Courts Continue to Split Over Enforceability of Benefit Plan Arbitration Provisions
- As discussed in a previous Holland & Knight alert, courts take various approaches when considering the enforceability of mandatory class-action waivers and arbitration provisions contained in Employee Retirement Income Security Act of 1974 (ERISA) plans.
- Recent decisions show that courts remain split on key issues, including the interpretation of the U.S. Supreme Court's decision in LaRue v. DeWolff, Boberg & Assoc., who must/can consent to a plan amendment, and the applicability and application of the "effective vindication" doctrine.
- Recent court decisions in the Seventh Circuit, as well as Delaware, New York, and Florida district courts have reached different results, and for different reasons.
Courts around the country continue to approach the enforceability of class-action waivers and arbitration provisions in ERISA plan documents differently. This alert discusses recent decisions addressing these issues in ERISA litigation as district courts evaluate the enforceability of arbitration provisions and class-action waivers against plan participants
Finding a Mandatory Class-Action Waiver and Arbitration Provision Unenforceable
In Smith v. Brd. of Dirs. of Triad Mfg., Inc., 13 F.4th 613, 615 (7th Cir. 2021), the Seventh Circuit evaluated whether an arbitration and class-action waiver provision that provides "[a]ll Covered Claims must be brought solely in the Claimant's individual capacity and not in a representative capacity or on a class, collective, or group basis[,]" and that the "Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than Claimant" is enforceable against a participant asserting ERISA § 502(a)(2) claims. Id. (emphasis added)
In rendering its decision that this specific provision is problematic, the Seventh Circuit observed that individual arbitration is not incompatible with ERISA: "Because Smith participated in a defined contribution plan, LaRue … governs, and the [Supreme] Court made clear in LaRue that [ERISA 502(a)] 'authorize[s] recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account.'" Id. at 622 (citing LaRue, 552 U.S. at 256). Therefore, the narrow issue in Smith was whether the specific arbitration provision at issue conflicted with ERISA. The court found that the clause "Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than Claimant" was problematic as it could arguably bar the award of any injunctive relief (i.e., removal of a fiduciary) that is specifically allowed under ERISA even in a single-plaintiff case. Based on the Seventh Circuit's reasoning, it appears the arbitration clause would have been fully enforceable had the highlighted phrase "or other relief" been left out of the arbitration provision.
On Sept. 10, 2021, the same day as the Smith decision, the U.S. District Court for the District of Delaware denied the defendants' motion to dismiss and compel arbitration because the court found that the plaintiff-participant had not consented to the plan's arbitration provision. Henry v. Wilmington Tr., N.A., 2021 U.S. Dist. LEXIS 171927, 2021 WL 4133622 (D. Del. Sept. 10, 2021). In Henry, the plan was amended after the initial ESOP formation transaction to add a section titled "ERISA Arbitration and Class Action Waiver." Despite that mandatory arbitration provision, the plaintiff filed suit in federal court alleging the defendant-trustee caused the plan to buy shares of the company's stock for more than fair market value. In response, the defendants moved to dismiss the complaint and compel individual arbitration.
The plaintiff argued that the arbitration provision was invalid because he never gave voluntary and knowing consent to the provision. The defendants asserted that the plan was governed by Virginia state law and, thus, Virginia state law governed whether the parties had a valid arbitration agreement. Relying on the Ninth Circuit's decision in Dorman v. Charles Schwab, the defendants argued that "[a] plan participant agrees to be bound by a provision in the plan document when he participates in the plan while the provision in in effect." 780 F. App'x 510, 512 (9th Cir. 2019). The district court declined to follow Dorman because, in the district court's opinion, the Ninth Circuit provided no reasoning for its decision. Instead, the district court looked to Virginia state law to determine whether the arbitration provision was valid. Because at this stage of the proceedings, the plaintiff could plausibly support his assertion that he did not have notice of the arbitration provision and did not give consent, the district court denied the motion without prejudice.
Because the court did not compel arbitration, it held that the class-action waiver (which was part of the arbitration provision) could not be enforced at that time. However, in a footnote, the court cited to Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1614, 1628 (2018) to "suggest  that very little will satisfy [plaintiff's] burden [to displace the Federal Arbitration Act], except a clear and express command by Congress that an arbitration provision requiring a class action waiver is void." The court could not "see that ERISA §§ 409(a) and 410(a) clear this hurdle."
The Henry court applied Virginia state contract law in analyzing whether to enforce the arbitration and class-action waiver at issue. The defendants may have had greater success if they had argued that federal common law, not state law, governs and/or that doctrines such as direct benefits estoppel avoid the necessity of establishing a participant had the requisite knowledge of, and gave consent to, the addition of the arbitration and class-action waiver provision to the plan.
On Nov. 2, 2021, the U.S. District Court for the Southern District of New York also denied a motion to compel individual arbitration, holding that the plaintiff had the right under ERISA §§ 409(a) and 502(a)(2) to recover remedies for the plan as a whole and that this right could not be waived. Cedeno v. Argent Trust Co., 2021 U.S. Dist. LEXIS 212926, 2021 WL 5087898 (S.D.N.Y. Nov. 2, 2021). In Cedeno, the plan document, adopted in 2017, included a section titled "Mandatory and Binding Arbitration" and set forth a procedure for resolving disputes. The plaintiff brought his complaint alleging that the defendants breached their fiduciary duties under ERISA, thereby causing the plan to suffer losses, and sought relief on behalf of the plan as a whole.
Defendants filed a motion to compel arbitration. The plaintiff opposed the motion on the following ground:
the subsection of the arbitration procedure limiting an arbitration to provide a remedy solely with respect to a participant's individual account and to prevent the arbitrator from awarding any relief for the benefit of the plan that goes beyond a benefit for the individual participant's account is void, and because that subsection is not severable from the arbitration procedure, the entire arbitration procedure must fail, and defendants' motion to compel arbitration must therefore be denied.
The defendants argued that a participant in a defined contribution plan did not have the statutory right to seek plan-wide relief and was limited to relief for that participant's individual account. The defendants also argued that the plan document's arbitration section included language preventing the plaintiff from recovering losses to the entire plan. The district court found the defendants' arguments unconvincing.
The Cedeno decision relied on the U.S. Supreme Court's decision in LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008) and the limited nature of the Seventh Circuit Court of Appeals decision in Smith. As support, the district court concluded that the plan's arbitration provision was unenforceable and "clearly contrary to law, because it attempts to limit remedies that ERISA expressly provides." Stated differently, the district court concluded that a class-action waiver that prohibits a participant from recovering any remedy under ERISA § 409(a) on behalf of all other participants' plan accounts is necessarily invalid. The Cedeno decision appears to have misapplied LaRue and Smith to reach this result.
Enforcing a Mandatory Class-Action Waiver and Arbitration Provision
On Jan. 20, 2022, the U.S. District Court for the Southern District of Florida granted the defendants' motion to compel individual arbitration of the plaintiffs' ERISA claims, thus preventing the plaintiffs from bringing the action on behalf of a putative class of similarly situated individuals. Holmes v. Baptist Health S. Fla., Inc., No. 21-22986-Civ-Scola, 2022 U.S. Dist. LEXIS 10834, 2022 WL 180638 (Jan. 20, 2022). In Holmes, the employer sponsored a defined contribution plan to facilitate employee retirement savings in which each participant has a separate account based on the amounts individually contributed. The plaintiffs alleged defendants "breached their fiduciary duties by failing to review and contain costs and by investing in high-cost investment funds despite the availability of similar funds with lower costs or better performance histories."
The plan was amended in 2020, pursuant to the plan sponsor's unilateral ability to amend the plan, to include an arbitration provision and class-action waiver. The arbitration provision also "precludes individuals that bring an arbitration claim from receiving 'remedial or equitable relief' that provides 'additional benefits or monetary relief to any person … other than the Claimant[.]'"
In response to the defendants' motion to compel arbitration, the plaintiffs argued the arbitration agreement was not enforceable because 1) the arbitration agreement and its waiver of certain plan-wide remedies violated the "effective vindication" doctrine; and 2) the arbitration agreement was not binding since it was added to the plan by a unilateral amendment in 2020. The district court addressed both arguments.
The plaintiffs first asserted that the plan's arbitration agreement triggered the "effective vindication" doctrine, a judge-made exception to the Federal Arbitration Act (FAA) that seeks to balance the competing federal policies in enforcing arbitration agreements and in vindicating the plaintiffs' rights to pursue statutory remedies, because it prevented the effective vindication of rights guaranteed in ERISA §§ 409(a) and 502(a)(2).
The plaintiffs relied on the Seventh Circuit's decision in Smith to support their argument: "where the Seventh Circuit held that an arbitration clause, which precluded relief that provided 'additional benefits or monetary or other relief to any' other individual, was unenforceable under the effective vindication doctrine, as the clause prohibited plan-wide relief that ERISA expressly permitted." However, the defendants countered that such plan-wide relief as sought by the plaintiffs was available only to those who brought a class action on behalf of the plan and, further, that any waiver of a remedy unique to a representative or class action is permissible.
The district court declined to follow the Smith rationale and held that the arbitration agreement at issue was valid and enforceable given the FAA's pro-arbitration policy and the rarity with which courts apply the effective vindication doctrine. Moreover, the arbitration clause at issue was narrower than the one in Smith, "[t]hus, while the arbitration clause in Smith completely denied some types of statute-authorized relief to the Plan, the clause here does not, as individual claimants can each recover the harm to their defined contribution accounts, and they can recover Plan-wide relief that does not provide additional benefits or monetary relief to others."
Next, the plaintiffs contended that the arbitration agreement was not binding on them because they did not knowingly or personally agree to it when it was unilaterally adopted by the 2020 amendment. The district court dismissed this argument because under ERISA § 409(a), the claims belong to the plan, not the individual participants and, "[t]herefore, the relevant inquiry is not whether individual participants agreed to the arbitration but whether the Plan agreed to arbitrate." Because the plan expressly provided for unilateral amendment by the plan sponsor, and the plan consented to the 2020 amendment – which included the arbitration agreement and class action waiver – the district court found that those bringing claims on the plan's behalf must arbitrate.
Lastly, plaintiffs argued that the arbitration agreement was binding only on those who were participating in the plan at the time the arbitration agreement was added. The district court restated its previous conclusion that because the plan agreed to arbitration, any claims on behalf of the plan must be brought in arbitration, regardless of the individual participant's status at the time of the amendment.
In summary, the district court held that the plan consented to arbitrate and that the plaintiffs who bring claims on behalf of the plan must arbitrate their claims on an individual basis.
Conclusion and Considerations
As the law continues to develop on the enforceability of ERISA plan arbitration provisions and class-action waivers, we should receive additional guidance from the Circuit Courts of Appeal so that plan sponsors who want to include arbitration provisions and class-action waivers in their plan document can do so knowing they will be enforced.
Holland & Knight's ERISA litigators have significant experience advising plan sponsors regarding the pros and cons of including arbitration provisions and class-action waivers in plan documents and other employment-related documents and can help identify best practices to increase the likelihood that those provisions, if adopted, will be enforceable.
For more information or questions regarding these decisions or ERISA, contact the authors or another member of Holland & Knight's ERISA Litigation Team.
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, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.