Seyfarth Synopsis: The Second Circuit recently ruled that an ERISA plan's arbitration provision was not enforceable because the provision barred plan-wide relief. Cedeno v. Sasson, 2024 WL 1895053 (2d Cir. May 1, 2024). The Court decision highlights the unsettled nature of the law surrounding ERISA arbitration provisions.
It is every employer and plan administrator's nightmare: an employee brings a convoluted ERISA lawsuit that could bring significant financial liability. To circumvent this legal landmine, a plan arbitration/class action waiver provision may seem to be an obvious solution, right? Not so fast!
In the wake of Cedeno v. Sasson, plan administrators may need to take additional precautions when deciding whether or not to included arbitration and exhaustion clauses. In Cedano, Plaintiff sued his former employer for fiduciary breach under Section 502(a)(2) of ERISA for allegedly buying shares of company stock at more than fair value for the employer's stock purchase plan. The Plan contained a mandatory arbitration clause, which stated that participant claims involving the Plan would be settled by binding arbitrations, and such claims must be brought in an individual capacity and not in a representative capacity or on a collective basis. Under this clause, the participant would not be able to seek any remedy that would provide additional benefits or relief to anyone other than the participant.
When Defendants moved to compel arbitration, the federal district court for the South District of New York denied the motion, holding the agreement was not enforceable on the grounds that it prevented Plaintiff from seeking plan-wide relief under ERISA Section 502(a). The Second Circuit affirmed the decision, concluding the Federal Arbitration Act does not allow courts to enforce arbitration agreement to the extent they prospectively waive substantive statutory rights. The Court also concluded that the Plan's arbitration provision constituted an unenforceable prospective waiver of Plaintiff's statutory rights and remedies under ERISA Section 502(a)(2).
In a forceful dissent, Circuit Judge Menashi argued the Federal Arbitration Act did not conflict with the terms of ERISA and that Section 502(a)(2) does not empower participants to act in a representative capacity to seek relief for fiduciary breaches. Cedeno is just the most recent Circuit Court decision regarding the appropriate scope of arbitration clauses in ERISA benefit plan. In its ruling, the Second Circuit joints the Third, Seventh, and Tenth Circuits in holding unenforceable plan arbitration provisions due to the provisions preventing a plan participating from seeking statutory relief under ERISA sections 502(a)(2). The Ninth Circuit in contrast has held that class action ERISA claims brought on behalf on an entire ERISA plan are subject to individual arbitration with relief limited to the individual plaintiff's claims. Given the unsettled nature of law in this area, Seyfarth is monitoring the continued progression of the circuit court decisions and will provide an update as soon as they are publicly available.
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