On February 9, 2023, the U.S. Court of Appeals for the Tenth Circuit refused to enforce an arbitration clause contained in an employee stock ownership plan (“ESOP”) document. In a 41-page opinion, the Court held that the ESOP Plan improperly limited the ESOP beneficiaries’ rights and remedies granted under the Employee Retirement Income Securities Act (“ERISA”). As such, the provision denying beneficiaries these ERISA rights and remedies was found null and void.
With alternative dispute resolution on the rise, this case confirms that in the Tenth Circuit, mandatory arbitration of ERISA claims is allowed. However, mandatory arbitration cannot limit the remedies that are otherwise provided to litigants under ERISA. In other words, an arbiter must be allowed to fashion the same relief that would otherwise be available to a beneficiary in federal court. When drafting or amending ERISA plan documents, the inclusion of, and extent of, a mandatory arbitration clause should be something to consider.
Plaintiff Harrison is a former employee of defendant Envision Management Holding, Inc. (“Envision”). While Harrison was employed by Envision, Envision created the ESOP and transferred 100% of Envision’s stock into the ESOP. Envision hired Argent Trust Company to serve as the Trustee of the ESOP and manage the sale. The ESOP purchased Envision’s stock for $163.7 million (priced at between $1,404 and 1,770 per share); however, weeks after the ESOP sale, the stock was valued at only $349 per share.
Harrison filed suit in the United States District Court, District of Colorado alleging six causes of action, including claims under 29 U.S.C. § 1132(a)(2) and (a)(3), and requesting plan-wide relief including, among other things, a declaration that all defendants breached their fiduciary duties, the removal of Argent as the ESOP trustee, and the restoration of the ESOP’s losses resulting from the breach of fiduciary duties.
Defendants moved to compel arbitration pursuant to an arbitration clause in the ESOP Plan. The arbitration clause required that any claim involving the ESOP, including any claims against fiduciaries or trustees, must be resolved exclusively by binding arbitration. The ESOP Plan further excluded beneficiaries from bringing class-action claims and prohibited a claimant from seeking relief on behalf of the Plan—i.e., claimants could only seek relief for harm they individually suffered and could not request changes to the ESOP Plan structure, such as the removal of trustees or fiduciaries. The District Court denied Defendants’ motion to compel arbitration finding that the arbitration clause precluded claimants from seeking relief expressly available under ERISA. Defendants appealed.
The Tenth Circuit did not take issue with the ESOP Plan’s mandate that claims be exclusively resolved through arbitration. Neither did the Tenth Circuit call into question the ESOP Plan’s exclusion on class or collective actions. Instead, the Tenth Circuit held that the ESOP Plan prevented claimants from vindicating their statutory remedies under ERISA and, as such, the provision was void.
29 U.S.C. § 1132(a)(2) allows claimants to obtain certain forms of plan-wide relief, including injunctive relief and the removal and replacement of plan fiduciaries. However, the ESOP Plan’s arbitration clause prohibited this same relief. While the Federal Arbitration Act requires the strict enforcement of arbitration clauses, [see 9 U.S.C. § 2], courts have employed the “effective vindication” doctrine to prohibit arbitration agreements from denying claimants their right to statutory remedies.
The Tenth Circuit applied the “effective vindication” doctrine and found that the ESOP Plan’s arbitration clause limited Harrison’s ability to effectuate rights and remedies that Congress expressly granted beneficiaries under ERISA. Because the ESOP Plan precluded Harrison from obtaining relief authorized under ERISA, the “effective vindication” doctrine prohibited its enforcement.
This case makes it clear that in the Tenth Circuit, ERISA plans are allowed to force claims to arbitration. ERISA plans are further allowed to prohibit class or collective actions. However, ERISA plans cannot limit the scope and breadth of remedies provided by ERISA.