Since the U.S. Supreme Court issued two decisions upholding mandatory arbitration of employment disputes, plan sponsors have been considering the use of mandatory arbitration to avoid 401(k) and 403(b) plan fiduciary breach lawsuits and class actions. However, the Supreme Court has never ruled on the permissibility of mandatory arbitration under ERISA, and ERISA itself doesn’t mention arbitration.
In the absence of Supreme Court guidance, federal courts dealing with motions to compel arbitration of these disputes have issued inconsistent decisions on the requirements to force arbitration of ERISA fiduciary breach claims and class action waivers. A decision just issued by a federal district court judge in Florida has upheld a plan’s mandatory arbitration policy and highlights the importance of adding plan language setting out a plan’s mandatory arbitration policy in a plan amendment. . (Civil Action No. 21-22986, 1/20/2022)
The Facts.
Baptist Health South Florida sponsors a 403(b) plan. Plaintiffs sought to pursue class action litigation challenging plan investments and fees during the period beginning February 3, 2015. In 2020, the plan was amended to include an arbitration policy providing that “any claim …which arises out of, relates to, or concerns the plan…shall be resolved exclusively by binding arbitration.” The provision also prohibited arbitrations brought on a representative or class basis, and remedial or equitable relief that provides additional benefits or monetary relief to anyone other than the claimant. The court ruled on Baptist Health’s motion to send the dispute to arbitration.
Legal Arguments.
Does the amendment prevent the vindication of federal statutory rights? The court looked to the Federal Arbitration Act (FAA) to determine enforceability of the Plan provision. Under the FAA, which was enacted to encourage arbitration, an arbitration agreement is generally valid if there is a written agreement that is enforceable and the claims come within the scope of the agreement. However, a narrow and rare exception applies if the agreement would prevent the vindication of a federal statutory right, and plaintiffs argued the exception applied here because the clause precluded equitable relief and plan-wide relief permitted under ERISA. Plaintiffs said the only way to obtain that relief was through class actions.
The Seventh Circuit Court of Appeals had relied on that analysis to invalidate a poorly drafted arbitration clause that prohibited plan-wide relief-such as removal and replacement of a breaching trustee- and had no severability provision- in Smith v. Greatbanc Trust Co. Judge Scola distinguished the current situation as involving a narrower prohibition than the one in Smith. He interpreted the Baptist Health language as prohibiting only plan-wide monetary relief, so that relief such as replacement of a trustee was not precluded. He also stressed that the 11th Circuit and the Supreme Court have not applied the effective vindication theory to invalidate an arbitration clause.
Is participant consent required?
Plaintiffs also contended that a unilateral amendment by the plan sponsor was impermissible because they hadn’t consented to it. However, citing the Ninth Circuit decision in Dorman v. Charles Schwab Corp., 780 F. App’x 510 (2019), the court found that it was the plan’s consent, not that of the participants, that was needed because fiduciary breach actions belong to the plan and are brought in a representative capacity on behalf of the plan as a whole. The Baptist Health plan provided for unilateral amendment by the plan sponsor and, as in Dorman, the plan provision was treated as the plan’s consent to arbitration. The court further rejected the argument that the plan amendment could bind only those who participated in the plan while the amendment was in effect. The amendment could even bind those who terminated employment and were cashed out from the plan before the amendment was adopted. The fact that the amendment was in effect for only part of the class period was not addressed.
Open Issues Regarding Arbitration.
Until the Supreme Court agrees to hear a case on mandatory arbitration of fiduciary breach claims and the enforceability of class action waivers under ERISA, the law will remain unsettled in this area. In addition to the cases discussed here, the Second Circuit Court of Appeals has questioned whether arbitration can deny a participant representative relief. In addition to the question of plan-wide relief, it remains unclear whether the issue of arbitrability can be assigned to an arbitrator, whether other circuits will require participant consent, whether the arbitration policy must be effectively communicated to the plan participants, and whether contract law principles such as whether there was consideration for the arbitration agreement are relevant.
What Is a Plan Sponsor to Do?
Some plan sponsors interested in requiring arbitration of ERISA claims may choose to wait until the law is clarified. However, unless a written arbitration policy has been adopted, there will not be a basis for attempting to compel arbitration of fiduciary breach and other ERISA claims. Plan sponsors looking to compel arbitration and to maximize the chances that their arbitration policies will be upheld should adopt plan amendments to evidence the plan’s consent to arbitration. In drafting these amendments, it is advisable to:
Provide that the provisions are severable
Provide that the issue of whether claims are arbitrable shall be decided by an arbitrator
Specifically reference class action waivers; and
Consider fallback clauses if plan-wide relief cannot be prohibited.
It is also a good idea to communicate the plan’s arbitration policy to participants in the plan’s summary plan description booklet (SPD) soon after an amendment is adopted. Those ruling on claims and appeals should also refer to the mandatory arbitration policy in the plan’s claims and appeal denial letters.