Two more federal Circuit Courts have weighed in on whether mandatory arbitration provisions with class action waivers are enforceable under the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
With recent rulings in Cedeno v. Sasson, 100 F.4th 386 (2d Cir. 2024) and Parker v Tenneco, 2024 WL 3873409 (6th Cir. Aug 1, 2024), the Second and Sixth Circuits now join the Third, Seventh, and Tenth Circuits in holding that arbitration provisions are unenforceable under the “effective vindication” doctrine if they prevent a participant or beneficiary from pursuing their rights under ERISA to seek plan-wide relief for breach of fiduciary duty claims brought on behalf of an ERISA plan. This is also the position supported by the Department of Labor (“DOL”), as evidenced by its amicus brief in Parker.
While the claims in these two cases were brought in the 401(k) plan context, the rulings are relevant to other types of ERISA plans containing arbitration provisions, including other types of retirement plans (such as employee stock ownership plans and defined benefit plans), broad-based severance plans and health and welfare plans.
Background
To mitigate litigation costs many plan sponsors have added arbitration provisions, often in combination with class action waivers, to their ERISA plans. In addition to requiring arbitration of individual benefit claims, some arbitration provisions are broadly drafted and limit the ability of a participant to bring a claim in a representative capacity on behalf of the plan or to recover losses on behalf of the plan. This has led to several legal challenges because ERISA’s civil enforcement provisions grant participants and beneficiaries the right to seek plan-wide relief with respect to certain fiduciary claims. Specifically, under ERISA Sections 502(a)(2) and 409(a), participants and beneficiaries are authorized to bring a civil action in a representative capacity on behalf of the entire ERISA plan for any losses to the plan resulting from a breach of fiduciary duty. In these cases, the courts have attempted to balance the statutory rights of participants and beneficiaries to bring a civil action under ERISA against the terms of the Federal Arbitration Act (“FAA”) which was enacted to encourage arbitration. The FAA provides that an agreement to arbitrate is “generally valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract,” and as a result there are limited grounds on which courts may invalidate an arbitration agreement. In Cedeno and Parker, the Circuit Courts analyzed whether a plan arbitration provision could override the statutory rights of participants and beneficiaries to bring representative claims for breach of fiduciary duty.
Recent Circuit Court Decisions
The plaintiffs in Cedeno and Parker both filed class action suits, which included breach of fiduciary duty claims under ERISA Section 502(a)(2) on behalf of the plan.
In Cedeno, the plaintiff claimed the plan, which was an ESOP, purchased shares for more than market value, and in Parker, the plaintiff claimed there was a failure to select, monitor and remove investment options in a 401(k) plan which resulted in excessive investment fees. In both cases the defendants moved to compel arbitration based on a provision in the plan document. In Cedeno, the plan provided for arbitration for any claims that arose out of, concerned, or related to the plan, including claims that asserted a failure to follow any provision of ERISA, such as claims for breach of fiduciary duty. The arbitration provision also specifically precluded any claims not brought on an individual basis, including claims brought in a representative capacity or on a class, collective, or group basis, and precluded any relief that had the effect of providing additional benefits or monetary or other relief to participants and beneficiaries other than the individual claimant.
In Parker, the plan had recently added an arbitration provision that similarly required that all claims be brought in an individual capacity and precluded a participant from seeking additional benefits or monetary relief on behalf of anyone else. However, it provided an exception that explicitly allowed a participant to seek injunctive relief on behalf of the plan.
In both cases, the arbitration provisions were both non-severable, meaning that if a court found any part of the arbitration provision unenforceable, the entire provision would be null and void.
In finding the arbitration provisions unenforceable, the Second and Sixth Circuits (like the Third, Seventh, and Tenth before them) relied on the effective vindication doctrine. This Supreme Court-created doctrine allows a court to overturn an arbitration provision if the provision acts “as a prospective waiver of a party’s right to pursue statutory remedies.” The complaints in Cedeno and Parker alleged both individual harm and harm to the plan as a whole and requested damages for losses suffered by the plan, which the arbitration provision would not allow them to pursue. The Circuit Courts evaluated the scope of ERISA Sections 409 and 502(a)(2) and determined that the fiduciary breach provisions of the arbitration provisions were unenforceable as they prevented the claimants in Cedeno and Parker from pursuing remedies on behalf of the plan and acting in a representative capacity. Further, because of the lack of a severability provision, once a portion of the arbitration provision was found unenforceable, the entire provision was void.
Take Aways
Although the findings in Cedeno and Parker turned on the facts, including the cause of action, the specific language of the arbitration provisions, and the fact the provisions were nonseverable, the holdings do provide additional guidance on how the majority of the Circuits and the DOL are looking at arbitration provisions limiting class actions for certain breach of fiduciary duty claims. (The current outlier is the Ninth Circuit which in a partially unpublished case, Dorman v. Charles Schwab Corp., 934 F.3d 1107 (9th Cir. 2019), allowed a class action waiver. However, there are currently two pending cases in the Ninth Circuit weighing whether class claims under ERISA can be forced into individual arbitration). There will only be certainty once the Supreme Court chimes in, especially since, as noted in dicta in Parker, we are in an era where judge-made doctrines, such as the effective vindication doctrine, are being curtailed.
Given these Circuit Court rulings and the recent uptick in breach of fiduciary duty claims brought for excessive investment fees, as well as lawsuits scrutinizing the use of plan forfeitures to make employer contributions, now is an excellent time to review any existing ERISA plan arbitration provisions to evaluate (i) if any modifications to the language should be considered (e.g., the addition of a severability provision) and (ii) whether arbitration will achieve the desired result for your organization (e.g., while arbitration can reduce costs, it can also provide unpredictable results as many arbitrators are not familiar with ERISA and we have seen contradictory decisions for similar claims). Companies interested in adding arbitration provisions to their ERISA documents or amending existing provisions should work with their counsel to carefully draft and fully understand what such provisions may cover. This careful drafting is crucial to ensure the provisions are comprehensive and effective, and to protect the Company’s interests.
Note, the findings in Cedeno and Parker look at individual arbitration to resolve breach of fiduciary claims under ERISA. Therefore, they are not directly applicable to equity plans, nonqualified deferred compensation programs that are not covered by ERISA and “top hat” plans which are exempt from ERISA’s fiduciary provisions. However, top hat plans are subject to ERISA’s enforcement provisions so to the extent the arbitration provision in a top hat plan impacts the ability of a participant to bring a claim on behalf of a class, the effective vindication doctrine may still apply.
