Arbitration of ERISA claims may appear to be old news, or a foregone conclusion. But the intersection of ERISA and the Federal Arbitration Act (FAA) raises novel legal questions, at least some of which are likely to present themselves in otherwise routine cases. This article introduces some background principles governing arbitration of statutory claims and identifies two potential challenges to mandatory arbitration of ERISA claims.
The FAA mandates the enforcement of arbitration agreements. Section 2 of the FAA provides that a written provision to arbitrate a dispute “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. The FAA applies only to arbitration agreements that bear a connection to interstate commerce, see § 2 (applying to “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce”); § 1 (defining “maritime transactions” and “commerce”), and it does not apply to “contracts of employment of transportation workers.” Cir. City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001); 9 U.S.C. § 1 (providing that “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”).
The FAA “provides two parallel devices for enforcing an arbitration agreement: a stay of litigation in any case raising a dispute referable to arbitration, 9 U.S.C. § 3, and an affirmative order to engage in arbitration, § 4.” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22 (1983); 9 U.S.C. § 3 (authorizing stay “in any of the courts of the United States”); § 4 (authorizing petition to compel arbitration in “United States district court”).
It is now clear that agreements to arbitrate statutory claims stand on more or less the same footing as agreements to arbitrate non-statutory claims. E.g., CompuCredit Corp. v. Greenwood, 565 U.S. 95, 98 (2012) (Arbitration agreements must be enforced “even when the claims at issue are federal statutory claims . . . .”); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 473 U.S. 614, 627 (1985) (The FAA “provides no basis for disfavoring agreements to arbitrate statutory claims by skewing the otherwise hospitable inquiry into arbitrability.”) However, if Congress intended to preclude parties from agreeing to arbitrate a statutory claim, then that determination will, of course, override the FAA. E.g., CompuCredit Corp., 565 U.S. at 98 (Arbitration agreements must be enforced “even when the claims at issue are federal statutory claims, unless the FAA’s mandate has been overridden by a contrary congressional command.”). More importantly for ERISA practitioners, a litigant must be able to effectively vindicate her statutory rights in an arbitral forum. Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 235-236 (2013) (discussing “the ‘effective vindication’ exception, which permits a court “to invalidate, on ‘public policy’ grounds, arbitration agreements that ‘operat [e] ... as a prospective waiver of a party's right to pursue statutory remedies.’”)’ Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 and n. 19 (1985) (“And so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.”).
As long as these two threshold hurdles have been cleared, mandatory arbitration of statutory claims is analyzed in much the same way as mandatory arbitration of any other claim: The party seeking arbitration must demonstrate the existence of a written agreement to arbitrate, which applies to the dispute and also binds the party against whom arbitration is sought. If a written agreement to arbitrate a particular dispute does not exist or does not bind the party against whom arbitration is sought, then arbitration can’t be required. And if the agreement is subject to a “generally applicable contract defense, such as fraud, duress, or unconscionability”—one that doesn’t “target arbitration either by name or by more subtle methods,” then a party cannot be obligated to arbitrate. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1622 (2018) [citing and quoting Kindred Nursing Centers L.P. v. Clark, 137 S. Ct. 1421, 1426 (2017) and AT & T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)].
These background principles map onto ERISA in a manner that is more interesting than one might initially think. This article discusses only the potential threshold challenges and will save analysis of the additional issues for a later time.
- Even though ERISA was enacted after the FAA and expressly does not displace it (or any other federal law, see 29 U.S.C. § 1144(d), Congress almost certainly intended ERISA claims to be decided in court, rather than in an arbitral forum. There is thus a credible argument that arbitration is inconsistent with ERISA. But the following suggests how such an argument is likely to fare at the Supreme Court:
In many cases over many years, this Court has heard and rejected efforts to conjure conflicts between the Arbitration Act and other federal statutes. In fact, this Court has rejected every such effort to date (save one temporary exception since overruled), with statutes ranging from the Sherman and Clayton Acts to the Age Discrimination in Employment Act, the Credit Repair Organizations Act, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Racketeer Influenced and Corrupt Organizations Act.
Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1627 (2018). It is therefore unsurprising that no federal appellate court has accepted this kind of general threshold challenge to arbitration of ERISA claims.
- The “effective vindication exception” may offer a more viable threshold challenge, depending on the contours of the arbitration agreement and the ERISA remedies sought by the would-be litigant. A particular litigant cannot be compelled to arbitrate unless she is permitted to effectively vindicate her statutory rights, and if the arbitration agreement includes a “prospective waiver of a party’s right to pursue statutory remedies,” then it will be unenforceable. Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 235-236 (2013) (citing and quoting footnote 19 of Mitsubishi Motors, where the Court stated: “We merely note that in the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.”). The Supreme Court has not invalidated an arbitration agreement on the basis of the effective vindication exception, but it has said that the exception “would certainly cover a provision in an arbitration agreement forbidding the assertion of certain statutory rights. And it would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable.” Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 236 (2013).
Federal courts of appeals have invalidated arbitration agreements on the basis of the effective vindication exception in other contexts. No appellate court has yet applied the effective vindication exception to invalidate an arbitration clause in an ERISA case, but the issue is pending before the Seventh Circuit. The Ninth Circuit has arguably rejected it, and the Second Circuit might be receptive to it in the future.
Seventh Circuit. The Northern District of Illinois in Smith v. GreatBanc Trust Company, et al. denied a motion to compel ERISA claims on, inter alia, the basis of the effective indication exception. Smith v. Greatbanc Tr. Co., No. 20 C 2350, 2020 WL 4926560 (N.D. Ill. Aug. 21, 2020). The arbitration provision in that case required arbitration of ERISA claims “in the [beneficiary’s] individual capacity and not in a representative capacity or on a class, collective, or group basis,” and it prohibited “any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary [(“Participant”]) other than the Claimant.” Smith v. Greatbanc Tr. Co., No. 20 C 2350, 2020 WL 4926560, at *2 (N.D. Ill. Aug. 21, 2020). The district court “assume[d] arguendo that ERISA claims are generally arbitrable,” id., but agreed with plaintiff that this arbitration clause “eliminate[d] his right to pursue plan-wide statutory remedies that are expressly granted under ERISA § 502(a)(2).”Id. at *4. The district court’s denial of the motion to compel arbitration was appealed to the Seventh Circuit, and it was argued on March 30, 2021. If the Seventh Circuit agrees with the district court that the mandatory arbitration provision improperly eliminates (a)(2) remedies, then it can invalidate the provision on that basis alone. If it disagrees, then it must address the district court’s other reasons for denying the motion to compel arbitration.
Ninth Circuit. In Dorman v. Charles Schwab Corporation, 780 F. App'x 510 (9th Cir. 2019), the Ninth Circuit ordered individualized arbitration of a lawsuit asserting (a)(2) claims, and stated that “[a]lthough § 502(a)(2) claims seek relief on behalf of a plan, the Supreme Court [in Larue v. DeWolff, Boberg & Associates, 552 U.S. 248 (2000)] has recognized that such claims are inherently individualized when brought in the context of a defined contribution plan . . . .” Dorman v. Charles Schwab Corp., 780 F. App'x 510, 514 (9th Cir. 2019). The arbitration clause in Dorman was not identical to the arbitration clause in Smith, and the Ninth Circuit did not cite Mitsubishi Motors, but the unpublished opinion arguably reflects a rejection of the applicability of the effective vindication exception, and subsequent Ninth Circuit panels may take the same approach.
Second Circuit. In Cooper v. Ruane Cunniff & Goldfarb Inc., 990 F.3d 173 (2d Cir. 2021), the Second Circuit held that mandatory arbitration was inappropriate. The court did not invalidate the arbitration agreement on the basis of the effective vindication exception, but the court did express concern that individualized arbitration was inconsistent with the “representative nature of the section 502(a)(2) right of action.” Id. at 184. The opinion might make it difficult for a future panel to reject application of the effective vindication exception; it will depend on the particular language of the arbitration provision and the ERISA remedies sought by the would-be litigant.