Earlier this year we reported on the “Employee and Retiree Access to Justice Act,” which sought to render arbitration and class action waiver provisions, and discretionary authority for plan administrators, in ERISA plans unenforceable. On September 29, 2022, the U.S. House of Representatives passed the Mental Health Matters Act (the Act) — which encompasses the Employee and Retiree Access to Justice Act.
The Employee and Retiree Access to Justice Act is — yes — another employee benefits bill recently introduced in both the House and Senate (see our other blog post on SECURE 2.0, already passed by the House and which now has a draft bill under review in the Senate Health, Education, Labor and Pensions Committee). In addition to seeking to eliminate individual arbitration as a method for resolving benefit denial and breach of fiduciary duty disputes under ERISA, the Employee and Retiree Access to Justice Act also seeks to invalidate discretionary clauses in ERISA-governed benefit plans. The prohibition of such clauses would eliminate deferential judicial review of benefit claim denials in court.
On April 27, 2022, the Sixth Circuit decided Hawkins v. Cintas Corporation, No. 21-3156, holding that claims for breach of fiduciary duty under § 502(a)(2) of the Employment Retirement Income Security Act of 1974 (ERISA), belong to the plan, and plaintiffs asserting such claims for alleged harm to their individual retirement accounts in defined contribution plans may not be compelled to arbitrate those claims absent the plan’s consent.
Hawkins is a putative class action that participants in an ERISA-governed defined-contribution retirement plan filed on behalf of the plan against Cintas Corporation, their former employer and the plan’s sponsor, under ERISA § 502(a)(2). The plaintiffs alleged that Cintas had breached fiduciary duties it owed to them under ERISA in connection with its administration of the plan, causing losses to the plan.
Enforcement of an ERISA plan’s arbitration provision has become a hotly litigated issue. Plaintiffs and courts often raise two objections to arbitration provisions in ERISA plans, including ESOPs. The first is whether participants or the plan itself consented to the arbitration provision. The second is whether class-action waiver language, which requires individualized arbitration, is enforceable under ERISA.
There have been several important ERISA arbitration decisions in recent years, including many involving ESOPs. Interestingly, these decisions suggest that courts are struggling with the same statutory-interpretation problems that courts struggle with when addressing a number of issues raised by ESOP litigation. Many key ERISA provisions are difficult, if not impossible, to interpret based solely on their express language. This is a real problem in ESOP litigation because many disputes turn on a court’s interpretation of the opaque ERISA provisions that are implicated by the disputes.
On January 20, 2022, the United States District Court for the Southern District of Florida enforced a mandatory arbitration and class action-waiver provision (Arbitration Provision) in an ERISA-governed defined contribution plan, precluding a putative class of former and current plan participants from pursuing breach-of-fiduciary duty claims against plan fiduciaries in federal court. The plaintiffs in Holmes v. Baptist Health South Florida, Inc., 2022 WL 180638, argued that the plan’s Arbitration Provision was unenforceable as it both violated the “effective vindication” doctrine and was unenforceable because the participants did not knowingly agree to it. The court rejected both arguments.
Holmes adds to the flurry of recent decisions on the enforceability of mandatory arbitration and class action-waiver provisions in defined-contribution plans, which have yielded inconsistent results and are still working their way through courts of appeals. However, plan sponsors following this line of cases can glean several takeaways from the Holmes decision:
On September 10, 2021, the Seventh Circuit decided Smith v. Board of Directors of Triad Manufacturing Inc., No. 20-2708, holding that benefit plans may require claimants to arbitrate claims under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. (ERISA), but may not preclude claimants from obtaining relief that ERISA provides.
Triad Manufacturing, acting through its board of directors, established an employee stock ownership plan (Plan) in December 2015, when several of Triad’s largest shareholders (Selling Shareholders) sold all of their stock to the Plan. The Plan was a defined-contribution employee retirement plan governed by ERISA. Triad, acting through the Board, was the Plan’s sponsor, GreatBanc served as the Plan’s trustee and James Smith was a former Triad employee and a participant in the Plan. When the value of Triad’s stock dropped significantly in the weeks following the ESOP transaction, the value of Smith’s interest in the Plan decreased commensurately, eventually prompting Smith to sue.