In April 2025, the Supreme Court’s decision in Cunningham v. Cornell lowered the pleading standard for plaintiff firms filing frivolous litigation against ERISA plans. Justice Sotomayor acknowledged this reality when she delivered the Court’s unanimous decision, stating there were practical concerns about “meritless litigation” which could harm ERISA plans.
By way of background, ERISA Section 406 prohibits plans from engaging in transactions with “parties in interest” (e.g., a retirement plan paying a fee to a third-party provider), and ERISA Section 408 contains exemptions permitting certain of these transactions (e.g., a retirement plan paying a recordkeeper and investment advisor a reasonable fee for such services). The Supreme Court ruled that plaintiffs need only to plausibly allege the elements of a prohibited transaction under Section 406 to survive a motion to dismiss; plaintiffs do not need to also plead that the exemptions under Section 408 do not apply. Rather, this burden of showing that an exemption applies now falls to the defendants to raise and prove after the motion to dismiss phase has occurred, at which point significant defense costs have been incurred.
This ruling did indeed continue the proliferation of frivolous litigation against plan fiduciaries, where cases need only survive the motion-to-dismiss to leverage settlements. At the time of the Cornell decision, almost 2/3 of recent class ERISA litigation had survived the motion to dismiss, and the increased likelihood of survival caused by the Court’s decision led to forecasts of increased lawsuits.
However, the ruling impacted cases in more ways than were forecasted. In addition to seeing an increase in litigation alleging prohibited transactions, we also saw plaintiffs amend complaints in existing excessive fee litigation to now include allegations of a prohibited transaction. We even saw the Second Circuit reverse a district court’s dismissal of a prohibited transaction claim from years earlier (Collins v. Northeast Grocery), ruling “plaintiffs need only allege that a fiduciary engaged in a prohibited transaction, not prove reasonableness of their claim at the pleading stage.”
When delivering its ruling, the Supreme Court did provide some guidance in the form of five approaches to address their “serious concerns” of forecasted “meritless litigation.” Specifically, they highlighted five approaches that could be used by district courts:
- Federal Rule of Civil Procedure 7, authorizing district courts to require that plaintiffs file a reply to the defendants “putting forward specific, nonconclusory factual allegations” showing an exemption does not apply
- dismissal for failure “to plausibly and clearly allege a concrete injury,” so that the plaintiffs lack standing
- targeted discovery to “expedite or limit discovery as necessary to mitigate unnecessary costs”
- Rule 11 sanctions imposed against plaintiffs and counsel in cases where “an exemption obviously applies” and there is a “lack of good-faith basis to believe otherwise”
- cost-shifting under ERISA Section 502(g)
At the time of the ruling, most forecasts did not pay much attention to this guidance, since courts historically have not used any of these tools for one reason or another. Instead, initial efforts to ‘solve’ the Cornell problem seemingly shifted to potential legislation (as we highlighted in our recent article Congressional Hearing on ERISA Litigation: Bipartisan Support Is Needed to Set a Higher Pleading Standard) which – like most other things in our country right now – seems unlikely to muster bipartisan support.
More recently, however, there have been glimmers of hope signaling that the Supreme Court’s decision in Cornell, despite its initial impact, may actually provide an unexpected playbook for fighting back against meritless litigation. As discussed below, in recent weeks, two courts have applied two of Cornell’s so-called screening tools to dismiss meritless claims, and a third court is considering whether to implement another.
A district court uses Rule 7 to require specific factual allegations from a plaintiff showing that an exemption does not apply.
In Cornell, the Supreme Court described the Rule 7 approach as follows:
“[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 problem, as noted by the concurring opinion, is this approach “does not appear to be a commonly used procedure.”
On December 31, 2025, Judge Daniel Calabretta of the U.S. District Court for the Eastern District of California issued an opinion in Dalton v. Freeman, an ESOP case involving allegations of prohibited transactions (among other allegations), which had previously survived a motion to dismiss in part. Here, the defendants filed a motion to compel a Rule 7 reply from the plaintiffs, and Judge Calabretta granted the motion, stating as follows:
[I]n reaching this decision [in Cunningham v. Cornell], the Supreme Court recognized that [the Cornell decision] creates a procedural issue. In short, by only requiring a plaintiff to plead the basic elements under section 406 and not necessitating that they address the exceptions under section 408 in their complaint, meritless cases could make their way past the motion to dismiss stage and into discovery. As a potential solution to this issue, the Court pointed district courts to an uncommonly used tool provided by the Federal Rules of Civil Procedure: the reply. Federal Rule of Civil Procedure 7(a) lists a reply as a permitted pleading where it is ordered by the court.
In the interest of ensuring that only meritorious claims where Plaintiffs can put forward specific, nonconclusory factual allegations showing the exemption does not apply proceed forward, the Court grants Defendant Alerus’ Motion and orders Plaintiffs to file a reply. . . . [I]f Plaintiffs can put forward specific, nonconclusory factual allegations that arguably show the asserted exemption does not apply, the parties will promptly proceed forward with discovery (internal citations omitted).
This is just one case, but it shows that similar approaches can follow in future cases.
Lack of standing defeats prohibited transaction claim
Another screening tool identified by the Court in Cornell was a standing-based defense, which was recently accepted in the case of Peeler v. Bayada Home Health Care. That case, before Judge Martin Reidinger, Chief Judge of the U.S. District Court for the Western District of North Carolina, involved various fiduciary prudence and loyalty claims, as well as prohibited transaction claims based on (1) unreasonable service provider fees (just like Cornell) and (2) self-dealing. The decision issued on January 27, 2026, dismissed all claims, and the discussion of the fee-based prohibited transaction claim stood out to us as most noteworthy.
With regard to that prohibited transaction claim, the plaintiffs objected to advisory fees paid to two firms hired to help the plan sponsor select and monitor plan investments, stating that the fees (1) were “not for necessary services,” in that “many 401k plans have no advisor,” and (2) were “grossly excessive in their amounts.”
Interestingly, the district court stated that the Supreme Court in Cornell “exhorted district courts to ‘dismiss suits that allege a prohibited transaction occurred but fail to identify any injury.’” And based on this direction, the court dismissed the plaintiffs’ claims for lack of standing. It seems the district court views the standing reference in Cornell as a statement instructing that standing has to be very closely scrutinized.
In this regard, the district court also found that bare allegations of excessive fees are not enough to allege an injury, a huge step forward that would, if uniformly adopted by courts, undo the harm created by Cornell with respect to fee-based cases. Instead of just accepting plaintiffs’ allegations of excessive fees as giving rise to standing, the court scrutinized the excessive fee allegations closely:
- District court: “[T]he Amended Complaint provides a table full of examples of ‘clients of a similar size with a similar number of funds’ that did contract for advisory services, thereby contradicting the Plaintiffs’ assertion that comparable 401k plans ‘have no advisor.’”
- District court: “[T]he Plaintiffs’ allegations fail to draw a meaningful comparison between the advisory fees incurred by the Plan and the advisory fees incurred by the alleged comparator plans.”
- This is really important. The court is saying that in order to establish standing, plaintiffs have to allege harm by alleging specific facts showing that based on meaningful comparisons, fees were too high. This is effectively undoing the harm caused by Cornell with respect to fee-based cases by requiring specific factual allegations showing why fees were too high; a mere allegation that a service provider was hired is not enough.
- District court: “[T]he Plaintiffs nowhere allege that the value of their individual accounts declined because of these advisory fees.”
- This is interesting, since the plan paid the fees. Effectively, the court is saying that the plaintiffs did not sufficiently allege that the amount spent on advice was not worth it. Apparently, if the plaintiffs got their money’s worth from the advisory services, they suffered no harm.
Defendants’ motion to require plaintiffs’ lawyers to pay defendants’ costs, including attorneys’ fees.
While Rule 7 and standing defenses may, in light of Cornell, offer new avenues for dismissing meritless claims, there is perhaps an even more important screening tool that was identified in Cornell, and that tool has the potential to disrupt the business of class-action ERISA litigation. As discussed below, fee shifting under ERISA Section 502(g) is currently being considered in the case of Whipple v. Southeastern Freight Lines.
In the Whipple case, which dates back to 2023, the plaintiffs alleged that an employer breached its fiduciary duties by allowing excessive recordkeeping fees. In 2025, however, after excluding testimony from the plaintiffs’ “expert,” the U.S. District Court for the District of South Carolina granted the plan sponsor’s motion for summary judgment and dismissed the plaintiffs’ claims. And now that the employer has won, it is pointing to the Cornell decision as the basis for its motion to require the plaintiffs’ attorneys – not the plaintiffs themselves – to pay the defendants’ costs, including attorneys’ fees of over $1 million.
The Whipple case, and its request for fee shifting, are especially interesting for three reasons.
- Baseless Allegations. First, the full facts of the case show how baseless the failed lawsuit was. The motion stated as follows:
“As Plaintiff later admitted at his deposition, he had no factual basis—apart from his trust in his counsel’s assertions—for crucial elements of his class action Complaint alleging that SEFL [the plan sponsor] caused the Plan to pay excessive compensation to its recordkeeper, T. Rowe Price (“TRP”), in the form of direct fees, revenue sharing, and float income. Plaintiff also admitted, however, that he had supplied his counsel with documents debunking the revenue sharing allegations even before the Complaint was filed. . . . [The plaintiffs’ expert] was forced to admit that all amounts collected from revenue sharing were rebated to Plan participants quarterly and all float interest was returned to the Plan throughout the class period. . . . But even after Plaintiff’s own expert conceded the issue, Plaintiff’s Counsel did not withdraw the meritless claims. . .
The Complaint further asserted, again without reference to any source, that SEFL “failed to obtain competitive bids (‘RFP’) during the Class Period which, in turn, caused the Plan to overpay for recordkeeping during the entire Class Period.” . . . As Plaintiffs’ expert later admitted, this allegation was blatantly untrue.”
- Cornell Forces the Reexamination of Federal Fee Shifting Rules. Second, the Whipple case is interesting because the defendants are requesting that the plaintiffs’ attorneys, rather than the plaintiffs, pay the defendants’ costs pursuant to ERISA Section 502(g). The courts are split on the issue of whether Section 502(g) authorizes costs to be paid by the attorneys, but the Cornell decision opens the door for arguments that in order for Section 502(g) to be effective, as intended by the Supreme Court, plaintiffs’ attorneys should be subject to Section 502(g).
Notably, the defendants are also seeking fee shifting under a separate federal law that is intended to dissuade unreasonable and vexatious litigation, 28 U.S.C. § 1927. That law states: “Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.”
- Fee Shifting Could Alter the Business of ERISA Litigation and Settlement Decisions. Third, this case is interesting because the defendant’s pursuit of fee shifting, if adopted more broadly, could totally change the economics of ERISA settlements and cookie-cutter ERISA filings. Over the past decade, most excessive fee cases that have survived a motion to dismiss have been settled before the merits could be decided. Thus, in these cases, there was no opportunity to ask plaintiffs’ counsel to pay for defendants’ costs. But the decision in this case and others like it could affect two things.
First, fee shifting could affect defendants’ willingness to settle meritless suits. If the cost of the defense can possibly (and properly) be placed on the plaintiffs’ lawyers, there may be less reason to settle.
Second, fee shifting could affect plaintiffs’ lawyers “sue them all” approach to litigation. Currently, the cost of each new complaint can be minimal, since the plaintiffs’ lawyers can use boilerplate complaints, so why not file lots of suits? If the plaintiffs’ lawyers lose some, they may win others with sympathetic judges, and the wins far more than cover the cost of the widespread filings. But if plaintiffs’ lawyers stand to lose millions in court costs if a suit does not settle, the cost/benefit analysis changes a lot. This type of baseless litigation needs to stop.
Conclusion: there are possible paths forward to avoid baseless litigation under Cornell.
With a legislative solution unlikely in the near future, these three approaches to the Cornell problem may represent the beginning of a more rational approach to weeding out “meritless litigation” – the Supreme Court’s words not ours.
