Can ERISA plan participants be denied their day in court? Title 1 of ERISA allows participants to sue fiduciaries who breach their fiduciary duties. The permissible venues, the statutes of limitations for claims and available remedies to apply in “civil actions” are set out. However, courts have increasingly held that plan sponsors may impose contractual restrictions of the exercise of those ERISA rights. The Supreme Court has held that plans may contractually shorten the period participants have to raise claims, and provisions requiring participants to bring suit in a particular place-such as where the plan is administered- have been upheld.
Mandatory arbitration of fiduciary breach claims is the latest and most significant battleground. ERISA is silent on arbitration, but the Federal Arbitration Act encourages arbitration of disputes. Two relatively recent Supreme Court decisions upheld arbitration clauses in the employment context, although the Supreme Court has not specifically addressed the permissibility of mandatory arbitration under ERISA. In the meantime, federal courts are grappling with these issues in inconsistent decisions.
The Supreme Court Decisions.
In its Epic Systems decision, (138 S. Ct. 1612) the Supreme Court ruled over dissent that employers could require that employment claims be arbitrated. Many fiduciaries, including some who had been using mandatory arbitration clauses, viewed this as supporting their position. In its Lamps Plus v. Varela decision (139 S. Ct. 1407) following Epic Systems, the Supreme Court even held, also over dissent, that employees could be required to give up their right to class arbitration actions, even when agreement language was ambiguous, meaning that even similar claims could be required to be arbitrated on a participant-by-participant basis.
Appeals Courts Issue Inconsistent Rulings.
The Ninth Circuit Court of Appeals initially issued a decision involving USC to the effect that fiduciary breach claims were claims of the plan and could not be subject to mandatory arbitration under an employment agreement. Then in the Dorman case, 934 F. 3d 1107 (9th Cir. 2019), the same court addressed the issue again in reviewing enforceability of a specific plan provision requiring arbitration of disputes. In Dorman, the Ninth Circuit concluded that the plan had consented to arbitration in the plan provision and required arbitration.
The Second Circuit recently reached a different result and issued its own decision holding that an ordinary agreement to arbitrate employment claims did not cover ERISA fiduciary breach claims. Cooper v. Ruane, Cunniff & Goldfarb Inc., No. 17-2805, March 4, 2021. The court did not consider fiduciary breach claims to be “related to employment” because parties who had never been employed by the sponsor, such as beneficiaries and the Department of Labor, could bring the same claims. Certain ERISA claims for “ERISA related benefits” were specifically excluded under the arbitration agreement. However, the court did not find that language to cover the fiduciary breach claims, even though the suit involved a 401(k) plan where plan investment return was directly reflected in account balances. There is no mention of a plan provision such as the provision cited in Dorman. An unusual wrinkle in this case is that the person seeking to compel arbitration was an investment adviser who was not even a party to the arbitration agreement. The lower court had permitted the adviser to rely on the agreement.
It is interesting to consider whether this court would reach the same result if presented with an agreement that explicitly required arbitration of fiduciary breach claims or a plan provision and communications stating that fiduciary breach claims were required to be arbitrated. Several statements in the decision suggest that the court might still find such provisions problematic. For example, the court refers more than once to the “protective purpose of ERISA” and expresses concern about a potential “tension with case law” if arbitration were to go forward.
Another case involving mandatory arbitration, Smith v. Bd. Of Dirs. Of Triad Mfg. Inc., No. 20-2708, is currently before the Seventh Circuit Court of Appeals, which just heard arguments. This case involves a plan arbitration provision that had been in the plan since 2018. Defendants argued that the plan document provision constitutes consent to arbitration and that the remedies under ERISA were not reduced in arbitration because an arbitrator can remove a trustee or order other nonmonetary remedies provided in ERISA. Some skepticism was expressed in oral argument, and it will be interesting to see how this court analyzes the issues.
Protecting Participants v. Reining in Litigation.
It is doubtful whether the drafters of ERISA foresaw this challenge to their provisions allowing participants to sue in federal court to enforce ERISA, or a world where arbitrators, rather than courts, could be interpreting significant provisions of ERISA in decisions that cannot be appealed absent rare circumstances such as fraud. Although the Federal Arbitration Act was enacted before ERISA, the Conference Report does not discuss arbitration. In addition, some of the remedies permitted in participant lawsuits, such as removal of breaching trustees and injunctions forbidding future action are not well-suited to arbitration even if available there as argued by Triad’s attorneys.
Plan fiduciaries may have to deal with conflicting interpretations of the same provisions in different arbitrations, without the possibility of Supreme Court resolution of the conflicts, which could greatly complicate plan administration and operations. In addition, as the Supreme Court dissenters pointed out, arbitration is intended to be a dispute resolution alternative agreed to by parties with equal bargaining power. Situations in which participants may lose their jobs if they do not agree to arbitrate ERISA and other disputes seem far removed from the classic arbitration scenario. And how would a plan participant refuse to consent to a plan arbitration clause?
On the other hand, mandatory arbitration and class action waivers could serve to rein in the ERISA lawsuits currently flooding the courts. While some of these lawsuits have targeted questionable practices, many excessive fee lawsuits seem to have been filed through cookie cutter complaints that contain little more than conclusory allegations that the fiduciaries should have selected different investments than they did. These lawsuits tie up fiduciaries’ and judges’ time, and may discourage competent people from serving on plan committees. Plaintiffs’ counsel have received generous fee awards in ERISA class actions, and the prospect of handling individual arbitrations may make these cases less financially attractive to them.
A Blueprint for Plan Sponsors That Want to Arbitrate.
While arbitration is not always preferable to litigation due to the limited appeal rights, and can often be more expensive and time consuming than plan sponsors might assume, plan sponsors seeking the best chance of enforcing mandatory arbitration of ERISA fiduciary breach claims should consider the following steps:
· Require all employees to sign an arbitration agreement that specifically refers to ERISA fiduciary breach claims and contains a clear class action waiver.
· Adopt a plan provision requiring individual arbitration of disputes.
· Include a provision in the Summary Plan Description stating that all fiduciary breach claims must be arbitrated on an individual basis.
· Reference the arbitration clause in communications regarding the dispute, including and decisions on claims and appeals of claim denials that are filed.
This is a developing area of the law and these cases will likely not be the last word on mandatory arbitration of fiduciary breach claims. The Supreme Court is likely to weigh in on these issues to resolve conflicting appellate decisions.