James W. Watkins, III, J.D., CFP Emeritus^TM, AWMA®

Listening to the recent oral arguments before SCOTUS in the Cunningham v. Cornell University case, I was both disappointed and encouraged by the questions and comments of some of the Justices. After all, the justices are supposedly among the best and the brightest attorneys in the legal profession.

And yet, I found some of the comments disingenuous and further evidence of what appears to be an ongoing financial services-courts complex, one that. IMHO, too often seems to disregard the reasons that ERISA was deemed necessary and protect employers and the financial services industry at the expense of plan participants. I could not help but notice that the lawyers and several justices referenced the asymmetry of important information between plan participants and plan sponsors.

Several justices cited the plans’ red herring of “expensive discovery” as a compelling factor in favor these 401k br3ach cases. Justice Kavanaugh is arguably the most knowledgeable of the current Supreme Court justices when it comes to ERISA. He cited the number of cases filed by Jerry Schlichter, suggesting the need to address the number of cases based on the alleged “expensive discovery” involved with such cases, without mentioning the relative merits of such cases.

Fortunately, Justice Jackson countered by suggesting that there were other viable options to address such concerns, notably limited and/or “controlled discovery” rather than unnecessarily denying employees the rights and protections guaranteed to them under ERISA, including the access to the courts to enforce such rights and protections. I maintain that allowing “controlled discovery,: including discovery of a plan’s advisory contract and the minutes from the plan’s meetings would be in furtherance with the overall purpose and goals of ERISA, without being onerous to a plan.

The main issue in Cunningham v. Cornell University has to do with what constitutes sufficient pleading in ERISA actions, the specificity required in the employees’ complaint. The Federal Rules of Civil Procedure (F.R.C.generally adopt a “notice pleading” standard that simply requires that a plaintiff provide sufficient information to let the defendant know to nature of the complaint, the alleged wrongdoing. This simple requirement acknowledges the fact that, in many cases, the defendants have greater knowledge of the relevant facts.

As the Solicitor General pointed out in the oral arguments, in ERISA actions, the plan sponsor is typically the only one who actually knows what the plan did and why they did it. And yet some courts continue to prematurely dismiss legitimate fiduciary breach actions based on the inability of the employees to plead the specifics of the plan’s actions, in effect, the employees’ inability to read the plan sponsor’s mind. This would appear to violate Rule 9 of the FRCP, which states that plaintiffs are not required to plead a defendant’s state of mind.

Interestingly, some jurists have stepped up and recognized the asymmetry issue in ERISA actions, most notably Sixth Circuit Chief Judge Sutton. In his TriHealth decision, Judge Sutton offered this observation

But at the pleading stage, it is too early to make these judgment calls. ‘In the absence of further development of the facts, we have no basis for crediting one set of reasonable inferences over the other. Because either assessment is plausible, the Rules of Civil Procedure entitle [the three employees] to pursue [their imprudence] claim (at least with respect to this theory) to the next stage^.1

This wait-and-see approach also makes sense given that discovery holds the promise of sharpening this process-based inquiry. Maybe TriHealth ‘investigated its alternatives and made a considered decision to offer retail shares rather than institutional shares’ because ‘the excess cost of the retail shares paid for the recordkeeping fees under [TriHealth’s] revenue-sharing model….’ Or maybe these considerations never entered the decision-making process. In the absence of discovery or some other explanation that would make an inference of imprudence implausible, we cannot dismiss the case on this ground. Nor is this an area in which the runaway costs of discovery necessarily cloud the picture. An attentive district court judge ought to be able to keep discovery within reasonable bounds given that the inquiry is narrow and ought to be readily answerable.²

As Judge Sutton referenced, the court has a number of options available to control the costs of discovery. Judge Sutton was presumably talking about options such as limited and/or  “controlled” discovery, where a judge can limit discovery to only such facts and documents relative to the case at hand. Presumably, the costs of such discovery could involve nothing more than copying costs, with perhaps some follow-up discovery and a few depositions. In some cases, follow-up requests for admissions and/or production may  provide the needed discovery information.

One interesting aspect of the Cornell case is the fact that it comes from the Second Circuit. The Second Circuit is the Circuit that addressed a burden of proof issue in Sacerdote v. New York University,³ correctly citing the Restatement and ruling that the burden of proof on causation properly belongs with the plan sponsor, but adding that

If a plaintiff succeeds in showing that “no prudent fiduciary” would have taken the challenged action, they have conclusively established loss causation, and there is no burden left to “shift” to the fiduciary defendant.⁴

I believe the Second Circuit is spot on. However, with Cunningham, the issue is what is required from the employees/plaintiffs to prove the breach and loss. I believe the Solicitor General’s amicus brief correctly presented the question and the solution.

When a plaintiff brings suit against a [plan sponsor]for breach of trust, the plaintiff generally bears the burden of proof . The general rule, however, is moderated in order to take account of the [plan sponsor’s]duties of disclosure …as well as the [plan sponsor’s] (often, unique access to information about the [plan] and its activities, and also to encourage the plan sponsor’s compliance with applicable fiduciary duties.⁵

Courts should generally not depart from the usual practice under [the Federal Rules of Civil Procedure](F.R.C.P) on the basis of perceived policy concerns. In any event, a district court has various tools to screen out implausible claims. To survive a motion to dismiss under F.R.CP. 12(b)(6), a compliant must plead “enough facts to state a claim for relief that is plausible on its face. (citing Bell Atl. Corp v. Twombly, 550 U.S. 544, 570 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)…[A]n inference pressed by the plaintiff is not plausible if the facts he points to are precisely the result one would expect from lawful conduct in which the defendant is known to have engaged.⁶

As a practical matter, moreover, it is not clear what additional facts petitioners could have alleged that would have satisfied the court of appeals, without the benefit of discovery….[P]articipants would likely require discovery into additional facts in the fiduciaries’ possession-such as the terms of of the contract, the range of contracted services, and performance metrics that justify the fees charged-to ascertain the quality and full extent of the services provided.⁷

As Justice Jackson pointed out, there are cost-efficient methods of controlling the costs associated with ERISA litigation. I would argue that the Court should follow its own advice in Tibble

We have often noted that an ERISA fiduciary’s duty is ‘derived from the common law of trusts.’ In determining the contours of an ERISA fiduciary’s duty, courts often must look to the law of trusts^.(citations omitted) ⁸

In the Cunningham case, perhaps the Court should look to Section100, comment f, of the Restatement (Third) of Trusts and accordingly shift the burden of proof on causation to plan sponsors, especially given the fact that several justices’ acknowledged the asymmetrical possession of relevant info in these cases.

Requiring employee/ plaintiffs to plead greater specificity, without allowing the discovery necessary to allow them to do so would make a mockery of ERISA’s goals and purposes and unnecessarily and inequitably deny employees their much needed access to the courts to protect their rights and guarantees under ERISA, which are needed given the current number and complexity of investment options offered within most plans.

[T]he Supreme Court has made clear that whatever the overall balance the common law might have struck between the protection and beneficiaries, ERISA’s adoption reflected ‘Congress'[s] desire to offer employees enhanced protection for their benefits….In other words, Congress sought to offer beneficiaries, not fiduciaries, more protection that they had at common law, albeit while still paying heed to the counterproductive effects of complexity and litigation risk.⁹

The fiduciary is in the best position to provide information about how it would have made investment decisions in light of the objectives of a particular plan and the characteristics of plan participants. Indeed, this Court recognized in Schaffer that ii is appropriate in some circumstances to shift the burden to establish ‘facts particularly within the knowledge’ of one party.¹⁰

Notes
1. Forman v. TriHealth, Inc., 40 F.4th 443, 450. (TriHealth)
2. TriHealth, 450.
3. Sacerdote v. New York University, 9 F.4th 95. (Sacerdote)
4. Sacerdote, 113
5. Solicitor General’s Amicus Brief in Brotherston v. Putnam Investments, LLC, https://www.justice.gov/usdoj-media/osg/media/1035476/dl?inline. (Brotherston amicus), 8
6. Solicitor General amicus brief, Cunningham v. Cornell University, https://www.supremecourt.gov/DocketPDF/23/23-1007/333121/20241202200914652_23-1007tsacUnitedStates.pdf.(Cunningham amicus), 29.
8.Tibble v. Edison International, Inc, 135 S. Ct. 1823, 1828 (2015) (Tibble)
9. Brotherston amicus, 37.
10. Brotherston amicus, 11.

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