September 7, 2022

Court Compels Proposed ESOP Class to Individual Arbitration Based on Plan Document

Holland & Knight Alert
Kayla Leland Pragid | Lindsey R. Camp | Todd D. Wozniak


  • Courts have taken varying fact-specific approaches when determining the viability of mandatory class action waivers and arbitration provisions contained in employee stock ownership plans (ESOPs).
  • Previous Holland & Knight alerts have discussed recent decisions and the impact of those decisions on such waivers and arbitration provisions.
  • More recently, the U.S. District Court for the District of Arizona issued an opinion synthesizing the historical case law and also providing guidance and clarification on when mandatory class action waiver and arbitration provisions in ESOP plans are enforceable. Ultimately, the Court compelled the plaintiff to arbitrate her claim on an individual basis, enforcing the mandatory class action waiver and arbitration provisions set forth in the ESOP plan document.

Historically, courts around the country have approached the enforceability of class action waivers and arbitration provisions in ESOP and Employee Retirement Income Security Act of 1974 (ERISA) plan documents differently, creating varying levels of uncertainty in the marketplace.

In the recent Robertson v. Argent Trust Company decision, plaintiff Shana Robertson brought a putative class action against an employee stock ownership plan (ESOP) trustee and others alleging, among other things, that the Trustee breached its fiduciary duties in connection with the formation of the Isagenix Worldwide Inc.'s ESOP in violation of ERISA. See No. 21-cv-01711-PHX-DWL, 2022 WL 2967710 (D. Ariz. July 27, 2022).

Case Background

Specifically, the Plaintiff sued to "enforce her rights under ERISA and the Plan, to recover the losses incurred by the Plan and/or the improper profits realized by Defendants resulting from their breaches of fiduciary duty and prohibited transactions, and equitable relief, including rescission of the ESOP Transaction and removal of fiduciaries who have failed to protect the Plan." See Robertson, 2022 WL 2967710, at *1 (citing the Compl. at ¶ 7). The Plaintiff claimed "the Plan ha[d] been injured and its participants ha[d] been deprived of hard-earned retirement benefits resulting from Defendants' violations of ERISA." Id. In response to the complaint, the defendants moved to compel the "Plaintiff to arbitrate her claims on an individual basis" pursuant to an arbitration clause in Sections 17.9(a)(ii) and (iii) of the ESOP plan that stated:

Any claim by a Claimant that arises out of this Plan or the Trust Agreement, including, without limitation, any claim for benefits under this Plan or the Trust Agreement; [and] any claim asserting a breach of, or failure to follow, any provision of ERISA or the Code, including without limitation, a breach of fiduciary duty ... shall be settled by binding arbitration ....

No Group, Class or Representative Arbitrations" provided all 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. Each arbitration shall be limited solely to one Claimant's Covered Claims and that Claimant may not seek or receive any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to any Employee, Participant or Beneficiary other than the Claimant."

Robertson, 2022 WL 2967710, at *1-2 (emphasis added).

In addition, approximately one week after the Plaintiff initiated the class action, the Plan was to state:

[N]othing in this provision shall be construed to preclude a Claimant from seeking injunctive relief, including, for example, seeking an injunction to remove or replace a Plan fiduciary even if such injunctive relief has an incidental impact on other Employees, Participants, or Beneficiaries.

Id. at *2.

The Plaintiff responded to the motion to compel arbitration by making two main arguments: (1) enforcing the mandatory class action waiver and arbitration provision was unconscionable, and (2) the provision was void because it prevents the "effective vindication" of statutory remedies. Id. at *3, 5.

The Plan's Mandatory Class Action Waiver and Arbitration Provision Is Enforceable

The Plan's Class Action Waiver and Mandatory Arbitration Provision Is Not Unconscionable Under Applicable Federal Law

As an initial matter, the parties disagreed as to whether Arizona state law or federal common law applied to the Court's analysis. After consideration of both arguments, the Court held that insofar as "the arbitration provision [wa]s found within an ERISA plan, its interpretation [wa]s governed by federal common law." Robertson, 2022 WL 2967710, at *4.

The Court then evaluated the viability of "Plaintiff's contract defense of substantive unconscionability under federal common law." Robertson, 2022 WL 2967710, at *4. The Court noted that the Plaintiff relied "solely on Arizona law in support of her claim of substantive unconscionability" and that "[t]o the extent Plaintiff mention[ed] federal common law at all" it was simply to "reject its applicability." Id. at *4. The Plaintiff's failure to develop any argument regarding unconscionability under federal common law was dispositive because the Plaintiff failed to meet her burden. Id. Nonetheless, the Court held that even if the Plaintiff had developed the argument, it would fail on the merits. Id. "To the extent Plaintiff argues that the Court should create and apply a federal common law doctrine of unconscionability, such an argument is foreclosed by well-established precedent establishing that ERISA mandates no minimum substantive content for employee welfare benefit plans, and therefore a court has no authority to draft the substantive content of such plans." Id. at *5 (internal quotations omitted).

Inapplicability of "Effective Vindication of Statutory Remedies"

Next, the Court addressed whether the doctrine of "effective vindication" voided the mandatory arbitration provision. Id. at *5.

Relying on a decision by the U.S. Court of Appeals for the Seventh Circuit in Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F.4th 613 (2021), the Plaintiff argued that the effective vindication doctrine voided, as a matter of public policy, the class action waiver and arbitration clause "because the Plan's prohibition against 'Group, Class or Representative Arbitrations' interferes with her ability to pursue statutory remedies." Robertson, 2022 WL 2967710, at *5 (internal citations omitted). Essentially, the Plaintiff argued that Section 502(a)(2) of ERISA "authorizes a plan participant to restore any losses to the plan resulting from each breach, and to restore to such plan any profits of a fiduciary which have been made through use of assets of the plan by the fiduciary" and that requiring the Plaintiff to arbitrate her claim individually (as opposed to litigating the claims as a class action) obstructed such "remedies that would protect the entire plan" because individual arbitration would "limit[] a participant's remedies to losses to his or her individual account and disgorgement of profits tied to his or her account," but would not encompass " 'any' plan losses." Id. at *5 (emphasis in original and citations omitted). Thus, according to the Plaintiff "the provision eviscerates statutory provisions protecting the financial integrity of the Plan" and is void against public policy under the effective vindication doctrine. Id.[i]

In response, the defendants argued that forcing the Plaintiff to individually arbitrate her claim in compliance with the ESOP did not prevent the effective vindication of any statutory right and highlighted that the U.S. Supreme Court has recognized that ERISA Section 502(a)(2) claims "authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account" and are inherently individualized. See id. (citing Smith, 13 F.4th at 622).

The Court explained the effective vindication doctrine "provides courts with a means to invalidate, on public policy grounds, arbitration agreements that operate as a prospective waiver of a party's right to pursue statutory remedies." The Court made clear, however, that the "doctrine is not triggered simply because an arbitration agreement may make a statutory remedy less efficient or more expensive to pursue—'the fact that [arbitration] is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy. Id. at *7.

The Court then analyzed several recent decisions involving the issue of "whether the Plan's prohibition against class-wide arbitration (with a carve-out for the pursuit of equitable and injunctive remedies, such as the removal of a fiduciary, that may indirectly benefit other participants) implicates the effective vindication doctrine." Id. at *8.

  1. LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008) – The Court distinguished LaRue, stating that the case "simply authorizes defined contribution plan participants to recover losses from their individual accounts using §502(a)(2) of ERISA. That is exactly what Plaintiff is allowed to do" under the at-issue ESOP plan. Robertson, 2022 WL 2967710, at *10.
  2. Munro v. Univ. of S. California, 896 F.3d 1088 (9th Cir. 2018) – The Court explained "the arbitration provisions on which the University of Southern California relied (unlike the provision at issue here) only required employees to 'arbitrate claims brought on their own behalf' and did not say anything about the arbitrability of class-wide claims." Robertson, 2022 WL 2967710, at *8 (emphasis added). The Court explained that the decision "narrowly held" that the arbitration provision was inapplicable "because the provision only extended to individual claims" and the court never analyzed "whether the provision was enforceable." Id. at *10.
  3. Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F. 4th 613 (7th Cir. 2021) and Harrison v. Envision Management Holding, Inc. Bd. of Directors, No. 21-cv-0304, 2022 WL 909394 (D. Colo. March 24, 2022) – The Court explained that these cases "bar enforcement when (unlike here) an arbitration provision in an ERISA plan precludes an individual participant from pursuing equitable remedies, such as removal of a fiduciary, that would benefit other participants." Robertson, 2022 WL 2967710, at *10. Here, the Plan was amended to eliminate this potential issue.
  4. Holmes v. Baptist Health S. Fla., No. 21-cv-22986, 2022 WL 180638 (S.D. Fla. Jan. 20, 2022) and Dorman v. Charles Schwab Corp., 780 F. App'x 510 (2019) ("Dorman II") – The Court found these cases instructive because both "courts confronted arbitration provisions similar to the post-Amendment version of the provision at issue here" and "the provisions were found to be valid and enforceable." Robertson, 2022 WL 2967710, at *10; see Dorman II, 780 F. App'x at 512-514 (ERISA plan's "waiver of class-wide and collective arbitration must be enforced according to its terms, and the arbitration must be conducted on an individualized basis").

Ultimately, the Court found that the Plaintiff's reliance on the effective vindication doctrine was misplaced, stating that "none of the cited cases suggest that an ERISA § 502(a)(2) plaintiff has an unqualified right to bring a collective action to recoup all of a fiduciary's losses and gains at once" and "the Plan's arbitration provision does not prevent Plaintiff from effectively vindicating statutory rights under ERISA." Robertson, 2022 WL 2967710, at *10. Importantly, the Court stated "[t]here is no indication that ERISA bars plan participants from choosing to waive collective action when an individualized remedy is still available." Id. (citing Dorman II, 780 F. App'x at 514).

Conclusion and Considerations

The analysis in Robertson synthesizes relevant case law and provides additional guidance for those seeking to enforce arbitration provisions and class action waivers in ERISA plan documents.

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. Our attorneys can help identify best practices to increase the likelihood that such 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 or Executive Compensation and Benefits Team.

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1 The Plaintiff also argued that the amendment to the Plan should not apply to her because it was adopted after she left Isagenix. See Robertson, 2022 WL 2967710, at *5. The Court disposed of that argument, stating that the amendment was valid and enforceable so long as the ERISA plan sponsor did "not violate their own plan's amendment procedure" in making the amendment. Id. at *7.

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.

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