Mandatory arbitration has the potential to rein in ERISA class actions, including lawsuits challenging plan investments and fees. The Federal Arbitration Act (FAA), which is older than ERISA, was enacted to encourage arbitration of disputes as a matter of federal policy. The U.S. Supreme Court’s decisions in two recent cases broadly supporting mandatory arbitration of employment claims under the FAA have encouraged plan sponsors to attempt to ward off ERISA class actions by adopting mandatory arbitration policies and requiring class action waivers.
The Supreme Court has never specifically ruled on arbitrability of ERISA claims, but no federal appeals court has held that ERISA claims are not generally arbitrable. Further, in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), the Supreme Court determined that overriding the FAA’s general mandate to enforce arbitration agreements requires a showing of Congressional intent. That intent can’t be shown, as ERISA and its legislative history are silent on arbitration. The FAA may also be overridden when arbitration would prevent the effective vindication of statutory rights, but that provision is infrequently invoked.
Due to lack of Supreme Court guidance on these issues, it is still not clear the extent to which particular arbitration provisions may apply to ERISA fiduciary breach claims. However, several Circuit Courts of Appeal have now weighed in and a bill called the Employee and Retiree Access to Justice Act has been introduced in the House and Senate (H.R. 7740 and S. 4219) with the express purpose of making predispute and nonconsensual post-dispute arbitration clauses unenforceable.
What is a plan sponsor favoring arbitration to do?
Look to the Reasoning in the Recent Cases.
If the plan sponsor has made a decision to attempt to enforce mandatory arbitration now, a review of the different standards applied in recent cases provides some guidance about how to increase the likelihood that a mandatory arbitration policy will be upheld. Here are some takeaways—
Avoid Relying Solely on Employment Agreements.
Although courts have been inconsistent in their approaches to mandatory arbitration provisions and class action waivers, there appears to be an emerging view that mandatory arbitration provisions in employment agreements cannot be relied upon to cover ERISA claims. For example, the Second Circuit, in Cooper v. Ruane, Cuniff & Goldfarb, Inc., 990 F. 3d 173 (2d Cir. 2021) found that general language requiring arbitration of employment-related claims did not include ERISA claims. Most recently, the Sixth Circuit in Hawkins v. Cintas Corp., No. 21-2156, 2022 WL 123694, refused to compel arbitration based on an employment agreement since it didn’t evidence the plan’s consent to arbitration.
Add Specific Plan Provisions.
Beginning with the Ninth Circuit’s 2019 decision in Dorman v. Charles Schwab, 934 F. 3d 1107, courts have generally looked at fiduciary breach claims as claims asserted on behalf of the plan, and many have required evidence that the plan has agreed to arbitration. The safest course for plan sponsors who want to compel arbitration and enforce class action waivers is to put a specific provision into the plan document. It would also be advisable to describe it in the plan’s summary plan description and claims and appeal denial letters in order to satisfy any notice requirement a court might impose.
Draft Plan Provisions Carefully.
Precise drafting is also important. In the Seventh Circuit’s Smith v. Greatbanc Trust Company decision, 13 F. 4th 613, the court refused to enforce any part of a very expansive plan provision providing that any relief would be available only to an individual participant’s account. The reason was that the provision lacked the typical severability clause and actually stated that the entire provision was invalid if any part was unenforceable. Fail safe provisions such as backup rules if certain provisions are unenforceable may also be helpful. In that decision, the court also became one of the few courts to apply the “effective vindication” exception to the FAA, applying it to rights to relief under ERISA Section 502(a)(2), which permits participants to sue for damages on behalf of the plan.
More Open Questions.
Among other issues to be resolved are whether an arbitration provision can apply to a participant who terminated employment before it was adopted, whether and how an arbitrator must be able to award plan-wide and equitable relief, and whether arbitrators can be directed to decide whether a dispute is arbitrable to avoid sending that issue to a judge.
Will Congress or the Supreme Court Change the Playing Field?
Most observers think that S. 4219 has little chance of passing in the Senate, even if the House signs off on its version. However, if that law were passed, it would appear that the Supreme Court’s requirement of a showing of Congressional intent to override the FAA would be satisfied. However, the legal uncertainty would not be completely resolved because the bills as introduced would amend only ERISA and not the FAA. ERISA does not preempt other federal law.
While it is risky to predict where the Supreme Court will come out on any given issue, the Supreme Court has seemed receptive to even restrictive arbitration agreements that provide that employees will be fired if they don’t sign. The Court has also upheld another restriction on a participant’s right to sue under Part 5 of Title 1 of ERISA, a contractually shortened limitations period. Those decisions came down before the Court had its current conservative majority. The new majority might be even more receptive to ERISA arbitration clauses, particularly if they are well-drafted and clearly communicated to plan participants.