Under recent Supreme Court authority, it now appears possible to avoid class actions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) by requiring that plan participants sign an arbitration agreement containing a class action waiver. Plan sponsors should consider whether to pursue this option, which would entail some loss of control over the employee benefit plans to which it applies.


Employee Stock Ownership Plans (“ESOP”) and 401(k) Plans often provide participants with the opportunity to invest in employer stock. Plans providing for investment in employer stock have been a main target of ERISA class actions over the past decade. When the employer stock loses value, plaintiffs argue that the fiduciaries should have monitored the company stock for suitability, anticipated the events that led to the loss, and (i) disinvested the plan from company stock, wholly or partially; or (ii) ceased purchasing company stock for the plan.

Under recent Supreme Court precedent, arbitration clauses that are linked to class action waivers are enforceable. See American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304, 2308, 2311-12 (2013); AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740, 1751-53 (2011).

The Second Circuit has held that ERISA claims for breach of fiduciary duty are arbitrable. See Bird v. Shearson Lehman/ American Express, 926 F.2d 116, 122 (2d Cir. 1991). The Second Circuit does not appear to have decided whether that extends to claims for benefits under ERISA section 502(a)(1)(B); however, other courts have held that an ERISA plan can make arbitration the exclusive remedy. See, e.g., Chappel v. Laboratory Corp. of America, 232 F.3d 719, 725 (9th Cir. 2000) (involving health plan); VanPamel v. TRW Vehicle Safety Sys., Inc., 723 F.3d 664, 669-70 (6th Cir. 2013) (involving collective bargaining agreement).

Recently the California Supreme Court, in Iskanian v. CLS Transportation Los Angeles, LLC, (link) (6/23/14), held that arbitration agreements with mandatory class waivers are generally enforceable and overruled its prior decision in Gentry v. Superior Court, 165 P.3d 556 (2007). Thus, California courts may not refuse to enforce an employment agreement arbitration agreement simply because it contains a class action waiver (except in a representative action under the California Private Attorney General Act). The Court further held rejected the argument that a class action waiver is unlawful under the National Labor Relations Act.

Therefore, based on the current state of the law, the risk of ERISA class actions could be significantly reduced by having plan participants enter into an arbitration agreement that contains a class action waiver. See, e.g., Hornsby v. Macon County Greyhound Park, Inc., 2012 WL 2135470, **9-10 (M.D. Ala. Jun. 13, 2012) (in ERISA case, upholding arbitration clause that did not permit classwide arbitration); Luchini v. Carmax, Inc., 2012 WL 2995483, **3, 16 (E.D. Cal. July 23, 2012) (plaintiff ’s ERISA and other claims were covered by arbitration clause that did not provide for class arbitration); Tenet HealthSystem Philadelphia, Inc. v. Rooney, 2012 WL 3550496, **1, 5 (E.D. Pa. Aug. 17, 2012) (in case where plaintiff brought claims under ERISA and other statutes, confirming arbitrator’s construction of agreement as not authorizing class arbitration).

Implementation of Plan Arbitration Provisions

These agreements may be executed separately by each employee/participant, or else consented to specifically in other documents that the participant signs as part of the initial employment agreement. See, e.g., Sutherland v. Ernst & Young LLP, 726 F.3d 290, 293-94 (2d Cir. 2013) (arbitration agreement and class action waiver were contained in “Common Ground Dispute Resolution Program” which was attached to employee’s offer letter and confidentiality agreement, both of which were countersigned by employee); Hendricks v. UBS Fin. Servs., Inc., 2013 WL 5969888, *1 (5th Cir. Nov. 11, 2013) (arbitration agreement was set forth as independent section of Compensation Plan; each plaintiff signed letters of understanding and acknowledgements in which they agreed to be bound by terms of Compensation Plan). The employee’s separate execution of a document manifesting agreement to the arbitration clause and class action waiver should be sufficient to establish the employee’s consent to such a program. Compare Nelson v. Cyprus Bagdad Copper Corp., 119 F.3d 756, 762 (9th Cir. 1997) (“the unilateral promulgation by an employer of arbitration provisions in an Employee Handbook does not constitute a ‘knowing agreement’ on the part of an employee to waive a statutory remedy provided by a civil rights law,” even if employee acknowledges receipt of handbook and agrees to read and understand it). Further, having an individual agreement with each participant affords the plan sponsor flexibility: The plan sponsor can choose, based on the circumstances of each individual case, whether to enforce the arbitration clause without establishing a precedent as to how it will conduct itself under the plan as a whole.

Other  Considerations

Most plan sponsors carry fiduciary insurance that would mitigate the costs of a class action. Still, indemnification of the members of a Plan investment committee and the board of directors or other fiduciary which retains the responsibility to monitor the actions of an investment committee adds to the cost when the plan sponsor, board and the committee members are all sued. Even with insurance, the costs of a class action can be significant.

The potential costs of ERISA class actions must be weighed against the value of maintaining control over claims administration and the construction and application of plan provisions. Benefits decisions are usually made in the first instance by a plan committee, which is composed of company personnel. If the claimant challenges the committee’s decision, it is then reviewed by a U.S. District Court under the liberal deference or “abuse of discretion”/ ”arbitrary and capricious” standard, and usually sustained.

Arbitration would remove such disputes from the control of the plan committee, and place them under the control of a non- party arbitrator. An arbitrator probably would not accord the same respect to the plan sponsor’s position that a committee would. Nor could multiple arbitrators deciding multiple claims adopt a uniform approach to construing and applying key provisions of the plan, the way a committee presumably would. Non-party arbitrators also would likely be unfamiliar with the plan sponsor’s benefit programs, and—unlike a plan committee—would need to be educated on the subject anew in each case. Additionally, by choosing arbitration, a plan sponsor would give up its right to appeal an adverse determination in most cases.

Finally, if a plan sponsor chooses to implement an arbitration agreement, it must comply with DOL regulations that set criteria to be met by procedures for determining ERISA claims. See 29 C.F.R. §2560.503-1(b), (e)-( j). A plan’s provisions should be reviewed to determine if they meet these requirements. ¢