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Appellate Court Says Arbitration Clause Can’t Bar ERISA Claims


A federal appellate court has affirmed the decision of a lower court—blocking the use of an arbitration clause in a plan document to forestall an ERISA fiduciary suit.

The court in question was the United States Court of Appeals for the Tenth Circuit—which affirmed the decision of the district court that had held that the arbitration clause in the plan document impermissibly blocked rights afforded under the Employee Retirement Income Security Act (ERISA). 

The Case

At issue was a suit brought by former employee and participant Robert Harrison who in January 2021 had sued Envision Management Holding (parent of radiology company Envision), the company's board of directors; a number of company executives; and plan trustee Argent Trust Co. on behalf of a proposed class of employees. In essence the appellate court summed up his claims[i] as alleging that "the seller defendants, with the effective assistance of Argent, were able to financially benefit by selling Envision to the ESOP for significantly more than it was worth, while at the same time leaving the ESOP with a $154.4 million debt.” That said, the focus here was on Harrison’s ability to bring suit in view of an arbitration clause contained in the plan document.

The fiduciary defendants for their part had argued that Section 21 of the Plan Document (entitled “ERISA ARBITRATION AND CLASS ACTION WAIVER” “require[d] arbitration of” Harrison’s claims and that Harrison, “[b]y filing his complaint in federal court,” was “seek[ing] to circumvent two federal laws—the Federal Arbitration Act [(FAA)] . . . , which mandates enforcing arbitration provisions, and ERISA, which dictates enforcing the terms of governing plan documents.” Oh, and they not only asked that the court compel Harrison to arbitrate all of his claims on an INDIVIDUAL basis (under the FAA), stay the suit, or dismiss it—along with awarding them “their attorneys’ fees and costs incurred in seeking this relief.”

On March 24, 2022, the district court ruled against those motions, concluding “in pertinent part, that ‘the arbitration provision in the Plan [wa]s invalid because it conflicts with ERISA.’” More specifically, according to the appellate court, “…the district court, invoking what is known as the effective vindication exception, concluded ‘that the arbitration provision acts as a prospective waiver’ of Harrison’s right to pursue statutory remedies under ERISA ‘because it disallows plan-wide relief, which is expressly contemplated by [sections 1132(a)(2) and 1109 of] ERISA.’” To which, on April 4, 2022, the defendants appealed.

The Review

The Tenth Circuit[ii] started its review (Harrison v. Envision Mgmt. Holding, Inc. Bd., 10th Cir., No. 22-1098, 2/9/23) by noting that “whether a party agreed to arbitration is a contract issue, meaning arbitration clauses are only valid if the parties intended to arbitrate”—something the court noted was “generally a matter of state law contract principles.” Also relevant was what the Supreme Court has termed the “‘effective vindication’ exception”—an exception that “finds its origin in the desire to prevent ‘prospective waiver of a party’s right to pursue statutory remedies.’”

To that end, the court noted that the plaintiff had argued that the arbitration clause at issue here “purports to bar participants from seeking relief that the statute allows them to pursue” because it bars “any claim brought in a ‘representative capacity’ and any remedy that ‘has the purpose or effect of providing additional benefits or monetary or other relief to [anyone] other than the Claimant.’” Lending support to that position was an amicus brief filed by the Labor Department that affirmed the right of participants to bring an action to recover, among other things, ‘any losses to the plan’ resulting from a fiduciary breach, and to seek ‘removal of such fiduciary”—positions that the DOL said both the Supreme Court and this court “have recognized” that “claims under these sections are ‘brought in a representative capacity on behalf of the plan as a whole.’”

‘Whole’ Cloth?

And indeed, the court noted that “many of Harrison’s claims… would benefit the Plan as a whole, rather than Harrison individually”—but that the arbitration clause in question was “written in a manner intended to foreclose any such plan-wide relief. In other words, Section 21(b) is not problematic because it requires Harrison to arbitrate his claims, but rather because it purports to foreclose a number of remedies that were specifically authorized by Congress in the ERISA provisions cited by Harrison.”

In response to arguments by the plan fiduciary-defendants that as the arbitration requirement was in the plan document, it precluded those rights, stating “Nothing in ERISA states that a plan document can override statutory remedies that were afforded to claimants by Congress. Further, as the DOL points out in its amicus brief, one of the ERISA sections that Defendants cite in support of their argument, § 1104(a)(1)(D), expressly states that fiduciaries are obligated to discharge their duties in accordance with the plan documents and instruments only to the extent that those documents and instruments ‘are consistent with the provisions of [Title I of ERISA].’” 

“It is not the Plan Document’s requirement that a claimant engage in the procedural mechanism of individual arbitration that is the problem here,” the court explained. “Rather, it is the Plan’s prohibition on an individual claimant seeking any form of relief that would benefit anyone other than the claimant.”

The plaintiffs here even went so far as to argue that this particular plaintiff didn’t need to bring suit, because the Labor Department could. The court pushed back on that notion, commenting that “nothing in the statute requires the Secretary of the DOL to file any such suit, and it is unreasonable to assume that the DOL is capable of policing every employer-sponsored benefit plan in the country. Indeed, the DOL notes in its amicus brief that “‘there could be a host of reasons preventing the Secretary from bringing even the most meritorious of claims,’ including its limited resources.”

And then, as it turns out, the Plan document contained a non-severability clause that made the entire arbitration procedure void if any of the requirements were found to be unenforceable or invalid—as was the case here—which means the court concluded that the entire arbitration procedure was rendered null and void.

“Because we agree with the district court that the remedies limitation contained in Section 21.1(b) prevents Harrison from effectively vindicating his statutory remedies, that means that the entire Arbitration Procedure outlined in Section 21 of the Plan is ‘rendered null and void in all respects.’ In other words, Defendants are precluded from arguing that Harrison is required to submit his claims to arbitration without the remedy limitations outlined in Section 21.1(b),” concluded the court—affirming the decision of the district court in dismissing the arbitration requirement.

What This Means

All in all, this decision leaves the matter of enforceability of these arbitration clauses in a bit of a muddle.  As it turns out, the Second, Sixth, and Seventh circuits have recently issued rulings allowing these cases to stay in court, while the Ninth Circuit has previously granted Charles Schwab Corporation’s bid for arbitration over its retirement plan investments.

Last year a bill was introduced in the U.S. House of Representatives that would prohibit arbitration and discretionary clauses in employer-sponsored benefit plans under the Employee Retirement Income Security Act (ERISA).

But for now, they would look to continue to be seen and incorporated, if only to give plaintiffs pondering litigation…pause.


[i] According to the appellate court, Harrison’s complaint sought various forms of relief, including a declaration that Defendants breached their fiduciary duties, the removal of the current plan trustee, the appointment of a new fiduciary to manage the plan, an order directing the current trustee to restore all losses to the plan that resulted from the fiduciary breaches, and an order directing Defendants to disgorge the profits they obtained from their fiduciary breaches.

[ii] Judge Mary Beck Briscoe wrote the opinion, joined by Judges Robert E. Bacharach and Michael R. Murphy.