BRIAN D. MURRAY and ANGEL L. GARRETT, December 19 2023
As plan sponsors increasingly look to arbitration provisions to avoid costly class action litigation, courts across the nation have weighed in on whether plan-wide claims for breach of fiduciary duty under ERISA § 502(a)(2) can be subject to mandatory arbitration.
ERISA § 502(a)(2) provides that a civil action for breach of fiduciary duty may be brought for the benefit of the plan as a whole. While every circuit court to consider the issue — the Second, Third, Fifth, Sixth, Seventh, Eighth, Ninth and Tenth Circuits — has recognized that claims under ERISA are generally arbitrable, there is a split in the courts on whether plan-wide claims for breach of fiduciary duty under ERISA § 502(a)(2) can be forced into arbitration. In determining whether to enforce arbitration clauses, courts generally examine one or both of the following questions: First, did the plan (on whose behalf a claim for breach of fiduciary duty under ERISA § 502(a)(2) is brought) consent to the arbitration agreement? Second, does the arbitration agreement abrogate substantive rights under ERISA?
Cases Holding Arbitration Agreements Unenforceable
Prospective Waiver of Statutory Remedies Unenforceable
The Third, Seventh and Tenth Circuits have refused to enforce arbitration clauses that purported to prospectively waive statutory remedies available under ERISA. In Smith v. Bd. of Directors of Triad Mfg., Inc.,1 the Seventh Circuit refused to enforce an arbitration/class action waiver provision in an employee stock ownership plan (ESOP). The provision precluded the arbitrator from “providing additional benefits or monetary or other relief to anyone other than Claimant.” The court held that the provision was unenforceable because it prospectively waived statutory remedies available under ERISA. The court made clear that it only took issue with the waiver of substantive statutory remedies — not the waiver of the procedural right to bring a class action. Likewise, in Harrison v. Envision Mgmt. Holding, Inc. Bd. of Directors,2 the Tenth Circuit held that the arbitration provision in an ESOP was invalid because it prevented the plaintiff from effectively vindicating his right to pursue plan-wide remedies under ERISA. In Henry v. Wilmington Trust NA,3 the Third Circuit similarly refused to enforce an arbitration provision because it purported to prospectively waive participants’ rights to seek remedies expressly authorized by ERISA.
ERISA Claims Outside the Scope of Arbitration Provision
Some courts have refused to compel arbitration of plan-wide ERISA claims on the ground that the claims were not within the scope of the arbitration provisions at issue. In Cooper v. Ruane Cunniff & Goldfarb Inc.,4 the defendant moved to compel arbitration of plaintiff’s plan-wide ERISA § 502(a)(2) claims based on an arbitration provision contained in the plaintiff’s individual employment agreement, which covered “[a]ll legal claims arising out of or relating to employment.” The Second Circuit held that the ERISA claims were outside the scope of the arbitration provision because they did not “relate to” plaintiff’s employment.
Likewise, in Hawkins v. Cintas Corporation,5 the Sixth Circuit held that former employees’ plan-wide ERISA § 502(a)(2) claims fell outside the scope of arbitration agreements contained in the employees’ individual employment agreements because the plan — on whose behalf the claims were brought — did not consent to arbitration. Rather, only plaintiffs (in their individual capacities) did.
Some courts have refused to compel arbitration of plan-wide ERISA claims on the ground that the claims were not within the scope of the arbitration provisions at issue. In Cooper v. Ruane Cunniff & Goldfarb Inc.,4 the defendant moved to compel arbitration of plaintiff’s plan-wide ERISA § 502(a)(2) claims based on an arbitration provision contained in the plaintiff’s individual employment agreement, which covered “[a]ll legal claims arising out of or relating to employment.” The Second Circuit held that the ERISA claims were outside the scope of the arbitration provision because they did not “relate to” plaintiff’s employment.
Likewise, in Hawkins v. Cintas Corporation,5 the Sixth Circuit held that former employees’ plan-wide ERISA § 502(a)(2) claims fell outside the scope of arbitration agreements contained in the employees’ individual employment agreements because the plan — on whose behalf the claims were brought — did not consent to arbitration. Rather, only plaintiffs (in their individual capacities) did.
Cases Holding Arbitration Agreements Enforceable
On the other hand, the Ninth Circuit and some district courts in other circuits, have enforced the arbitration of claims seeking plan-wide relief under ERISA.
In Dorman v. Charles Schwab Corp.,6 a former Schwab employee and participant in Schwab’s 401(k) plan filed a putative class action on behalf of the plan, alleging fiduciary breaches under ERISA and seeking plan-wide relief. The defendants moved to compel individual arbitration based on an arbitration/class action waiver provision in the plan document. The Ninth Circuit held that the arbitration provision was enforceable because the plan (to which the § 502(a)(2) claim ultimately belonged) consented, even though the provision was added to the plan after Plaintiff filed suit. Dorman therefore stands in contrast to the Ninth Circuit’s prior decision in Munro v. University of Southern California,7 where the court held that arbitration provisions in individual employment agreements did not bind the plan because the plan never consented to arbitration.
In Holmes v. Baptist Health S. Fla., Inc.,8 the United States District Court for the Southern District of Florida, which is in the Eleventh Circuit, enforced a mandatory arbitration and class action-waiver provision in a defined contribution 403(b) plan. The arbitration provision precluded relief that provides “additional benefits or monetary relief to any person” other than the claimant. Because, the court reasoned, a waiver of the right to bring a class action is permissible, the concomitant waiver of remedies associated with class actions is also permissible.
More recently, in Merrow v. Horizon Bank,9 the United States District Court for the Eastern District of Kentucky, which is in the Sixth Circuit, held that an arbitration provision in an ESOP was enforceable because the plan consented. There, the arbitration provision broadly provided that, “[i]n exchange for participation in this Plan, each Claimant agrees to arbitrate and be bound by the final and binding arbitration result of any dispute, claim or controversy arising hereunder.” The ESOP also contained a class action waiver. The court rejected the plaintiffs’ argument that these provisions prospectively waived statutory rights and were thus invalid. The court reasoned that the provisions did not place limitations on the recovery available under ERISA, only the manner in which plaintiffs’ rights would be processed.
Supreme Court Declines to Address the Issue
The U.S. Supreme Court recently declined to weigh in on whether plan-wide ERISA § 502(a)(2) claims can be subject to arbitration. Specifically, in October 2023, the Court declined to review the Third and Tenth Circuits’ decisions in Henry and Harrison, in which those courts held arbitration provisions were unenforceable because they prospectively waived remedies available under ERISA, thereby preventing participants from effectively vindicating their rights under the statute. In January 2023, the Court also declined to review the Sixth Circuit’s decision in Hawkins, in which the Sixth Circuit affirmed the district court’s holding that the plan did not consent to arbitration provisions in individual employment agreements. Thus, for the time being, the question of whether plan-wide ERISA claims can be subject to arbitration will be left to a patchwork of different federal court decisions.
Practical Considerations
Plans and plan sponsors deciding whether to include an arbitration provision in their plans should weigh the possible pros and cons carefully. On the one hand, arbitration provisions with class action waivers may make it more difficult for plaintiffs to seek plan-wide relief, as plaintiffs will need to bring multiple individual arbitrations rather than one class or collective action. Additionally, arbitration is often viewed as a more efficient forum than federal court by employers, as arbitrations typically resolve more quickly, and appeal rights are significantly more limited than in federal court.
On the other hand, defending against multiple individual arbitrations may be burdensome and inefficient. There is also the risk of inconsistent decisions by different arbitrators, as well as the risk that a particular arbitrator might grant equitable relief, which includes reformation or removal of fiduciaries. Moreover, the difficulty in overturning an arbitrator’s decision (except in rare circumstances), coupled with the risk that an arbitrator may not be an expert in the nuances of ERISA, could ultimately backfire.
Once the decision to add an arbitration provision is made, plan sponsors should include the arbitration provision in the plan document itself, as courts have held arbitration provisions in individual employment agreements are generally unenforceable in the context of plan-wide claims for relief. Further, plan sponsors should consider not including language that prospectively waives statutory remedies available under ERISA.
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1 13 F.4th 613 (7th Cir. 2021).
2 59 F.4th 1090 (10th Cir.), cert. denied sub nom. Argent Trust Co., et al. v. Harrison, No. 23-30, 2023 WL 6558426
(U.S. Oct. 10, 2023).
3 72 F.4th 499 (3d Cir.), cert. denied, No. 23-122, 2023 WL 6797729 (U.S. Oct. 16, 2023).
4 990 F.3d 173 (2d Cir. 2021).
5 32 F.4th 625 (6th Cir. 2022), cert. denied, 143 S. Ct. 564, 214 L. Ed. 2d 335 (2023).
6 780 Fed.Appx. 510 (9th Cir. 2019).
7 896 F.3d 1088 (9th Cir. 2018).
8 No. 21-22986-CIV, 2022 WL 180638 (S.D. Fla. Jan. 20, 2022).
9 No. 22-cv-123, 2023 WL 7003231 (E.D. Ky. Oct. 24, 2023).
