Second Circuit

On April 17, 2025, the Supreme Court issued its opinion in Cunningham v. Cornell University, No. 23-1007, 604 U.S. ___ (2025), a case addressing the pleading standard for prohibited-transaction claims under § 406(a) of the Employee Retirement Income Security Act of 1974 (ERISA).  Section 406(a) proscribes certain transactions between plans and “parties in interest” absent a statutory exemption enumerated under ERISA § 408.  The core question on appeal was whether plaintiffs must allege, as an element of a prohibited-transaction claim under § 406(a), that an exemption under § 408 does not render the challenged transaction lawful.

In a decision that is expected to have wide-ranging implications, the Court held that exemptions under § 408 provide affirmative defenses to liability under § 406(a).  Consequently, plaintiffs need not allege that any of the exemptions set forth in § 408 are unavailable to state a plausible claim for relief.  Rather, the burden falls on plan fiduciary defendants to plead and prove that an exemption under § 408 nullifies a plaintiff’s claim.

The Court recognized that its decision in Cunningham could make it more difficult for defendants to secure the dismissal of prohibited-transaction claims by invoking a statutory exemption.  If so, plan sponsors (and other fiduciaries) could be forced to engage in costly discovery defending transactions that ERISA expressly permits, effectively penalizing them for providing valuable and necessary services to participants.

Provided below is a more detailed discussion of Cunningham, divided into three parts.  The first part briefly discusses the legal framework governing prohibited-transaction claims.  The second part summarizes the Court’s analysis.  The third part concludes with an overview of potential mitigation strategies.Continue Reading A Closer Look:  Supreme Court Rejects Heightened Pleading Standard for Prohibited-Transaction Claims under ERISA § 406(a)

In two closely watched cases, the Second Circuit has ruled that the Fair Labor Standards Act (“FLSA”) does not preclude the waiver of class action claims (known technically as “collective actions” under the FLSA). In decisions issued on August 9th and 12th, the Second Circuit reversed lower court rulings that had refused to enforce individual arbitration agreements signed by the plaintiffs.  Instead, the appeals court sent the cases back to the district courts with instructions to compel the plaintiffs to honor their agreements with their employers and to submit their FLSA overtime disputes to separate, individual arbitration proceedings.

Following the Supreme Court’s recent decision in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the Second Circuit in Sutherland v. Ernst & Young, case no. 12-cv-304, rejected the plaintiff’s arguments that the FLSA contained a “contrary congressional command” barring waivers of class arbitration, and, further, that the plaintiff could not “effectively vindicate” her rights in an individual arbitration, inasmuch as such a proceeding would be “prohibitively expensive.”  In Raniere et al. v. Citigroup Inc. et al., case no. 11-cv-5213, the Second Circuit issued the same decision on the same basis.
Continue Reading Individual Arbitration Agreements Held to Preclude Class Actions under FLSA

Many appellate courts have ruled that fiduciaries who allow plan investment in employer stock are entitled to deferential judicial review or a “presumption of prudence” when the plan document requires or encourages the offering of employer stock as an investment option.  But a new Second Circuit decision demonstrates that references to an employer stock fund in the plan document may not sufficiently “encourage” that option to give rise to the presumption.  Taveras v. UBS AG, No. 12-1662 (2d Cir. Feb. 27, 2013).
Continue Reading When Does a Plan Document “Encourage” an Employer Stock Fund Enough to Justify the Presumption of Prudence?