The U.S. Supreme Court has recently upheld arbitration provisions in various contexts — an employment agreement in Rent-A-Center, West, Inc. v. Jackson, a consumer contract with a cell phone service provider AT&T Mobility LLC v. Concepcion, and a merchant agreement with a credit card company in American Express Co. v. Italian Colors Restaurant.
What would the Court do with an arbitration provision precluding judicial review of ERISA claim and appeal denials?
The establishment of ERISA plans are voluntary, and ERISA plan sponsors “have large leeway to design disability and other welfare plans as they see fit.” Heimeshoff v. Hartford Life & Accident Ins., 134 S. Ct. 604, 612 (2013). The same is generally true of ERISA pension benefit plans, provided they meet minimum participation, vesting and funding requirements. In Heimeshoff, the Court recognized the importance of enforcing plan terms as written.
The Supreme Court has also said that “courts must place arbitration agreements on equal footing with other contracts, … and enforce them according to their terms.” AT&T Mobility LLC v. Concepcion, 131 S. C. 1740, 1745-46 (2011) (citations omitted).
ERISA is silent on mandatory arbitration in lieu of judicial review under Section 502(a) of ERISA (although a DOL regulation arguably prohibits it in the non-collective bargaining context). The recent Supreme Court decisions suggest, however, that plan sponsors may condition benefits on an agreement to arbitrate a final claim denial.
Arbitration may soon be seen as an attractive alternative to federal court litigation, especially if the plan sponsor is of the view that the federal courts will allow expensive discovery as part of litigation seeking to review a final claim denial.
There are negatives to arbitration, to be sure. Arbitration would not allow any appellate review on the merits. An award may be attacked only on the basis of fraud or the arbitrator’s exceeding the scope of his authority. Arbitration must be consistent with requirements in other applicable laws, such as the National Labor Relations Act and state insurance statutes not preempted by ERISA. An arbitration clause in lieu of ERISA review also may face a challenge based on DOL regulations.
Federal courts have reviewed ERISA plan provisions requiring arbitration of final claim denials, without the benefit of the Supreme Court decisions noted above, and issued these decisions worth noting:
- In Snyder v. Federal Ins. Co., 2009 WL 700708 (S.D. Ohio Mar. 13, 2009), the court was asked to compel arbitration after exhaustion of the plan’s claim and appeal procedure for denial of benefits. The court denied arbitration because of the DOL regulation at 29 C.F.R. § 2560.503-1(c)(4) prohibiting mandatory arbitration in lieu of court review. The arbitration provision was deemed voluntary — one that can be declined by any party.
- In Wicklander v. Defined Benefit Pension Plan, 2004 WL 2260609 (D. Or. Oct. 5, 2004), the plaintiffs arbitrated their claims following denials of disability benefits. After the denials were upheld by the arbitrator, the plaintiffs filed suit in federal court. The defendant moved to dismiss by arguing that the arbitration decision was not reviewable on its merits. The court denied the motion to dismiss, finding that the plan language did not prohibit plaintiff from bringing a civil action under ERISA Section 502(a) after completing mandatory arbitration. Left open was the issue whether plan language could, if worded properly, preclude Section 502(a) judicial review.
- In Chappel v. Laboratory Corp. of Am., 232 F.3d 719 (9th Cir. 2000), plaintiff was denied benefits. The court enforced the plan’s mandatory arbitration provision (without addressing whether the arbitrator’s decision could still be reviewed under ERISA Section 502(a)).
We expect that the Supreme Court’s recent, strong endorsement of arbitration will prompt some ERISA plan sponsors to consider implementing arbitration as an alternative to court litigation. Whether that makes sense, of course, will turn on the individual circumstances of the sponsor and its analysis of the associated legal risks.