It is well established that plan sponsors and fiduciaries may require plan participants and beneficiaries to participate in mandatory, binding arbitration as a means to prosecute claims under the Employee Retirement Income Security Act of 1974. It remains unclear, however, whether such arbitration agreements may preclude participants and beneficiaries from pursuing ERISA claims—including fiduciary breach claims—on a classwide basis. Two recent U.S. Supreme Court rulings[1] have brought renewed interest in these issues, as they suggest that employers may be able to avoid class litigation through the use of provisions that require participants to pursue ERISA claims in arbitration and then limit the arbitration to the pursuit of individual claims.

As discussed below, there is a lack of consensus among the lower courts as to application of these rulings in employment-related disputes, which in turn has left a great deal of uncertainty about whether class action waivers will be enforced in connection with ERISA claims; and, if so, whether these waivers can effectively preclude class litigation altogether.

Arbitrability of ERISA Claims

Twenty-five years ago, the U.S. Supreme Court ruled that the "duty to enforce arbitration agreements is not diminished when a party bound by an agreement raises a claim founded on statutory rights."[2] The case in question was brought by trustees for various pension and profit-sharing plans alleging that a brokerage firm and the financial consultant who handled their accounts violated certain securities laws. In its ruling, the Supreme Court observed that "'we are well past the time when judicial suspicion of the desirability of arbitration and the competence of arbitral tribunals' should inhibit enforcement of the [Federal Arbitration] Act 'in controversies based on statutes.'"

The court concluded that the Federal Arbitration Act (FAA) required enforcement of arbitration clauses unless either: (a) there existed a well-founded claim that the arbitration clause resulted from the sort of fraud or excessive economic power which could invalidate any contract; or (b) the party opposing arbitration demonstrated that Congress intended to prohibit waiver of judicial remedies for the statutory rights in question.

The court rejected many of the reasons offered in prior decisions as bases for refusing to enforce arbitration clauses. For example, it rejected the presumption that arbitral tribunals were incapable of handling complex disputes and that streamlined arbitration procedures entailed a diminution of substantive rights. It also saw no reason to assume that arbitrators would not follow the law, as judicial review was sufficient to ensure that they complied with the commands of federal statutes.

Consistent with the Court's ruling in McMahon, all circuit courts that have addressed the issue have concluded that employee benefit plans may require participants and beneficiaries to arbitrate their claims under ERISA. This includes all types of ERISA claims, such as claims for benefits, claims alleging a breach of fiduciary duty, claims based upon ERISA's substantive requirements, and discrimination and/or interference with benefits claims.[3] In so ruling, the courts have rejected various grounds for concluding that Congress intended to exempt ERISA claims from the FAA, including, for example, that: (a) ERISA confers exclusive jurisdiction on the federal courts; (b) arbitration will stifle judicial development of ERISA claims, since not all such claims will be subject to arbitration, and judges will continue to issue decisions interpreting ERISA; and (c) compulsory arbitration of ERISA claims will frustrate the legislative goal of developing a consistent body of law because there is no assurance that arbitrators will follow court precedents.

U.S. Supreme Court Rulings on Class Action Waivers

In the past two years, the U.S. Supreme Court has issued two rulings that have profoundly impacted the legal landscape of class arbitration claims. First, in Stolt-Nielsen v. AnimalFeeds, the Supreme Court held that, absent a mutual agreement to participate in classwide arbitration, a party could not be compelled to arbitrate classwide claims. At issue in Stolt-Nielsen was a shipping agreement that required the parties to arbitrate any dispute arising from their commercial relationship.

In 2005, AnimalFeeds served Stolt-Nielsen with a demand for class arbitration. While the parties agreed that they had to arbitrate the dispute pursuant to their contract, they also agreed that the arbitration clause was silent on the issue of class arbitration. They therefore submitted the question of class arbitration to a panel of arbitrators, who concluded, based on the rationale that public policy favors class arbitration, that class arbitration was permissible. Upon Stolt-Nielsen's motion to vacate the award, the U.S. District Court for the

Southern District of New York held that the panel had erred in basing its decision on policy grounds, and that it should have considered whether existing law provided instruction as to how to interpret a silent contract. The Supreme Court agreed. It also observed that while the panel made a few references to the parties' intent, its award did not clarify how intent informed its decision. The Court then turned to the FAA for guidance in how to treat the silent arbitration clause and concluded that, although some "silent" agreements may lend themselves to inferences regarding parties' intent, this particular agreement did not.

Second, in AT&T v. Concepcion, the Supreme Court held that the FAA preempted a California rule prohibiting certain arbitration contracts that prevented individuals from arbitrating class claims. The dispute concerned a promotion in which AT&T Mobility advertised a free or discounted phone for customers who entered into an agreement for cellular phone service. As a part of the service agreement, customers had to agree to resolve disputes through arbitration. When customers received their new phones and first bills, they were charged sales tax on the full retail value of the phone, ranging from approximately $10 to $30.

Several groups of plaintiffs filed claims alleging unfair competition and deceptive practices, in violation of California law. The suits were consolidated in federal court. AT&T filed motions to compel individual arbitrations of the claims. The district court determined that the class waiver provision was unconscionable, relying on the California rule first established by existing state precedent. The court thus invalidated the provision and allowed the class claim to proceed in federal court. The Ninth Circuit affirmed.

The Supreme Court reversed and determined that the FAA preempted the state-law rule, as the rule interfered with the FAA's goal of promoting arbitration and its expeditious results. The Court reasoned that the FAA reflected a liberal approach toward arbitration and required, as one of its fundamental precepts, that arbitration agreements be held on equal footing with any other contractual agreements. Therefore, arbitration agreements should only be struck down for reasons that could nullify other contracts, such as fraud, duress, or unconscionability. Here, no such reason justified striking down the class waiver clause.

Application of Stolt-Nielsen and Concepcion

As of the writing of this article, there do not appear to be any published decisions directly addressing the enforceability of class action waivers under ERISA, although the Middle District of Alabama recently touched on the issue and compelled arbitration of plaintiffs' ERISA claims seeking reimbursement of excess health insurance premiums withheld from their paychecks. In Hornsby v. Macon County Greyhound Park Inc.,[4] the district court concluded that, under Alabama's default rule, the arbitration agreement's silence meant that the plaintiffs were not permitted to pursue their claims as class claims. In so ruling, the court rejected plaintiffs' argument that it was unconscionable under Alabama law to preclude class claims where, as here, it would be more efficient to proceed as a class.

There have been a number of decisions, not all of which have reached consistent conclusions, that have ruled on the enforceability of class action waiver provisions in labor and employment law disputes.

Shortly after the Supreme Court issued its decision in Concepcion, the National Labor Relations Board (Board) held that an employer could not, as a condition of employment, require that employees waive their right to bring class and collective claims before an arbitrator or a judge.[5] In D.R. Horton, the arbitration agreement stated that employees must bring employment-related claims before an arbitrator, and the arbitrator could only hear individual claims. The Board concluded that by foreclosing the possibility of group action in any forum, the agreement violated Section 7 of the National Labor Relations Act (NLRA), which provides for employees' rights to engage in concerted activities for the purpose of mutual aid or protection. The Board purported to distinguish Concepcion on the grounds that: (a) D.R. Horton's agreement violated employees' statutorily protected rights, while no such rights were at play in the Concepcion consumer context; and (b) Concepcion involved a conflict between state and federal law, whereas D.R. Horton involved two federal laws, the FAA and the NLRA, that did not in fact conflict with each other, since the FAA protects parties' rights to arbitrate only insofar as the parties do not forgo any substantive rights afforded by statute.

Federal district courts also have had several occasions to determine the enforceability of class action waivers in the employment arena. For example, in Chen-Oster v. Goldman Sachs & Co.,[6] the court denied Goldman Sachs' motion to compel arbitration of plaintiffs' "pattern and practice" gender discrimination claims. Although the court concluded that the arbitration agreement encompassed these claims and that the policy's silence with respect to the availability of class arbitration rendered class arbitration unavailable, the court nevertheless held that the arbitration clause should not be enforced because federal law creates a substantive right to be free of "pattern or practice" discrimination by an employer, and compulsory arbitration would preclude plaintiffs from enforcing this right. At issue, according to the court, was "not a right to proceed, procedurally, as a class, but rather the right, guaranteed by Title VII, to be free from discriminatory employment practices." The court thus concluded that Concepcion was not applicable.[7]

Two district courts recently reached opposite conclusions with respect to the same arbitration policy applicable at certain Citigroup-affiliated entities (collectively, Citigroup). This particular policy provided that arbitration was the exclusive forum for resolving all employment-related disputes, and that employees could not submit any class or collective actions under the policy. In both cases, plaintiffs alleged that they were denied overtime compensation as a result of having been misclassified as exempt from the wage and hour provisions of the Fair Labor Standards Act (FLSA). After plaintiffs separately commenced their claims as collective actions, Citigroup moved to compel individual arbitration pursuant to the arbitration agreement.

In Raniere v. Citigroup Inc.,[8] the Southern District of New York denied Citigroup's motion to compel individual arbitration. The court concluded that Concepcion was distinguishable because that case concerned whether a state law was preempted by the FAA, and Raniere's claim was based entirely on federal law. The court observed that the FAA requires a court to declare an otherwise operative arbitration clause unenforceable if enforcement would prevent plaintiffs from vindicating their statutory rights. Here, the court concluded that the right to proceed collectively under the FLSA could not be waived as a matter of federal law. The court reasoned that the FLSA collective action is a ''unique animal,'' whose procedures and legislative history justify different treatment from class actions brought under Rule 23 of the Federal Rules of Civil Procedure. For instance, whereas Rule 23 class actions require would-be plaintiffs to opt out if they do not wish to be included in the class, the FLSA requires that plaintiffs affirmatively opt in if they want their claims adjudicated. This feature of the FLSA reflected Congress's desire to give plaintiffs the advantage of lower costs associated with pooled resources.

Six months after Raniere, the Middle District of Florida granted a similar motion by Citigroup and concluded that, by virtue of the same policy at issue in Raniere, the lead plaintiff and five opt-ins had legally waived their right to bring an FLSA collective action.[9] The court relied on two earlier decisions by the Eleventh Circuit, one that had enforced a waiver of collective action rights under the FLSA, and another that, like Concepcion, held that a class action waiver in a commercial arbitration agreement was enforceable. In light of these precedents, the court summarily rejected plaintiffs' assertion that Concepcion was inapplicable in the employment context.

Two other federal district courts have reached opposite conclusions as to the enforceability of arbitration clauses to preclude class claims, based on differing views as to the relevance of policy concerns such as whether or not plaintiff's expenses in pursuing her claim on an individual basis would have dwarfed her maximum potential recovery.[10]

Proskauer's Perspective

In combination, the rulings in Stolt-Nielsen and Concepcion could conceivably permit employers/plan sponsors to avoid defending class action ERISA claims in federal court by conditioning employment on arbitration agreements, and avoiding classwide arbitration by either making no allowance for such claims in the arbitration agreement or, alternatively, specifically providing that the arbitrations will be limited to individual claims.

The recent case law applying the Supreme Court rulings in employment claims suggests that some courts may look to find means to distinguish ERISA claims and thereby preclude the use of arbitration clauses in this manner. There are arguments for distinguishing these anti-arbitration rulings in the ERISA contexts, however. For instance, to the extent some courts have determined that the FLSA confers a substantive right to proceed as a collective action, that reasoning would not appear to apply under ERISA. Similarly, to the extent the one court's reasoning was based on its belief that plaintiffs are required to pursue Title VII "pattern and practice" claims as class actions, that reasoning also would not appear to apply under ERISA since there is no requirement to pursue any type of ERISA claim, including a claim for breach of fiduciary duty seeking planwide recovery, as a class claim.

Given the current state of the law, there appears to be enough of a possibility to prevail on enforcing class waivers in arbitration agreements that plan sponsors and fiduciaries should include them in their arbitration agreements and plan documents if perceived to be an advantage. Even if enforced, however, their impact remains unclear in light of the fact that, as mentioned, a single participant may commence a lawsuit in a representative capacity under ERISA,[11] without resorting to the class action devices available under the Federal Rules of Civil Procedure.

If plan sponsors and fiduciaries decide to require class action waivers, arbitration agreements should expressly state that claims in arbitration are limited to individual claims. These polices should appear in the plan document and summary plan description and should be made clearly known to all participants and beneficiaries.