- Although the Supreme Court's recent decision in Epic Systems Corp. v. Lewis was not a case under the Employee Retirement Income Security Act of 1974 (ERISA), the Court's analysis indicates that it would likely reject an argument that an arbitration provision with a class action waiver in an employee stock ownership plan (ESOP) is fundamentally unenforceable under ERISA.
- However, the decision leaves open numerous questions about the practical effect of including such provisions in ESOPs.
The U.S. Supreme Court's long-awaited decision on May 21, 2018, in Epic Systems Corp. v. Lewis held that mandatory individualized arbitration clauses in employment agreements are enforceable, concluding that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced by their terms and that nothing in FAA's savings clause or the National Labor Relations Act (NLRA) provides otherwise. Although Epic Systems was not an Employee Retirement Income Security Act of 1974 (ERISA) case, the Court's analysis sheds light on how it would treat an argument that a class action waiver in an arbitration provision in an ERISA plan document are unenforceable. However, the Epic Systems decision leaves open many questions about the use of such provisions in ERISA plans, specifically employee stock ownership plans (ESOPs).
Background and Court Opinion
The Epic Systems case involved an agreement between an employee and employer entered into as a condition of employment, wherein the employee agreed to mandatory individualized arbitration that banned collective judicial and arbitral proceedings of any kind.
In 2012, the National Labor Relations Board (NLRB) released an opinion finding that class waivers violated Section 7 of the NLRA, reasoning that the class waivers limit employees' rights to engage in "concerted activities" in pursuit of their "mutual aid or protection." The U.S. Court of Appeals for the Seventh Circuit followed this reasoning in finding that the arbitration clause at issue was unenforceable. Epic Systems Corp. v. Lewis, 823 F.3d 1147 (7th Cir. 2016).
However, the Supreme Court reversed the Seventh Circuit and rejected this theory. The Court reasoned that the FAA instructs "federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings." It rejected the plaintiffs' argument and the NLRB's position that class waivers violate Section 7 of the NLRA, stating "the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act."
The Court also found that the NLRA's protection of "concerted activities" did not override the FAA because the Court could give effect to both laws and there was no clear and manifest intent for the NLRA to displace the FAA. In rejecting the plaintiffs' theories, the Court noted that Congress "does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions."
Justice Neil Gorsuch delivered the opinion of the Court, in which Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito joined. Justice Thomas filed a concurring opinion explaining that the FAA's savings clause concerns the contract's formation. In this case, the challenge was not premised on the contract's formation, but on a public policy defense. Because "'[r]efusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made,' the saving clause does not apply here."
Justice Ruth Bader Ginsburg filed a dissenting opinion, in which Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined, arguing that the rights conferred by Section 7 of the NLRA take precedence over the FAA and noting an extreme imbalance between employees and employers.
The Court's reasoning in Epic Systems indicates that, at least under its current composition, the Court would likely reject an argument that an arbitration provision with a class action waiver in an ERISA plan is fundamentally unenforceable under ERISA. However, the Epic Systems decision leaves open numerous questions about the practical effect of including such provisions in ERISA plans, specifically ESOPs.
One question is whether a class-action waiver/arbitration provision contained in a plan document would be binding on a plan participant where the participant did not expressly agree to the provision. Generally, participants in ESOPs do not opt-in to the plan; rather, assuming that the employees meet the general eligibility requirements, they are automatically included in the plan. This situation could subject an ESOP to the argument that there was no agreement to arbitrate in the first place. The Epic Systems decision did not directly address this issue, although a footnote in Justice Ginsburg's dissent questions whether the employees "agreed" to the provision at issue.
Another open question is whether including a class-action waiver/mandatory arbitration provision would change the impact of claims brought by plan participants. ERISA Section 502(a)(2) claims are derivative claims by their nature – they are brought for losses suffered by the plan, not the complaining participant individually. Thus, whether a participant brings a claim as a putative class-action or simply as a derivative claim may not change the amount of any damages award if there was a finding of a fiduciary breach.
These issues also raise the question of whether such an arbitration provision would always be in the plan's best interests. An arbitration of one participant's case would certainly be cheaper than defending a class action, but the economics are not so clear if multiple participants pursued separate arbitrations of similar issues. Such a situation also raises the question of how a plan fiduciary would administer the plan if separate arbitrations had conflicting results, or whether a plan fiduciary could or should rely on those results in determining how to administer the plan going forward.
The decision in Epic Systems leaves open many questions for plan sponsors, administrators and fiduciaries surrounding the inclusion and effect of class action waivers in arbitration provisions in ERISA plans, specifically ESOPs.