Arbitration Provisions in an ERISA Plan Cannot Negate Right to Sue under ERISA in Class Action on Behalf of the Plan
Two recent circuit court decisions support the majority of federal circuits, which have held that arbitration provisions in an ERISA retirement plan cannot negate the statutory right under ERISA §502(a)(2) to sue in a class action on behalf of the plan and the plan participants.
Arbitration Provisions Govern in Ordinary ERISA Benefit Claims or Other Individual Claims
Under ERISA § 503, 29 USC § 1133, and DOL Reg. § 2560.503-1, ERISA claims for benefits must be brought in federal court once internal appeals have been exhausted. However, it is generally accepted under caselaw and regulations that arbitration clauses in the plan documents are binding, thus preventing appeal to federal court.
Also, in some cases arbitrability of ERISA claims has been extended to individual arbitration agreements even if not contained in the plan. See, e.g., Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, Inc., 847 F.2d 475 (8th Cir. 1988) (arbitration agreement between customer and securities broker which managed its profit-sharing and pension accounts, to arbitrate any dispute arising under ERISA, was enforceable as written).
Individual claims under ERISA § 502 that are not on behalf of all participants can be arbitrable. See, e.g., Bird v. Shearson Lehman/American Express, 926 F.2d 116 (2d Cir. 1991) (pre-dispute arbitration clauses can be enforced, even when the ERISÀ claims are statutory); Kramer v. Smith Barney, 80 F.3d 1080 (5th Cir. 1996) (brokerage customer brought suit alleging fraud; court held that claims are arbitrable).
Arbitration Provisions Cannot Preempt Class Action Plan-Wide Claims for Breach of ERISA Fiduciary Duties According to Most Circuits (Including Two Recent Cases)
There is a split in the federal circuit courts on whether plan-wide claims for breach of fiduciary duty under ERISA § 502(a)(2), 29 USC § 1132(a)(2), can be negated by 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.
Most recent courts, including the Second, Third, Sixth, Seventh and Tenth Circuits, have held that arbitration clauses do not preempt the plan’s right to sue for all its participants under ERISA §502(a)(2). Other circuits, including the Ninth Circuit, disagree.
A recent Second Circuit case of Cedeno v. Sasson, 100 F.4th 386 (2d Cir. May 1, 2024), cert. denied, — S.Ct. —, 2024 WL 4655015 (Nov. 4, 2024), held that arbitration provisions in the plan do not preempt the right to sue on behalf of all the participants in class action suits under ERISA §502(a)(2). The case involved an ESOP plan participant who brought a putative class action suit against the former employer, trustee of ESOP and others for breach of ERISA fiduciary duties, alleging the plan purchased shares of trustee’s parent corporation for more than fair market value, and seeking equitable relief including restoration of plan-wide losses and declaration that trustee breached fiduciary duties. The court held that arbitration provisions in plan governing document was unenforceable because it would prevent participants from pursuing plan-wide statutory remedies under ERISA §502(a)(2).
Similarly, a recent Sixth Circuit case in Parker v. Tenneco, Inc., 114 F.4th 786 (6th Cir. Aug. 20, 2024), held that arbitration provisions in a 401(k) plan would not prohibit the filing of a putative class action on behalf of all the participants under ERISA §502(a)(2). Participants in the 401(k) plan covered by ERISA filed a putative class action on behalf of the plan, themselves, and all other similarly situated participants, claiming that plan fiduciaries breached their fiduciary duties owed under ERISA and seeking all losses accruing to plans, disgorgement of all profits, and other injunctive remedies. The court held the arbitration provisions were invalid as prospective waivers of statutorily guaranteed rights and remedies under ERISA §502(a)(2).
Other similar cases include the following: The Third Circuit in Henry on behalf of BSC Ventures Holdings, Inc. Emp. Stock Ownership Plan v. Wilmington Tr. NA, 72 F.4th 499 (3rd Cir. 2023), declined to enforce a provision in an arbitration agreement requiring individual arbitration where a plan participant sought plan-wide remedies under ERISA §502(a)(2). The Seventh Circuit in Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F.4th 613 (7th Cir. 2021), held that an arbitration provision could not be enforced with regard to plan-wide claim for breach of fiduciary duties under ERISA §502(a)(2). See also, Hawkins v. Cintas Corp., 32 F.4th 625, 629 (6th Cir. 2022) (agreements to arbitrate in employment agreements that required employees to agree to arbitrate all claims that either the employee or employer has against the other party could not bind the plan to arbitration of a breach of fiduciary duty claims brought by participants on behalf of the plan). The Tenth Circuit in Harrison v. Envision Management Holding, Inc., 59 F.4th 1090 (10th Cir. 2023) held that a nearly identical provision within an arbitration agreement was unenforceable when applied to an ERISA §502(a)(2) claim; claim was that defendants financially benefitted from the sale of their company to their employee benefit plan for significantly more than it was worth, while at the same time leaving the plan with a multi-million dollar debt; the court therefore denied the defendants’ motion to compel arbitration; court held that ERISA §502(a)(2), seeking plan-wide relief on behalf of the plan could not be subject to arbitration.
In contrast, in Dorman v. Charles Schwab Corporation, 780 F. App’x 510 (9th Cir. 2019), the Ninth Circuit in an unpublished decision concluded that an arbitration provision in a 401(k) plan document must be enforced and claims may proceed in arbitration individually, notwithstanding the provisions of ERISA §502(a)(2) with regard to plan-wide claim for breach of fiduciary duties.
