A federal appellate court has held that a plan’s adoption of an arbitration agreement is sufficient to require a class action suit on behalf of the plan to those terms.
The suit was filed in mid-May 2020 in the U.S. District Court of the District of New Jersey against the fiduciaries of the $4.4 billion ADP TotalSource Retirement Savings Plan (including third-party investment consultant NFP Retirement Inc.) on behalf of participants in the multiple employer plan (MEP) by the law firm of Schlichter Bogard & Denton.
The allegations made in this suit (Berkelhammer v. ADP TotalSource Group Inc., D.N.J., No. 20-cv-05696, complaint filed 5/7/20) by participant-plaintiffs Beth Berkelhammer and Naomi Ruiz were that the ADP defendants: breached their fiduciary duties and engaged in prohibited transactions by failing to monitor and control the Plan’s recordkeeping fees and causing the Plan to pay excessive fees; breached their fiduciary duties and engaged in prohibited transactions by unlawfully paying themselves from Plan assets; and selected and retained imprudent investments in the Plan.
Or—as the appellate court (Beth Berkelhammer et al. v. ADP TotalSource Group Inc. et al., case number 22-1618, in the U.S. Court of Appeals for the Third Circuit) positioned it; “The short story: Appellants, individually and as representatives of a class of participants and beneficiaries, sued ADP TotalSource, the administrative committee, and NFP on behalf of the Plan, alleging breaches of fiduciary duties and violations of ERISA. NFP responded with a motion to compel arbitration, which the District Court granted, reasoning that although Appellants had not personally consented to the arbitration clause in the IAA (Investment Advisory Account) the Plan had. Since Appellants sued on the Plan’s behalf, the District Court held that arbitration was required.”
Is the Arbitration Clause Valid?
“Consent is the key,” U.S. Circuit Judge Paul Matey wrote for the panel as “a court may submit to arbitration only those disputes . . . that the parties have agreed to submit.” He went on to note that, “Indeed, it is consent that allows arbitrators to decide cases at all because arbitrators ‘derive their powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution.’”
That, Judge Matey commented, requires that two questions be answered; “First, is there a valid arbitration agreement between the parties? And second, does the dispute fall with[in] the language of that agreement?” He then went on to note that, “Neither question is much disputed here. The IAA is a contract that calls for arbitrating the sort of claims pressed by Appellants. Instead, this appeal asks who is a party to the IAA and whose consent—Appellants’ or the Plan’s—is needed for arbitration. The answers turn on the claims Appellants assert and the ordinary meaning of ERISA.”
Does the Arbitration Clause Control!
Judge Matey recalled that “it is the plan—and not the individual claimant—to whom the breaching fiduciary owes its duty.”
NFP had argued that, "As numerous courts have recognized and this court's own cases dictate, in light of the derivative status of such claims, it is a plan's consent to alternative dispute resolution—not a plaintiff's—that is required in order to compel mediation or arbitration of such claims. Just as an individual plaintiff cannot bind a plan to her agreements, an individual plaintiff cannot negate the plan's own agreements by insisting her consent to them is necessary."
Now, there have been a series of cases of late involving arbitration clauses and their applicability. Here Judge Matey drew a contrast between this case and two of those; “Whereas in Munro and Hawkins the plaintiffs had agreed to arbitrate and the plans had not, here the Plan agreed to arbitrate, not Appellants. The difference in direction does not change the result: the Plan’s agreement to arbitrate is what matters, and that agreement applies to Appellants’ claims on the Plan’s behalf.”
And basically—since the injuries alleged were to the plan—and since the plan agreed to the arbitration—the court said the arbitration clause took precedence. Or, as Judge Matey concluded in ruling for the fiduciary defendants, “Because Appellants’ claims belong to the Plan, the Plan’s consent to arbitrate controls. So we will affirm the District Court’s judgment.”
What This Means
It may seem odd that an agreement that the participants weren’t a party to should limit their actions, but it has cut both ways, with individual arbitration agreements being found insufficient to block claims on behalf of the plan(s). This ruling does not, of course, preclude a future action—it simply requires that those claims be aired and resolve attempted via the arbitration process.
