Prohibited Transaction Claims After Cunningham v. Cornell: Have District Courts Responded to the Supreme Court’s Suggestions?
Just over one year ago, the US Supreme Court addressed the pleading requirements for prohibited-transaction claims under ERISA, holding that a plaintiff need only allege the elements of a prohibited transaction in ERISA Section 406 without also needing to address any potential prohibited transaction exemptions in Section 408. The Court recognized the “serious concern” that its decision could lead to an “avalanche of meritless litigation,” and suggested five tools that district courts could use to screen out meritless, “barebones” suits. This Legal Update reviews ERISA prohibited-transaction claims since Cunningham and analyzes whether district courts have been using those tools.
Background on ERISA Prohibited Transactions and Cunningham
ERISA prohibited-transaction claims relate to the fiduciary duty of loyalty, which requires plan fiduciaries to act “solely in the interest of the plan’s participants and beneficiaries” and to “deal fairly and honestly with beneficiaries.” Congress enacted ERISA Section 406 to supplement the duty of loyalty by categorically barring—unless specifically exempted—certain transactions deemed likely to injure the plan, including certain transactions between a plan and a “party in interest.” ERISA defines “party in interest” broadly, to include, among other parties, the plan’s fiduciaries, administrator, sponsor, and any “person providing services to such plan.” One of ERISA’s prohibited transactions is the “furnishing of goods, services, or facilities between the plan and a party in interest.”
On its face, Section 406 encompasses routine transactions that are necessary for the administration and operation of retirement plans. For this reason, Section 406 includes an express carve-out exempting certain plan arrangements from the prohibited transaction rules. Specifically, Section 406 opens by stating that the enumerated list of “transactions between a plan and a party in interest” are prohibited “except as provided in Section 1108.” Section 408 (29 U.S.C. § 1108) includes a list of more than 20 prohibited transaction exemptions, including when a transaction is for “services necessary for the operation of the plan, if no more than reasonable compensation is paid.”
Prior to Cunningham, ERISA Section 406’s express reference to the exemptions in Section 408 had led to a circuit split on the pleading standard to plausibly allege a prohibited-transaction claim under Section 406(a). Accordingly, the Supreme Court granted certiorari in Cunningham to decide whether an ERISA plaintiff (i) simply needs to allege that a plan fiduciary caused the plan to engage in a prohibited transaction under Section 406 or (ii) also needs to allege that there is no applicable exemption under Section 408. The Court chose the first option: holding that an ERISA plaintiff only needs to allege the elements of a prohibited transaction in Section 406 and does not need to plead around the exemptions in Section 408, which are affirmative defenses for which the defendant fiduciary bears the burdens of pleading and proof.
The Court conceded that this interpretation of ERISA Sections 406 and 408 could result in an “avalanche of meritless litigation.” The Court also recognized that modern ERISA plans require fiduciaries to transact with service providers, meaning plaintiffs (and their lawyers) could potentially survive motions to dismiss and force plans to engage in costly discovery and protracted litigation even in cases challenging reasonable plan arrangements. While the Court ultimately held that these legitimate concerns could not overcome ERISA’s statutory language, it offered lower courts five potential solutions to help them address potentially meritless prohibited transaction claims.
The Supreme Court’s Suggested Tools to Address Meritless Prohibited Transaction Claims
The five tools mentioned by the Supreme Court are described below, along with an analysis of whether courts are deploying them.
1. Reply to the Answer Under Federal Rule of Civil Procedure 7
The Court’s first proposed solution was a relatively obscure pleading tool found in Federal Rule of Civil Procedure 7: a reply to an answer. The Court noted that, if a fiduciary believes a prohibited transaction exemption applies and files an answer stating as much, Rule 7 allows the district court “to insist that the plaintiff file a reply putting forward specific, nonconclusory factual allegations showing the exemption does not apply.” And if the plaintiff cannot proffer such facts in the reply to the answer, then the court may dismiss the claim for failure to state a claim. Notably, Justice Alito, joined by Justices Thomas and Kavanaugh, strongly endorsed this solution in a concurring opinion as the “most promising” and urged district courts to “strongly consider utilizing this option.”
The Court recognized that a reply to an answer under Rule 7 is a rarely used tool in litigation. Prior to Cunningham, its primary use was in cases alleging a constitutional violation against a government official where the official asserts qualified immunity as an affirmative defense.1 In that scenario, some courts have required the plaintiff to file a reply to an answer to specifically address the qualified immunity defense. If the plaintiff then fails to reply with enough factual specificity to overcome the affirmative defense on the pleadings, the official may file a motion for judgment on the pleadings under Rule 12(c) to obtain an early dismissal.
Although it has only been a year since Cunningham, we have seen two instances of the reply to an answer being used in an ERISA prohibited-transaction case: one following a defendant’s motion asking the court to order a reply to the answer raising the prohibited-transaction exemption, and the other being ordered sua sponte by the court.
First, in Dalton v. Freeman, the plaintiffs asserted a prohibited-transaction claim under Section 406, in addition to other claims.2 Plaintiffs alleged that the trustee of an Employee Stock Ownership Plan (“ESOP”) breached its fiduciary duties and engaged in prohibited transactions. The trustee raised an affirmative defense in its answer, arguing that the alleged prohibited transaction was exempted under Section 408(e), which permits retirement plans to buy or sell employer securities for adequate consideration. The trustee then asked the court to order the plaintiff to file a Rule 7 reply to the answer, which the court granted, relying heavily on Cunningham. The trustee, however, did not file a motion for judgment on the pleadings in response to the plaintiffs’ reply. Instead, the case moved to discovery.
Second, in a recent pharmacy benefit manager case, the plaintiffs alleged that the defendants’ agreement with a pharmacy benefit manager for its health plan was a prohibited transaction.3 Although the district court concluded that the plaintiffs had plausibly alleged the elements of a prohibited transaction after Cunningham, it emphasized that the defendants “may have ample defenses to this claim.” Acknowledging sua sponte the Supreme Court’s suggestion about requiring a reply to an answer asserting an affirmative defense, it ordered plaintiffs to file a reply. That reply to the answer was filed on April 27, 2026.
With only one year since Cunningham, it is too early to know how frequently this pleading tool will be used. Typically, a defendant in an ERISA prohibited-transaction case will not file an answer asserting an affirmative defense until after the district court rules on a motion to dismiss. For example, in the pharmacy benefit manager case discussed above, the complaint was filed in March 2025 (before Cunningham was decided), and the district court’s order requiring a reply to the answer was issued a year later in March 2026. Thus, we are just starting to enter the window when we could expect to see this tool being used with more frequency. That it has already been used at least twice suggests that parties and courts are willing to try this suggestion from the Supreme Court.
2. Dismissal for Lack of Article III Standing
The Court’s second suggestion was to remind district courts that they must, “consistent with Article III standing, dismiss suits that allege a prohibited transaction occurred but fail to identify an injury.” To establish standing, a plaintiff must demonstrate that (1) he or she suffered an injury in fact that is concrete, particularized, and actual or imminent, (2) the injury was caused by the defendant, and (3) the injury would likely be redressed by the requested judicial relief.
Unlike the rare reply to the answer, Article III standing arguments have been used to successfully dismiss prohibited-transaction cases post-Cunningham. For example, in Peeler v. Bayada Home Health Care, Inc., the plaintiff brought a prohibited-transaction claim based on payments made to financial institutions for 401(k) plan advisory services, claiming that the payments were not for necessary services and were excessive because many plans either do not have an advisor or pay less for those services.4 The court found that other portions of the complaint undercut these allegations, as the comparator plans alleged in the complaint showed that other plans contracted for similar advisory services. In addition, the complaint failed to meaningfully compare the Plan’s advisory fees and the comparator plans’ advisory fees. Finally, the plaintiffs did not allege that the value of their individual accounts declined because of these advisory fees. As a result, the court found the plaintiffs lacked Article III standing because the advisory fees allegations provided no more than a speculative basis for inferring that the plaintiffs incurred actual loss because of the plan’s payments for advisory services.
Standing arguments have also been fruitful in ESOP cases. For example, in Taylor v. BDO USA, P.C.,5the court relied on Cunningham in dismissing a prohibited-transaction claim for lack of standing because the complaint pointed “to no instance in which a tangible loss of value was actually incurred” by the plaintiff. The court explained that “without a showing that any harm flowed from the Transaction to [the plaintiff], including any post-Transaction decline in the value of [the plaintiff’s plan] account, the court cannot conclude, beyond mere speculation, that [the plaintiff] has suffered a constitutionally cognizable injury.” Likewise, in Dyer v. Green, the court similarly dismissed an ESOP-related prohibited transaction claim for lack of standing. That court explained that without factual allegations supporting the valuation of the closely held corporation’s stock, there was no objective measure for a participant to show an actual future loss of benefits from the transaction, so any claim of injury was pure speculation.6
Of course, standing arguments are not always successful, and different courts may reach different conclusions on similar facts. For example, in the recent wave of pension risk transfer cases, there has been a split over whether the plaintiffs plausibly alleged Article III standing to challenge as a prohibited transaction their employer’s decision to engage in a pension risk transfer. Some courts have held that the plaintiffs sufficiently alleged that the pension risk transfer caused a substantial risk to their promised benefits, while others have concluded that allegations of future risk—particularly given the plaintiffs received their promised benefits to date—were too speculative to support Article III standing.7
While not always successful, Article III standing arguments have been the most prevalent and most likely to succeed of the five methods to challenge prohibited-transaction cases since Cunningham.
3. Expedited or Limited Discovery
The Court next suggested that for prohibited-transaction claims that “proceed past the motion to dismiss stage, . . . district courts retain discretionary authority to expedite or limit discovery as necessary to mitigate unnecessary costs. ”This method focuses on cases that survive motions to dismiss; it was not suggested to encourage discovery during the pendency of a motion to dismiss.
We have not yet seen any written opinions where a court expedited or limited discovery citing Cunningham. This does not mean, however, that courts have not used this tool in ERISA cases. Federal courts throughout the country have long acknowledged that discovery in ERISA cases can be voluminous, can place disproportionate burdens on plan sponsors and fiduciaries, and should be kept within reasonable bounds. As such, the Supreme Court’s suggestion was a reminder that discovery in ERISA cases should be kept within reasonable bounds.
4. Sanctions under Federal Rule 11
The Court’s fourth suggestion was that “in cases where an exemption [under Section 408] obviously applies, and a plaintiff and his counsel lack a good-faith basis to believe otherwise, Rule 11 may permit a district court to impose sanctions against them.”
Federal Rule of Civil Procedure 11 allows courts to impose sanctions where an attorney submits a pleading, motion, or other paper to the court for an improper purpose or without proper support in law or in evidence. Courts typically impose Rule 11 sanctions only in extreme cases. Additionally, a party moving for Rule 11 sanctions must provide a copy of the motion to the opposing party at least 21 days before submitting the motion to the court, providing a procedural obstacle.
Perhaps unsurprisingly given the high bar for sanctions, we are not aware of any cases since Cunningham citing Cunningham to impose sanctions under Rule 11.8
5. Fee Shifting
Finally, the Court stated that “ERISA itself gives district courts an additional tool to ward off meritless litigation: cost shifting.”
At least one court has relied on Cunningham to award attorney’s fees to successful defendants in meritless ERISA litigation, albeit not in a prohibited-transaction case. In Kelly v. Altria Client Services, LLC, the court cited Cunningham when awarding over $76,000 to a defendant who defeated plaintiff’s ERISA claim on summary judgment.9 The court rejected an argument that awarding fees would chill future ERISA claims, explaining that “cost shifting serves not to prevent legitimate claims from being brought, but instead to deter illegitimate ones.” Additionally, as of this writing, at least two motions for fees in ERISA cases are pending.10
Alternative Dismissal Argument: No Party-In-Interest Transaction
While the methods suggested by the Supreme Court have gained some traction, none have been heavily used, at least not yet. Beyond the five methods, an additional argument may be lingering that goes to whether a plaintiff has plausibly alleged the elements of a prohibited transaction under ERISA Section 406(a). Even after Cunningham, the threshold legal question remains of when a plan fiduciary causes a plan to engage in a transaction with a “party in interest.” As noted above, ERISA defines “party in interest” in the present tense and includes only “person[s] providing services to the plan.” As a result, the parties in ERISA cases often disagree over whether the term “party in interest” applies to all plan service providers or only to those service providers with a preexisting relationship with the plan at the time of the challenged transaction.
In 2023, the Fifth Circuit discussed this dispute in D.L. Markham DDS, MSD, Inc. 401(k) Plan v. Variable Annuity Life Insurance Co.11 The Fifth Circuit agreed with the Third and Tenth Circuits that a “party in interest” only includes service providers with a preexisting relationship with a plan, rejecting the broader interpretation that a “party in interest” includes all service providers. Since Cunningham, some courts have adopted the Markham analysis,12 but it has not been universal. With Cunningham relaxing the pleading requirements for prohibited-transaction claims, this narrower interpretation of “party in interest” endorsed in Markham could take on more importance in providing another method to dispose of some prohibited-transaction claims at the pleading stage.
Conclusion
While the Supreme Court’s five suggestions have not been widely adopted in the year since Cunningham, three of them have been utilized at least once, showing that courts are willing to use these tools in the right circumstances. It remains to be seen whether—and to what extent—district courts will use the Supreme Court’s suggestions to dismiss or narrow prohibited-transaction claims; however, plan sponsors and fiduciaries should use all of the tools available to them when faced with prohibited-transaction claims challenging necessary and appropriate plan service provider arrangements.
1 Most notably, the tool has been used in the Fifth Circuit. See, e.g., Armstrong v. Ashley, 60 F.4th 262 (5th Cir. 2023); Bosarge v. Mississippi Bureau of Narcotics, 796 F.3d 435 (5th Cir. 2015); Porter v. Valdez, 424 Fed. App’x 382 (5th Cir. 2011); Gaines v. Jefferson Cnty. Sch. Dist., 2023 WL 4096702, at *2, *5 (S.D. Miss. June 20, 2023); Schultea v. Wood, 47 F.3d 1427, 1434 (5th Cir. 1995) (en banc); Linicomn v. Hill, 902 F.3d 529, 535 (5th Cir. 2018).
2 2025 WL 3771345, at *2 (E.D. Cal. Dec. 31, 2025).
3 Stern v. JP Morgan Chase & Co., 2026 WL 654714, at *13 (S.D.N.Y. Mar. 9, 2026).
4 2026 WL 208630 (W.D.N.C. Jan. 27, 2026).
5 2025 WL 2420941, at *3 (D. Mass. Aug. 21, 2025).
6 Dyer v. Green, 2025 WL 4056746, at *5 (D. Mass. Nov. 26, 2025); see also MacTaggert on behalf of Extreme Eng’g Sols., Inc. Emp. Stock Ownership Plan v. Pro. Fiduciary Servs., LLC, 2025 WL 1726143, at *6 (W.D. Wis. June 20, 2025) (dismissing plaintiffs’ ESOP prohibited transaction claim for lack of standing); Plutzer on behalf of Tharanco Grp., Inc. Emp. Stock Ownership Plan v. Bankers Tr. Co. of S. Dakota, 2022 WL 596356, at *7 (S.D.N.Y. Feb. 28, 2022), aff’d sub nom. Plutzer on behalf of Tharanco Grp., Inc. v. Bankers Tr. Co. of S. Dakota, 2022 WL 17086483 (2d Cir. Nov. 21, 2022) (same).
7 Dempsey v. Verizon Commc’ns, 2026 WL 72197, at *8 (S.D.N.Y. Jan. 8, 2026).
8 Although not mentioned by the Court in Cunningham, a related tool is 28 U.S.C. § 1927, which permits a court to require any attorney who “multiplies the proceedings in any case unreasonably and vexatiously” to “satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” The defendant in a pending ERISA class action relied in part on this statutory provision in a pending motion for attorneys’ fees. See Whipple v. Se. Freight Lines, Inc., No. 3:23-cv-04583-SAL, Dkt. No. 133.
9 No. 3:23-cv-725-HEH, 2025 WL 2313210, at *1 (E.D. Va. Aug. 11, 2025).
10 Whipple v. Se. Freight Lines, Inc., 3:25-cv-04583-SAL (D.S.C.), ECF No. 133; Barragan v. Honeywell Int’l Inc., 2:24-cv-0429-EP-JRA (D.N.J.), ECF No. 89, see also ECF No. 82 (administratively terminating motion for attorneys’ fees while appeal is pending).
11 88 F.4th 602, 611 (5th Cir. 2023)
12 Piercy v. AT&T, 2025 WL 2505660 at *44 (D. Mass. Aug. 29, 2025); Tedford v. Equitable Financial Life Ins. Co., et al., 2026 WL 1398640, at *6 (D.N.J. May 19, 2026) (holding that court’s precedents aligned with Markham analysis and granting motion to dismiss) Fleming v. Kellogg Co., 2025 WL 4053174, at *8 (W.D. Mich. Dec. 8, 2025) (citing Markham and dismissing prohibited-transaction claim); Eibensteiner v. Essilorluxottica USA Inc., 2026 WL 1140895, at *4 (N.D. Tex. Apr. 27, 2026) (same).
