Attorney Nicole Saharsky of Mayer Brown LLP, representing Cornell University, argued that the plaintiffs had no grounds to file the lawsuit due to a lack of evidence, citing the plaintiffs failed to allege that the recordkeeping services were “unnecessary.”

Attorney Xiao Wang, representing the petitioner, Casey Cunningham, asserted that this argument undermines employee protections provided by law since Cornell engaged in prohibited transactions with two major retirement service providers – Fidelity and TIAA – that handled recordkeeping duties for workers’ retirement plans, and this led to “greater recordkeeping fees.”

The Supreme Court was divided on the issue, with Associate Justice Brett Kavanaugh expressing concern about the burden of providing evidence for employers if plaintiffs can sue without evidence upfront, which “risks opening the floodgates to burdensome [lawsuits],” he said. On the opposite end, Justice Ketanji Brown Jackson questioned whether the current legal standard makes it too difficult for workers to hold fiduciaries accountable because it “would be really, really hard for us to determine that the plaintiff has to plead them because they don’t have the information,” she said.

“The Court’s decision will establish what plaintiffs are required to allege to plausibly state a prohibited transaction claim under ERISA," said Blake Crohan, Senior Associate in the ERISA Litigation Team at Alston & Bird. "The Justices were skeptical that merely alleging there was an agreement between the plan and outside service provider is sufficient, with Justice Kavanaugh saying such a standard 'seems nuts.' What additional facts are required remains to be seen. But I expect the Court will narrowly tailor its opinion, as the Justices were clearly aware of the potential spillover effect this case may have on the pleading standards in other cases that involving statutes with exemptions to prohibitions.”

"There were two issues the [Supreme] Court and the parties seemed to struggle with the most," said Rick Pearl, partner at Faegre Drinker. "The first was the pleading standard for what the Court and parties referred to as 'prohibited transactions' claims, and whether ERISA or a federal pleading standard requires a plaintiff to plead more than just the occurrence of a transaction that falls within ERISA's prohibited transactions provision, particularly in 406(a). The second issue was whether there was some mechanism for a district court to dispose of cases at the pleading stage or shortly thereafter without requiring defendants to engage in full discovery."

On Oct. 4, the Supreme Court had agreed to review a ruling that dismissed a class action lawsuit on behalf of 28,000 Cornell University employees accusing the school's retirement plans of paying excessive recordkeeping fees.

Related: Supreme Court will hear ERISA class action suit: Did Cornell Univ. mismanage its 403(b) plan?

Originally filed in 2016 by law firm Schlichter Bogard, which has filed litigation against many universities’ retirement plans, the lawsuit claims that Cornell and its fiduciaries breached their ERISA duties by: 

• Offering certain investment products (CREF Stock Account, Money Market Account, TIAA Traditional Annuity) that were not in the best interest of participants.
• Failing to effectively monitor and control recordkeeping fees.
• Failing to effectively monitor and offer appropriate investment options.

The Supreme Court adjourned the hearing to allow more time for deliberation. Justices will reconvene on Feb. 21 to continue discussions. “A decision could come at any time before the term ends in June," said Schlichter.