Federal courts' rulings differ on how to treat an ERISA arbitration

It should comes as no surprise that defined contribution plan officials are skittish about inserting arbitration clauses in defined contribution plans when they read headlines like "courts grapple with competing considerations" and "courts continue to be split over enforceability of benefit plan arbitration provisions."

The headlines come from ERISA attorneys' reports commenting on various rulings covering arbitration-clause defenses in fiduciary breach cases.

Absent U.S. Supreme Court guidance, ERISA attorneys say sponsors that want to add arbitration clauses must pay close attention to the wording of such clauses as well as the jurisdictions where such clauses seem most acceptable.

The 9th Circuit Court of Appeals, San Francisco, has issued two rulings that established a framework for lawyers — representing plaintiffs and defendants — to assess how arbitration agreements might stand up in court. Ninth Circuit decisions only apply to the nine states in its jurisdiction, but the rulings enabled lawyers and other judges to study the judges' reasoning.

In July 2018, the appeals court ruled that the University of Southern California couldn't compel arbitration for nine former and current employees who had alleged ERISA violations by two university 403(b) plans.

The appeals court judges, who supported an earlier U.S. District Court decision, said the arbitration clauses in the participants' individual employment agreements didn't extend to their ERISA complaints in the case of Munro et al. vs. University of Southern California et al. USC petitioned the Supreme Court, which declined to review the case in February 2019.

By contrast, the 9th Circuit judges ruled in August 2019 that Charles Schwab Corp. could compel arbitration in a fiduciary breach lawsuit filed by a former employee against the company and its 401(k) plan fiduciaries. The judges ruled that arbitration was enforceable because the arbitration clause had been written into the plan, affecting all participants.

In the case of Dorman et al. vs. The Charles Schwab Corp. et al., the appeals court not only reversed a decision by a Los Angeles federal district court but also overturned its own 1984 decision rejecting an effort by a company to compel arbitration. The judges also cited a 2013 U.S. Supreme Court decision in a non-ERISA case, noting that the justices said arbitrators are "competent to interpret and apply federal statutes."

However, inserting an arbitration clause within a plan isn't a guarantee of a pro-sponsor ruling if the clause isn't written to a court's satisfaction that participants' ERISA rights are protected. That was the theme of the ruling by the 7th Circuit Court of Appeals, Chicago, in September 2021 in the case of Smith vs. Board of Directors of Triad Manufacturing Inc. et al., in which a former employee accused the company and fiduciaries of violating ERISA in the management of an employee stock ownership plan.

Although Triad had an arbitration clause as part of the employee stock ownership plan, the appeals court ruled that it "prohibits relief that ERISA expressly permits." The judges rejected the company's appeal of a federal district court ruling that the dispute be settled by arbitration or dismissed.

"The problem with the plan's arbitration provision is its prohibition on certain planwide remedies – not planwide representation," the judges wrote.

"Joining every other circuit to consider the issue, we recognize that ERISA claims are generally arbitrable," they added. "The pivotal question here is whether this ERISA arbitration provision is enforceable. We conclude the answer is no."

However, when Florida plaintiffs used the 7th Circuit decision to oppose arbitration in an ERISA complaint, a U.S. District Court judge in Miami supported the sponsor.

In January 2022, U.S. District Judge Robert N. Scola Jr. said the sponsor could compel arbitration in an ERISA complaint filed by former participants in a 403(b) plan in the case of Lawanda Holmes et al. vs. Baptist Health South Florida Inc. et al.

Baptist Health added an arbitration clause in 2020. Plaintiffs argued that the clause was unenforceable because the alleged ERISA violations began in 2015, adding that they never agreed to the provision.

Mr. Scola wrote that the 7th Circuit's ruling was based on an arbitration clause that "completely denied some types of statute-authorized relief to the plan, the clause here does not."

The judge pointed out that Baptist Health's addition of an arbitration clause meant the plan fiduciaries agreed to arbitration on behalf of all current and former participants and that Ms. Holmes' participation in the plan meant consent. Individual consent and lack of notice wasn't necessary.

However, a participant's consent to arbitration was necessary in a September 2021 ERISA lawsuit when a U.S. District Court Judge in Wilmington, Del rejected a motion to dismiss a complaint involving a company's employee stock ownership plan.

"The facts at this stage of proceedings plausibly support (the plaintiff's) assertion that he did not have notice and therefore did not have the necessary intent to manifest assent," U.S. District Court Maryellen Noreika wrote in the case of Henry vs. Wilmington Trust NA et al.

The plaintiff is a former employee of BSC Ventures Holdings Inc., Roanoke, Va., who sued Wilmington Trust for allegedly violating ERISA through its buying of ESOP shares at above market value. The defendants sought to dismiss the lawsuit based on arbitration agreements added in 2017 and 2019 to the ESOP. They argued that the plaintiff consented to arbitration by remaining in the plan after the arbitration provision was added.

The plaintiff said he was never asked to sign an agreement with his employer "or anyone else regarding the arbitration clause," wrote the judge, adding that the plaintiff said he didn't learn about the arbitration clause until after he filed his ERISA complaint.