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.
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.
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:
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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