unreasonable.
The dismissal occurred before the Supreme Court’s decision in Cornell. The plaintiffs appealed to the Second Circuit, which agreed with the district court that the plaintiffs did not allege sufficient facts supporting their claims. However, under Cornell, it is not necessary to have any facts – conclusory allegations alone are enough to survive a motion to dismiss. So, in August, the Second Circuit relied on Cornell to reverse the dismissal of a prohibited transaction claim for which there was no basis.
Another case we would note is Asis v. University of Rochester in the District Court for the Western District of New York, where a complaint was filed in July of this year, and an amended complaint was filed on November 10. The original complaint alleged two fiduciary breaches and a prohibited transaction, all based on the plan allegedly paying unreasonable fees. The amended complaint dropped the two fiduciary breach claims and retained only the prohibited transaction claim. The amended complaint appears to reflect a recognition that there is no longer a need to allege facts showing that a fiduciary did anything wrong. Following the Supreme Court’s ruling on Cornell, all a plaintiff needs to do to survive a motion to dismiss is to allege the plan hired a service provider, along with an assertion (with or without facts) that the fees were too high. In other words, why bother trying to allege a breach of fiduciary duty? Since the objective is to survive a motion to dismiss and procure a settlement, there is no longer a need for any evidence of alleged wrongdoing.
Interestingly, perhaps the most prominent frivolous case is Cornell itself. That case, as previously discussed, revolves around the following issues: (i) whether Cornell engaged in a prohibited transaction by hiring a plan recordkeeper; and (ii) whether that arrangement was eligible for a prohibited transaction exemption as a reasonable and necessary service provider contract for which the plan paid no more than reasonable compensation. And as a result of the Supreme Court’s April decision, that case has been remanded to the lower courts to further explore whether Cornell agreed to pay its recordkeeper a fee that exceeded reasonable compensation.
This prohibited transaction claim, which dates back to 2016, is especially frivolous at this point because the lower courts have already rejected the plaintiffs’ claim that the plan paid too much for recordkeeping services. First, in 2019, the U.S. District Court for the Southern District of New York dismissed the plaintiffs’ excessive recordkeeping fee claims following Cornell’s motion for summary judgment, ruling that, after considering all of the plaintiffs’ claims and the testimony of their expert witnesses, the plaintiffs failed to offer any evidence that “would lead a reasonable juror to conclude that Cornell could have achieved lower fees.” This means that, even after intense discovery and battles of the experts, the district court concluded that the plaintiffs’ excessive recordkeeping claims lacked merit.
Second, in 2023, the Second Circuit Court of Appeals affirmed the district court’s dismissal, explaining that the expert opinions that the plaintiffs offered to support their excessive recordkeeping fee claims failed to offer “any cognizable methodology in support of their conclusions, [and] instead simply reference[ed] their knowledge of the relevant industry and a few examples of other university plans that paid lower fees.” In both instances, which were focused on ERISA’s duty of prudence, reviewing courts concluded that Cornell plaintiffs were unable to establish that the plan paid too much for recordkeeping fees.
Given this background, the Cornell case is particularly frivolous because the plaintiffs’ only ongoing claim asks the reviewing courts to rule that Cornell agreed to unreasonable recordkeeping fees, notwithstanding the fact that the district court and Second Circuit have already concluded, with the benefit of discovery, that the plan did not pay too much for recordkeeping fees. While the Supreme Court’s decision may belabor the final result, force additional attorneys’ fees, and force Cornell to jump through the hoops of explaining why the plans’ recordkeeping fees were reasonable in the context of ERISA’s prohibited transaction rules, this exercise is frivolous and wasteful given the previous rulings rejecting the plaintiffs excessive fee claims.
Employers facing ERISA litigation, as well as fiduciary liability insurers, can clearly tell that, given its long history and previous rulings, the Supreme Court’s decision to revive the prohibited claims against Cornell has revived one of the more frivolous attacks on employers in recent years. What may be even more concerning, however, is the fact that key decisionmakers have not been able to distinguish this kind of baseless claim from other potential lawsuits that may allege actual ERISA violations.
ERISA class litigation, driven by plaintiff law firms, may have once had some noble intentions to benefit participants by forcing plan fiduciaries to review compensation provided to their service providers, to review complacent and stale investment lineups, and to review fees and expenses within the plan. And there may even be some plaintiff law firms which believe they still have these same noble intentions. However, ERISA class litigation has reached the point where good plans with a good fiduciary process and with low fees are being sued for simply contracting with their service providers. And not just sued, but forced to spend millions of dollars defending such lawsuits – not because they breached their fiduciary duty, not because they failed to review compensation provided to their service providers, not because they failed to monitor their investment lineups, not because they failed to reduce plan expenses and fees. But simply because they contracted with service providers as all plans do in their normal course of business.
And as plan sponsors continue to spend millions of dollars, we are approaching a tipping point where they will simply decide that offering these optional plans with valuable benefits to employees is simply not worth the risk. They will make a calculated business decision to stop offering a retirement plan or certain valuable benefits within a plan, all of which are intended for the benefit of their employees.
One concern that Encore hears often from both policyholders and from various service providers, is that plan sponsors are afraid of being sued, and that the risk of being sued impacts their decisions to provide new options or services within their plans. This same concern was presented by Ms. Dudley at the hearing, where she stated that more than 80% of respondents to a recent survey by the American Benefits Council indicated that that the risk of litigation is “a very significant or somewhat significant factor affecting their decisions.” It is disappointing that the hearing barely touched on this sentiment, or that the number of frivolous lawsuits has had a tangible impact on plan sponsors. A higher pleading standard following the Cornell decision is an important step in ending the onslaught of baseless litigation, which is something that would benefit plan participants and not restrict their rights. Clearly, there is more work to do to convince both parties to find the common ground needed for a bipartisan solution.
