An attorney defending a mandatory arbitration clause in an ERISA plan document on Tuesday fielded tough questions from a panel of Seventh Circuit judges, which wanted to square statutory language authorizing plan-wide relief with a plan term requiring individual arbitration of claims alleging fiduciary mismanagement.
The judges’ questions highlighted tensions between the Employee Retirement Income Security Act—which authorizes retirement plan participants to file lawsuits seeking relief that benefits the entire plan—and a provision in the Triad Manufacturing Inc. employee stock ownership plan requiring these disputes to be resolved through binding arbitration.
The case asks the judges to consider a 2020 ruling allowing a dispute over Triad’s employee stock ownership plan to proceed in court, despite the defendants’ attempt to enforce a mandatory arbitration clause added to the plan in 2018. The Triad defendants appealed, arguing that federal law favors arbitration and that an ERISA plan’s arbitration requirement constitutes consent to arbitrate on behalf of the plan’s participants. They received support from the American Benefits Council, while the AARP and public interest advocacy group Public Justice PC filed briefs criticizing these clauses.
Benjamin P. Fryer, a partner in Ford & Harrison LLP’s Charlotte, N.C., office, argued in favor of the arbitration provision, saying it didn’t limit the relief available to plan participants under ERISA. All of the remedies authorized by the statute—even those that could benefit the plan as a whole, like removal of breaching fiduciaries—can be obtained through individual arbitration, Fryer told the judges.
Peter K. Stris, a founding partner of Stris & Maher LLP in Los Angeles, disagreed, calling the Triad plan’s arbitration clause a “textbook prospective waiver of statutory rights.” The law is clear that ERISA plan participants can sue over plan mismanagement and seek relief on behalf of the entire plan, he said.
The Seventh Circuit panel—composed of Judges Michael S. Kanne, Michael B. Brennan, and Michael Y. Scudder Jr.—directed most of its questioning toward Fryer, suggesting that a simple ruling enforcing the Triad plan’s arbitration clause was unlikely.
Law in Flux
Arbitration is an alternative to litigation that employers sometimes prefer because of its confidentiality and ability to control costs. Arbitration agreements typically include class action waivers, which bar employees from participating in class actions against their employers.
Amid a big spike in class suits challenging 401(k) plan fees, several employers have pointed to arbitration clauses in employment agreements or plan documents in an effort to cut off class litigation challenging their retirement plans under ERISA. Federal courts haven’t reached a consensus on whether this is permissible.
In 2019, the Ninth Circuit allowed Charles Schwab Corp. to force arbitration in a proposed class action challenging its 401(k) plan fees based on an arbitration provision and class action waiver added to the plan in 2014. But earlier this month, the Second Circuit declined to interpret an arbitration agreement in DST Systems Inc.’s employee handbook as blocking a DST employee from bringing a class suit challenging his 401(k) plan’s investment options.
A move toward greater use and acceptance of arbitration clauses as a method for cutting off class litigation over retirement plan management could be bad news for workers’ retirement security.
“If participants lose the right to bring these claims on behalf of their plans, that could have a tremendous and negative impact on retirement savings in America,” James Bloom, an attorney with Schneider Wallace Cottrell Konecky LLP in Emeryville, Calif., told Bloomberg Law.
“The Department of Labor depends on individual plan participants to enforce fiduciary duties and make sure plans are being managed appropriately,” Bloom said. “If the class device is no longer available, and if the fiduciaries can force participants into individual litigation, it would really be detrimental to that statutory scheme and put a lot more burden on the Department of Labor to enforce these rights.”
As the appeals courts continue to grapple with these questions, one place to watch is Congress, which may be poised to address arbitration agreements in employment contracts, said René E. Thorne, a principal with Jackson Lewis PC in New Orleans and co-leader of the firm’s ERISA Complex Litigation group.
“For me, the real issue now appears to be whether Congress will legislate a change,” Thorne told Bloomberg Law. “A number of bills are pending that seek to limit or prohibit arbitration agreements in the employment context.”
“Democratic control of the House, and past indications that there may be some bi-partisan support in the Senate for such a bill means that one of these bills could be passed this year,” she said.
The case is Smith v. Bd. of Dirs. of Triad Mfg., Inc., 7th Cir., No. 20-2708, argued 3/30/21.