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ERISA Plan Arbitration Clause Faces Skeptical Seventh Circuit

Bloomberg Law

March 30, 2021


  • Arbitration of ERISA plan mismanagement claims at issue.
  • Judges focus questions on attorney arguing for arbitration.

An attorney defending a mandatory arbitration clause in an ERISA plan document on Tuesday fielded tough questions from a panel of Seventh Circuit judges, which wanted to square statutory language authorizing plan-wide relief with a plan term requiring individual arbitration of claims alleging fiduciary mismanagement.

The judges’ questions highlighted tensions between the Employee Retirement Income Security Act—which authorizes retirement plan participants to file lawsuits seeking relief that benefits the entire plan—and a provision in the Triad Manufacturing Inc. employee stock ownership plan requiring these disputes to be resolved through binding arbitration.

The case asks the judges to consider a 2020 ruling allowing a dispute over Triad’s employee stock ownership plan to proceed in court, despite the defendants’ attempt to enforce a mandatory arbitration clause added to the plan in 2018. The Triad defendants appealed, arguing that federal law favors arbitration and that an ERISA plan’s arbitration requirement constitutes consent to arbitrate on behalf of the plan’s participants. They received support from the American Benefits Council, while the AARP and public interest advocacy group Public Justice PC filed briefs criticizing these clauses.

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Law in Flux

Arbitration is an alternative to litigation that employers sometimes prefer because of its confidentiality and ability to control costs. Arbitration agreements typically include class action waivers, which bar employees from participating in class actions against their employers.

Amid a big spike in class suits challenging 401(k) plan fees, several employers have pointed to arbitration clauses in employment agreements or plan documents in an effort to cut off class litigation challenging their retirement plans under ERISA. Federal courts haven’t reached a consensus on whether this is permissible.

In 2019, the Ninth Circuit allowed Charles Schwab Corp. to force arbitration in a proposed class action challenging its 401(k) plan fees based on an arbitration provision and class action waiver added to the plan in 2014. But earlier this month, the Second Circuit declined to interpret an arbitration agreement in DST Systems Inc.’s employee handbook as blocking a DST employee from bringing a class suit challenging his 401(k) plan’s investment options.

A move toward greater use and acceptance of arbitration clauses as a method for cutting off class litigation over retirement plan management could be bad news for workers’ retirement security.

The proposed class is represented Cohen Milstein Sellers & Toll PLLC and Stris & Maher LLP.

Read ERISA Plan Arbitration Clause Faces Skeptical Seventh Circuit.