Against the overwhelming success of class action waivers over the past 20-plus years, ERISA class action claims continue to stand out.
Relative to other federal statutory claims such as wage and hour violations, ERISA claims remain tougher to channel into arbitration. For example, in Munro v. University of Southern California, the University of Southern California attempted to compel arbitration in the 9th Circuit but was unsuccessful—which ultimately resulted in a $13 million settlement last week.
Historically, in fact, some courts such as the 9th Circuit went so far as to hold that ERISA claims were categorically not arbitrable.
In 2019, however, ERISA claims began to more fully align with the judicial trend allowing arbitration absent a congressional mandate to the contrary. In Dorman v. Charles Schwab Corp., the 9th Circuit held that ERISA claims are arbitrable.
Dorman was momentous: the case reversed 35 years of 9th Circuit authority. And post-Dorman, Courts have repeatedly affirmed that ERISA claims are generally arbitrable.
But Dorman left unanswered questions. Dorman relied principally on a non-ERISA Supreme Court case, American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, and the Court made clear it was limiting its ruling.
With the shifted landscape signaled by Dorman (and the Supreme Court arbitration cases foreshadowing Dorman), more and more plan sponsors are deploying arbitration clauses in their plan documents and employment agreements. But 4 years after Dorman, the enforceability of these clauses remains very much up in the air.
Effective vindication doctrine, anyone?
Two years after Dorman, the 7th Circuit weighed in, and refused to compel arbitration of an ERISA case. In Smith v. Bd. of Directors of Triad Mfg., Inc., 13 F.4th 613 (7th Cir. 2021), the 7th Circuit distinguished Dorman. At issue in Smith was an arbitration clause prohibiting a participant from seeking relief which had the “purpose or effect of providing additional benefits or monetary… or other relief to any Eligible Employee, Participant or Beneficiary other than the Claimant.” Unlike the arbitration clause in Dorman, the 7th Circuit ruled that the “provision prohibits relief that ERISA expressly permits” and refused to send the case to arbitration.
In so ruling, the Court applied the “effective vindication” doctrine. The effective vindication doctrine is a narrow exception barring arbitration when an arbitration clause prevents a plaintiff from effectively vindicating a claim. The effective vindication doctrine has not weathered well, but the doctrine has found some traction in the ERISA context. Other courts have followed Smith and declined to enforce arbitration clauses on effective vindication grounds, including an opinion earlier this year from Delaware.
So, while it’s clear that theoretically ERISA claims are subject to arbitration based on Dorman, it remains unclear how effective arbitration clauses are in practice. While class action waivers are not problematic under ERISA per se, such waivers may be held to prospectively waive substantive relief expressly authorized under ERISA and therefore found unenforceable.
Unfortunately, this lack of clarity may persist for some time, as the Supreme Court just declined in January 2023 to take this issue up.
Where do we go from here?
Some plan sponsors may fairly ask: If my arbitration clause is going to be found unenforceable, why even bother including one? To answer that question, it’s useful to consider arguments that Defendants moving to compel arbitration overcame in American Express Co. v. Italian Colors Restaurant. In Italian Colors, Defendants sought to enforce a class action waiver and compel individual arbitration.
Plaintiffs resisted arbitration, and submitted expert testimony showing that it would not make economic sense to bring an individual antitrust claim, because the expert testimony required to support such a claim would dwarf any individual recovery.
The Supreme Court squarely rejected this policy concern, concluding that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 236 (2013) (emphasis in original). To put a fine point on it, it is perfectly permissible (legally and strategically) to discourage federal statutory claims with class action waivers. And employers should at the very least be considering deploying arbitration clauses to limit their potential exposure for ERISA class and representative claims.
Italian Colors demonstrates the significant protection arbitration clauses can confer: Plaintiffs’ attorneys are disincentivized to bring class claims when arbitration clauses make such cases a losing business proposition.
3 considerations for plan sponsors
1. Keep in mind the pros and cons of arbitration.
Remember that arbitration has pros and cons. There is a very narrow right of review in arbitration, and arbitration generally proceeds far more quickly than traditional litigation. This feature can cut both ways: the speed and relaxed procedures of arbitration should not necessarily be viewed as all upside for plan sponsors. In some cases, plan sponsors may prefer the security of a right of appeal and the more expansive discovery procedures available in court.
Plan sponsors concerned about litigating plan-wide equitable and remedial claims in arbitration should consider including language in their class action waivers conditioning arbitration on enforcement of the class action waiver. Sponsors should work with counsel to ensure their plan documents contain the most up-to-date language and align with their intent.
2. Consider including an arbitration clause in your plan document and in your employment agreements.
Arbitration remains a contractual arrangement. While federal courts generally construe consent liberally, it is still incumbent on the party compelling arbitration to demonstrate an agreement.
Work with counsel to ensure your documents align and you implement the agreements operationally.
3. Play the long game.
The Supreme Court turns down far more cases than it takes. Understand that this issue will continue to be litigated and there will be further opportunities for the Supreme Court to settle this split among the federal courts. While predictions are risky business, given the Supreme Court’s clearly expressed preference for arbitration absent a Congressional mandate to the contrary, the Supreme Court could very well find the effective vindication exception does not override arbitration clauses. Implementing your arbitration clause now gives you the option to compel arbitration if and when the Supreme Court settles the issue once and for all.
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Bonnie Treichel is the Founder and Chief Solutions Officer of Endeavor Retirement, a consultancy focused on tools and training for financial advisors. She is also a co-founder of Endeavor Law, a law firm providing solutions for the financial services industry. Sean Cooper is the Chief Strategy Officer of Endeavor Retirement and a co-founder of Endeavor Law.