Alex Smith
by Alex Smith
Courts have been mixed regarding the enforceability of arbitration provisions in Employee Retirement Income Security Act (ERISA) retirement plans since the U.S. 9th Circuit Court of Appeals’ 2019 decision in Dorman v. Charles Schwab Corp. Some employers and plan sponsors have considered adding arbitration provisions based on Dorman and the proliferation of ERISA class action lawsuits. Following the decision from the 10th Circuit (whose rulings apply to all Colorado employers) in Harrison v. Envision Management Holding, Inc. Board, however, employers in the 10th Circuit may want to reconsider.
10th Circuit’s decision
In Harrison, the 10th Circuit rejected the enforcement of an employee stock ownership plan’s (ESOP) arbitration provision in a lawsuit filed by a plan participant alleging the ESOP’s fiduciaries overpaid for the employer’s stock, breached numerous ERISA fiduciary duties, and engaged in prohibited transactions.
The 10th Circuit’s ruling focused on the ESOP’s specific arbitration provision, which allowed participants to obtain only individual relief and therefore made it impossible for them to obtain the plan-wide relief under ERISA. As a result, the 10th Circuit concluded the participants couldn’t effectively vindicate their statutory rights under ERISA.
In its ruling, the 10th Circuit relied on the 7th Circuit’s decision in Smith v. Board of Directors of Triad Manufacturing, Inc., which involved similar claims and a similar arbitration provision. It didn’t address, however, why the 9th Circuit’s decision in Dorman enforcing a 401(k) plan’s arbitration provision is inapposite nor whether another retirement plan’s arbitration provision that permitted plan-wide relief could be permissible under other circumstances. The Harrison decision leaves employers in the 10th Circuit with a rather significant unanswered question.
Next steps
For employers in the 10th Circuit, the court’s recent ruling changes the calculation for whether to insert an arbitration provision in their ERISA plans. Even without a broad rejection of ERISA arbitration provisions, the court’s decision is likely to make district courts within the 10th Circuit at least pause when considering such a provision.
An employer seeking to enforce arbitration in its ERISA retirement plan within the 10th Circuit will likely need to convince the court that the 10th Circuit’s recent decision should be viewed narrowly, and favorable out-of-circuit decisions are more applicable to the facts.
While the 10th Circuit’s decision leaves the unanswered question of whether a narrower retirement plan arbitration provision could be permissible, as a practical matter, such a narrow provision is likely ineffective anyway in accomplishing an employer’s goals of pushing ERISA litigation into arbitration or limiting potential exposure for fiduciary breach claims.
