March 19, 2019

Courts Continue to Rule on Retirement Plan Mandatory Arbitration Provisions

Holland & Knight Alert
Gregory K. Brown | Louis L. Joseph

HIGHLIGHTS:

  • Some retirement plans, including employee stock ownership plans (ESOPs), have in the past few years included terms and provisions that require participant breach of fiduciary claims to be resolved in arbitration on a participant-by-participant basis together with a class action waiver.
  • The validity and effect of these mandatory arbitration provisions have been challenged, and the courts are beginning to define the extent to which those provisions have effect.
  • Mandatory arbitration provisions are not a simple matter and should be adopted only after a plan sponsor has carefully considered a number of factors.

In the past few years, some retirement plans, including employee stock ownership plans (ESOPs), have included terms and provisions that require participant breach of fiduciary claims to be resolved in arbitration on a participant-by-participant basis together with a class action waiver. This has been done, in part, to attempt to thwart the plethora of participant class action cases, particularly in 401(k) plan fee disputes, but also for ESOP breach of fiduciary duty claims. Predictably, this has caused the courts to begin to consider participant motions to invalidate or limit the effect of these mandatory arbitration provisions.

Recent Court Cases

Most recently, the U.S. Supreme Court denied the University of Southern California's (USC) petition for writ of certiorari to have it determine whether participants can be compelled to arbitrate claims of Employee Retirement Income Security Act of 1974, as amended (ERISA) fiduciary breaches pursuant to agreements to arbitrate individual claims as part of their employment contracts. In University of Southern California v. Munro, the U.S. Court of Appeals for the Ninth Circuit had previously held that the participants are not required to arbitrate their claims because the claims were brought on behalf of an ERISA retirement plan, not the individual participants. (See Holland & Knight's alert, "Ninth Circuit: Individual Employment Provision Cannot Compel Arbitration of 409(a) Claim," July 31, 2018.) This denial of the USC petition allows the participants to move forward with their lawsuit.

Last year, in Brown v. Wilmington Trust, a federal district court in Ohio ruled that the breach of fiduciary duty claims of a cashed-out ESOP participant were not subject to a mandatory arbitration provision in the ESOP plan document that was adopted after the participant was cashed out. (See Holland & Knight's alert, "District Court: ESOP Arbitration Provision Doesn't Apply to 'Cashed-Out' Participant," Aug. 13, 2018.) The Ninth Circuit is currently considering another ERISA arbitration case, Dorman v. The Charles Schwab Corporation, in which the retirement plan in question contains an arbitration agreement and class action waiver in its governing document. The district court in that case denied the plan sponsor's motion to compel arbitration and allowed the plaintiff to move forward with his lawsuit because the plaintiff's employment with the plan sponsor terminated before the arbitration provision was added to the plan document. Thus, the validity and effect of mandatory arbitration provisions has been challenged, and the courts are beginning to define the extent to which those provisions have effect.

Considerations for Plan Sponsors and Fiduciaries

Mandatory arbitration provisions are not a simple matter and should be adopted only after careful consideration. In particular, a plan sponsor should carefully consider a number of factors, including, but not limited to the following:

  • What is the effectiveness to thwart class actions versus the risk of numerous participant arbitrations regarding the same subject matter and inconsistent arbitration awards?
  • Will the arbitration involve arbitrators with sufficient ERISA background and experience? Judges have a staff of clerks and research assistants that can dive into the law; arbitrators generally do not.
  • What are the potential time and cost savings derived from arbitration as an alternative to litigation?
  • What will be the effect on fiduciary indemnification and insurance coverage? Mandatory arbitration provisions may invalidate the fiduciary's insurance coverage. Arbitration awards in favor of plaintiffs may make it difficult for all fiduciaries (internal and external) to secure insurance.
  • What is the risk of an adverse arbitration award that is generally non-appealable? Arbitration is not the same as mediation. In mediation, the parties agree to bring their matter to a "neutral" third party to negotiate a settlement. Arbitrations often end up with some kind of award to the plaintiffs.

This consideration should involve the plan sponsor and all affected fiduciaries. It may be more advantageous to include the provisions in a new plan than an existing plan where participants have accrued substantial vested benefits, but this has not been ruled on yet. In the meantime, the courts are likely to provide more definition and clarification on these provisions for plan sponsors and fiduciaries to consider.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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