District Court Finds Arbitration and Class Action Waiver Provision Enforceable in Retirement Plan

The Eastern District of Kentucky recently became the latest court to weigh in on arbitration and class action waiver provisions in ERISA-governed defined contribution plans. In Merrow v. Horizon Bank, the court found such a provision enforceable and compelled arbitration of the plaintiffs’ ERISA breach of fiduciary duty and prohibited transaction claims.

The three plaintiffs were former employees of P.L. Marketing (PLM), who were vested participants in the P.L. Marketing, Inc. Employee Stock Ownership Plan (the Plan). They filed an action against Horizon Bank, the Plan’s trustee, asserting that defendants violated ERISA by causing the Plan to overpay for company stock.  Plaintiffs brought three ERISA claims, arguing: 1) Horizon participated in a prohibited transaction; 2) Horizon breached its fiduciary duty as the Plan administrator; and 3) the selling shareholders knowingly participated in ERISA violations under 29 U.S.C. § 1132(a)(3).

Defendants moved to dismiss the action, arguing in part that the court did not have subject matter jurisdiction because the plaintiffs’ claims were subject to a binding individual arbitration agreement under the Plan. The arbitration provision included language stating, “[i]n exchange for participation in this Plan, each Claimant agrees to arbitrate and be bound by the final and binding arbitration result of any dispute, claim or controversy arising hereunder [after administrative exhaustion]” (emphasis added). The Plan also included a waiver of class or collective actions.

Plaintiffs argued that the arbitration provision should not be enforced because the Plan required automatic enrollment in the Plan, without their election or consent, and that there was no alternative compensation option to choose for their labor. The court summarily rejected this argument and found that the plaintiffs failed to meet their burden to show the arbitration agreement was invalid under the Federal Arbitration Act, which requires arbitration agreements to be enforced so long as they are a valid contract.

Plaintiffs also contended that the arbitration clause was unenforceable because it operated as a prospective waiver of statutory remedies. The court disagreed, stating that this argument misconstrues Supreme Court and Sixth Circuit precedent, and finding that an arbitration agreement does not alter or abridge substantive rights, but rather changes how those rights are processed. Therefore, the court held that the plaintiffs’ claims must be brought in arbitration and stayed the case pending that arbitration.

The court also rejected the plaintiff’s reliance on the Hawkins v. Cintas Corp. decision, where the Sixth Circuit found an arbitration provision unenforceable because it was located in an employment agreement, rather than an ERISA plan. The district court explained that this distinction rendered Hawkins irrelevant and refused to expand its holding as plaintiffs wanted.

Faegre Drinker Perspective:

Enforcement of an ERISA plan’s arbitration provision has become an intensely litigated issue, and this decision is a rare victory for defendants seeking to enforce them. Several appellate courts—including the Third, Seventh and Tenth Circuits—have accepted the plaintiffs’ “prospective waiver of statutory rights” theory and refused to enforce arbitration provisions. The Eastern District of Kentucky’s decision aligns with the Ninth Circuit’s position and indicates this issue is far from resolved.

For additional information on the enforceability of arbitration provisions, please see our previous posts here, here, and here.

The case name is Merrow, et al. v. Horizon Bank, et al., No. 2:22-CV-00123 (E.D. Ky. Oct. 24, 2023).

If you have questions about this case or other ERISA matters, please contact a member of the Faegre Drinker Benefits & Executive Compensation team.

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About Author: Kimberly Jones

Kimberly Jones advocates for clients in a broad range of ERISA-related matters in federal courts throughout the country. She is co-leader of the firm’s ERISA litigation team, and a member of the benefits and executive compensation practice group. View all posts by and

About Author: Caitlin M. Britos

Caitlin Britos assists clients in benefit plan issues and executive compensation matters. She advises clients on remaining compliant with ERISA and Internal Revenue Code. View all posts by and

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