DOL opposes arbitration in ERISA case

A lawsuit criticizing a private company's employee stock ownership plan has turned into a policy dispute about arbitration clauses in ERISA plans, pitting the U.S. Department of Labor against prominent retirement industry trade organizations.

In its first-ever amicus brief about arbitration clauses in an ERISA plan, the Labor Department supports a plaintiff suing his employer and fiduciaries over the value of an ESOP. The defendants argue that the complaint should be addressed by arbitration rather than in the courts.

The DOL "is not here contending that ERISA claims are categorically non-arbitrable," said the amicus brief filed June 10 in Cedeno vs. Argent Trust Co. et al., which is now before the 2nd U.S. Circuit Court of Appeals in New York. However, "a participant cannot be compelled to arbitrate if they are deprived of the full range of ERISA remedies that would be available had they brought the same claim in federal court," the document said.

The Labor Department noted that Mr. Cedeno alleged fiduciary breaches "that caused losses to the plan extending beyond his own account," which, the DOL wrote, means "'appropriate' relief to remedy those breaches could also extend accordingly."

But the "remedy provision" in the arbitration clause "categorically precludes any participant from seeking recovery for the plan beyond that which would inure to the participant's individual account," the Labor Department wrote, adding that this clause "cut off" an arbitrator's ability to consider the "full range of relief" depending on the context of the fiduciary breach claim.

The DOL declined to comment beyond its amicus brief.

"This has moved toward a bigger policy issue," said Chantel Sheaks, vice president of retirement policy for the U.S. Chamber of Commerce, Washington. "It's a broader issue" than an ESOP lawsuit.

The Chamber filed an amicus brief March 11 supporting the defendants. It asked the appeals court to overturn a November 2021 New York U.S. District Court ruling that the arbitration clause was unenforceable because it failed to protect participants' rights under ERISA. "If the decision is allowed to stand, plaintiffs and their lawyers will be emboldened to pursue wasteful and unnecessary class action litigation," the Chamber's amicus brief said.

Arbitration clauses in ERISA plans "are getting increased public policy attention," said Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council in Washington. The legal debate over arbitration clauses "has been simmering for some time," Ms. Dudley said.

The American Benefits Council also filed a March 11 amicus brief jointly with the ESOP Association, Washington, supporting the defendants. "Individualized arbitration strikes an appropriate balance between protecting benefits and encouraging growth of employer-sponsored benefit plans," the amicus brief said. "This court should reverse the District Court and uphold the arbitration provision."

The wording of an arbitration clause was the primary issue in the case in question. Ramon Cedeno, a participant in an ESOP run by Strategic Financial Solutions LLC, New York, sued Argent Trust Co., Atlanta, and other fiduciary defendants in November 2020, alleging they had violated ERISA by purchasing ESOP shares at more than fair-market value and impairing participants' investments. Mr. Cedeno sought class-action status.

The defendants responded that the Strategic Financial Solutions' plan document contains an arbitration clause that governed Mr. Cedeno's individual complaint.

"The defendants argue that a participant in a defined contribution plan does not have the statutory right to seek plan-wide relief and is limited to relief for that participant's individual account," wrote U.S. District Judge John G. Koeltl in New York on Nov. 2, rejecting the defendants' request that the allegations be heard by an arbitrator. "That argument is contrary to the text of ERISA as well as to well-established precedent."

The arbitration clause precluded participants "from seeking relief for the plan as a whole, a form of relief that is otherwise provided for by ERISA," Mr. Koeltl wrote. "The plaintiff has the right under (ERISA) to recover for the plan as a whole. That right is not waivable."

The defendants subsequently appealed to the 2nd U.S. Circuit Court of Appeals.

"In this case, the district court correctly held that arbitration agreements cannot prospectively waive participants' right to pursue ERISA's statutory remedies, including plan-wide relief," the DOL amicus brief said. "The Secretary (of Labor) has a substantial interest in ensuring that participants are not forced to arbitrate under agreements that prohibit the plan-wide remedies that ERISA provides."

Arbitration clauses in ERISA plans have been used by sponsors hoping to reduce the risk of lawsuits, usually related to allegations of excessive fees, poor investment choices and other alleged abuses cited by plaintiffs' lawyers. Arbitration clauses have occasionally been part of other ESOP lawsuits, too.

Rulings in different judicial jurisdictions — at the District Court and appeals court levels — have been inconsistent in determining whether an arbitration clause adequately protects participants' ERISA rights.

No court has ruled that ERISA prohibits arbitration. Until or if that happens, Ms. Sheaks said she doubts the Supreme Court would agree to address a so-called circuit split in which there is clear disagreement among appeals courts. "It's not quite a conflict," Ms. Sheaks said, adding that the various court rulings reflect "fact-driven" differences about whether arbitration clauses are properly written.

Supporters of arbitration clauses say sponsors are using this strategy to counteract a proliferation of ERISA lawsuits. "They weren't doing it just because they wanted arbitration," Ms. Sheaks said, adding that some sponsors that belong to the Chamber have been sued more than once by different plaintiffs.

"I would tell the DOL to step very carefully because they could undermine the very mission that EBSA is supposed to be performing," Ms. Dudley said, referring to the Employee Benefits Security Administration. "ERISA was put in to stabilize the (retirement) system."

Ms. Dudley and Ms. Sheaks added that inconsistent court rulings aren't the retirement industry's only concern about arbitration clauses and ERISA. They point to legislation introduced in the Senate by Sen. Tina Smith, D-Minn., and in the House of Representatives by Rep. Mark DeSaulnier, D-Calif., that would declare arbitration clauses unenforceable in retirement and other benefits plans covered by ERISA.

The legislation would "limit recovery amounts, increase the costs of claims for benefits, and increase the time for courts to resolve claims for benefits," the Chamber of Commerce wrote in a May 18 letter to members of the House Education and Labor Committee.

"The bill will increase costs for small businesses to operate a retirement plan and will lead to more frivolous lawsuits against plan sponsors," said a May 17 letter from the American Retirement Association to the committee's top Democratic and top Republican members.