Federal District Courts Disagree on Compelling Individual Arbitration of ERISA Class Action

In recent years, it has become more common for ERISA-governed benefit plans to include arbitration and class action-waiver provisions in their plan documents. Perhaps unsurprisingly, these provisions have engendered litigation, with plan participants and beneficiaries challenging plan fiduciaries’ ability to enforce these terms, which require the participants and beneficiaries to arbitrate their claims individually.

Federal courts have not responded uniformly to these challenges. For example, in Dorman v. Charles Schwab Corp., 780 F. App’x 510, 513 (9th Cir. 2019), the Ninth Circuit Court of Appeals upheld the enforceability of an arbitration and class action-waiver provision in an ERISA-governed defined contribution retirement plan, which precluded the plan participants and beneficiaries from pursuing a class action for fiduciary breaches under ERISA in federal court. In Smith v. Greatbanc Trust Co., 13 F.4th 613 (7th Cir. 2021), the Seventh Circuit Court of Appeals held that defined contribution plans may require claimants to arbitrate claims under ERISA but may not preclude claimants from obtaining substantive relief that ERISA guarantees. And in Cooper v. Ruane Cunniff & Goldfarb Inc., 990 F.3d 173, 184 (2d Cir. 2021), the Second Circuit Court of Appeals expressed skepticism that a plan’s class action-waiver provision could be enforceable to preclude a plan participant or beneficiary from bringing representative claims under ERISA § 502(a)(2) in light of that court’s holding in Coan v. Kaufman, 457 F.3d 250 (2d Cir. 2006), requiring parties suing on behalf of a plan under that subsection to demonstrate their suitability to serve as representatives of the interests of other plan stakeholders. A number of other federal district court decisions addressing these issues are pending appeal. See, e.g., Henry on behalf of BSC Ventures Holdings, Inc. Emp. Stock Ownership Plan v. Wilmington Tr., N.A., No. CV 19-1925 (MN), 2021 WL 4133622, at *1 (D. Del. Sept. 10, 2021) (appeal filed Oct. 1, 2021, No. 21-2801); Hawkins v. Cintas Corps., No. 1:19-CV-1062, 2021 WL 274341, at *1 (S.D. Ohio Jan. 27, 2021) (appeal filed Feb. 19, 2021, No. 21-3156); Harrison v. Envision Mgmt. Holding, Inc. Bd. of Directors, No. 21-CV-0304-RMR-NYW, 2022 WL 909394, at *1 (D. Colo. Mar. 24, 2022) (appeal filed Apr. 6, 2022).

In January, the first district court in the Eleventh Circuit Court of Appeals entered the fray. On January 20, 2022, the United States District Court for the Southern District of Florida enforced a mandatory arbitration and class action-waiver provision (Arbitration Provision) in a defined contribution plan. The plaintiffs in Holmes v. Baptist Health South Florida, Inc., 2022 WL 180638, argued that the plan’s Arbitration Provision was unenforceable for two reasons. First, plaintiffs asserted that the Arbitration Provision violated the “effective vindication” doctrine, which voids arbitration agreements that operate as a prospective waiver of a party’s right to pursue statutory remedies. Plaintiffs claimed the Arbitration Provision precluded participants from obtaining plan-wide relief that ERISA authorizes because the Provision prohibited relief that provided “additional benefits or monetary relief to any other person.” Second, plaintiffs contended that the Arbitration Provision was unenforceable because the participants did not knowingly agree to it. The court rejected both arguments.

The court first concluded that the Arbitration Provision’s prohibition on obtaining relief on behalf of others did not violate the “effective vindication” doctrine. It observed that courts generally have upheld class action arbitration waivers, even in the ERISA context, and reasoned that if “a waiver of the right to bring a class action in arbitration is permissible, the concomitant waiver of remedies associated with class actions is also permissible.” In so holding, the court expressly declined to follow the Seventh Circuit Court of Appeals’ reasoning in Smith, which invalidated a similar arbitration provision as violating the “effective vindication” doctrine. However, in dicta, the Florida district court also distinguished the Arbitration Provision from the one in Smith: it reasoned that the plan language in Smith was broader because it precluded plan participants from obtaining any relief on behalf of other individuals, such that it precluded participants from pursuing statutory remedies, such as removal of fiduciaries, that would inhere to the benefit of all plan participants. The language before the Florida district court, however, precluded participants from obtaining only “additional benefits or monetary relief” for any other person, which the court interpreted as permitting participants to pursue statutory remedies like fiduciary removal.

The district court also dismissed plaintiffs’ argument that the Arbitration Provision was unenforceable because they had not knowingly agreed to it. Following the Ninth Circuit Court of Appeals’ reasoning in Dorman, the court reasoned that, because the plaintiffs were pursuing claims under ERISA § 409(a), which belong to the plan, the appropriate inquiry was not whether the plaintiffs had agreed to amending the plan with the Arbitration Provision, but whether the plan had. Finding that the plan had consented to the amendment, which the plan sponsor effected consistent with the plan’s terms, the court held that the plaintiffs, who were seeking to enforce the plan’s rights, were bound by the plan’s agreement to the Arbitration Provision. For the same reason, the court also rejected the plaintiffs’ argument that only those plaintiffs who were still participants in the plan at the time of the amendment could be bound by it.

The court therefore granted the plan defendants’ motion to compel arbitration and stayed the plaintiffs’ lawsuit pending the outcome of those arbitrations. Notably, the plaintiffs did not appeal the district court’s ruling.

Illustrating the varying approaches federal courts are taking to these issues, only two months after Holmes, in the Harrison case referenced above, the District of Colorado reached the opposite conclusion and denied a motion to enforce a plan’s arbitration and class action-waiver provision. Unlike Holmes, the Harrison court followed Smith’s lead in holding that the plan’s arbitration and class action-waiver provision was unenforceable under the “effective vindication” doctrine because it precluded plan participants and beneficiaries from pursuing claims under ERISA § 502(a)(2) for certain plan-wide remedies, such as the removal of plan fiduciaries. The Harrison defendants have appealed that decision to the Tenth Circuit Court of Appeals. 

Takeaways for Plan Sponsors:

Holmes and Harrison add to the flurry of recent decisions on the enforceability of mandatory arbitration and class action-waiver provisions in defined contribution plans, which have yielded inconsistent results and are still working their way through courts of appeals. However, plan sponsors following this line of cases can glean several takeaways from these decisions:

• Federal courts continue to hold that ERISA claims may be subject to mandatory
• Holmes is the first federal district court decision in the Eleventh Circuit enforcing arbitration and class action-waiver provisions in defined contribution plans against claimants bringing claims under ERISA § 502(a)(2).
• There is now at least one federal district court in the Eleventh Circuit that has followed the Ninth Circuit in holding that only the plan, and not the plan’s participants, need to have consented to a mandatory arbitration and class action-waiver provision for the provision to apply to the participants’ claims under ERISA §§ 409(a) and 502(a)(2).
• There is a split among federal courts as to whether arbitration and class action-waiver provisions may preclude plan participants from obtaining relief that ERISA makes available, such as the removal of fiduciaries. For now, at least one federal district court in the Eleventh Circuit has said that it may, while the Seventh Circuit and a federal district court in the Tenth Circuit recently held that it may not.
• Given the disagreement among district courts as to the propriety of ERISA plans’ relief-limiting provisions, plan sponsors that wish to maximize the enforcement potential of their arbitration provisions should ensure that the language does not preclude relief available under ERISA, and severability provisions should authorize courts to sever only those portions of a plan that are unenforceable or contrary to law.