March 30, 2021
A Seventh Circuit judge on Tuesday pushed a St. Louis manufacturing company to explain how workers alleging retirement plan mismanagement can use individual arbitration to seek relief including the removal of directors, which would inevitably benefit other participants, when the plan’s arbitration provision says any relief can only benefit the claimant.
In oral arguments Tuesday, Triad Manufacturing Co.’s board of directors urged the appellate court to let it push into individual arbitration an Employee Retirement Income Security Act class action alleging retirement plan mismanagement, led by named plaintiff James Smith.
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But U.S. Circuit Judge Michael Scudder said that removal remedy appears to conflict with language in the provision that states an individual claimant can only seek relief that “does not include or result in the provision of additional benefits or monetary relief to any [participant] other than the claimant.”
“How do you square that with the language of the plan document? He can only receive remedial or equitable relief that does not benefit another plan participant. So how can that relief be entered?” Judge Scudder asked.
The judge said that, had he been another plan participant in a hypothetical scenario in which Smith won that relief in individual arbitration, “I would be mighty thankful that [Smith] brought the lawsuit. It would definitely benefit me.”
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Peter K. Stris of Stris & Maher LLP, arguing for the employees, said Judge Scudder’s reading of the provision was the right one. The U.S. Supreme Court has deemed arbitration agreements invalid and unenforceable if they operate as a prospective waiver of a party’s right to pursue statutory remedies, and this arbitration clause is a “textbook” example of that, he said.
“There’s no way to read it other than to say that it prohibits fiduciary removal,” Stris said. “My friend on the other side now wants to say the provision doesn’t bar fiduciary removal because that’s obviously a prospective waiver, and there’s a nonseverability waiver in the clause. But that’s the provision that’s written. That is a prospective waiver, and before I even get to loss restoration and disgorgement, that means the entire provision is unenforceable.”
A proposed class of current and former Triad workers led by Smith accuse the company’s board of directors and three board members of selling Triad stock to the company’s ESOP at an inflated price, giving board members “a hefty profit at their employees’ expense.”
The board defendants sought to force Smith to arbitrate the dispute, citing a provision in the ESOP’s governing documents that sent all proposed ERISA class actions to individual arbitration.
Smith fought back, saying the provision was invalid and inapplicable to him, because he was no longer employed by Triad when the arbitration clause was added. And the proposed class contends the mandatory arbitration clause is null and void because it attempts to restrict workers’ ERISA-protected right to sue collectively.
An Illinois federal judge agreed with Smith, denying the board defendants’ motion to compel arbitration. The company appealed the denial in October.
Benefits attorneys are keeping a close eye on this case due to its interrogation of whether individual arbitration clauses in employee benefit plans violate ERISA, a hot-button issue that has also been taken up by the Ninth Circuit. In an unpublished memorandum issued in 2019, that court upheld the legality of such clauses.
U.S. Circuit Judges Michael Kanne, Michael Scudder and Michael Brennan sat on the panel for the Seventh Circuit on Tuesday.
The proposed class is represented by Karen L. Handorf, Michelle C. Yau and Jamie L. Bowers of Cohen Milstein Sellers & Toll PLLC and Peter K. Stris, Rachana A. Pathak, Douglas D. Geyser and John Stokes of Stris & Maher LLP.