Recently, the Tenth Circuit Court of Appeals held an arbitration provision impermissibly blocked rights afforded to a retirement plan participant under the Employee Retirement Income Security Act (ERISA) and was therefore unenforceable.

As background, in Harrison v. Envision Management Holding, Inc. (Envision), the plaintiff, a former employee of Envision and participant in Envision’s defined contribution retirement plan, filed suit under various provisions of ERISA against the fiduciaries of the plan in the United States District Court for the District of Colorado.

The plaintiff alleged that the fiduciaries breached their duties to the plan by purchasing Envision for significantly more than it was worth. The purchase allegedly left the plan with a $154.4 million debt, while the owners of Envision financially benefitted and retained control of the company. The plaintiff sought plan-wide relief under ERISA §§ 502(a)(2), and (a)(3), alleging that Envision’s actions caused the plaintiff and the other plan participants to suffer significant losses to their plan retirement savings.

Envision filed a motion to compel arbitration and to stay the proceedings, arguing that the plan document required arbitration of the plaintiff’s claims, and that by filing in federal court, the plaintiff was seeking to circumvent the Federal Arbitration Act (FAA) and ERISA. Envision argued that the FAA mandates enforcing arbitration provisions, and ERISA dictates enforcing the terms of governing plan documents. The specific arbitration clause at issue barred claims brought in a representative capacity, as well as any remedy that provides additional benefits or relief to anyone other than the claimant. In opposition, the plaintiff argued that Envision attempted to limit the substantive relief Congress made available to him under ERISA, including his right to seek relief on behalf of the plan as a whole, rather than his own individual losses, per ERISA § 502(a)(2). The district court issued an order denying Envision’s motion, concluding that the arbitration provision was invalid as it conflicted with ERISA. Envision appealed.

In support of the plaintiff, the Department of Labor (DOL) filed an amicus brief, arguing that ERISA §§ 502(a)(2) and 409(a) authorize participants to bring an action to recover any losses to the plan resulting from a fiduciary breach in a representative capacity on behalf of the plan as a whole, even in the context of defined contribution plans comprising individual participant accounts.

In a de novo review, the Tenth Circuit assessed the general validity of arbitration provisions, as well as the “effective vindication exception” to the same. The exception is rooted in public policy concerns to prevent a prospective waiver of a party’s right to pursue statutory remedies. An arbitration provision would be invalidated by the effective vindication exception if the prospective litigant can’t effectively vindicate his statutory cause of action in arbitration. While noting that the Supreme Court has recognized the effective vindication exception, the appellate court explained that, thus far, the Supreme Court has declined to actually apply it to invalidate an arbitration provision.

In its analysis, the Tenth Circuit held that to determine whether the effective vindication exception applies, a court must: 1) examine the statutory remedies sought in the complaint; and 2) determine whether the arbitration provisions contained in the plan document effectively prevent the claimant from obtaining those statutory remedies in the arbitral forum.

Here, the plaintiff attempted to recover additional relief, including an order removing the fiduciary of the plan and imposing liability on the fiduciaries for losses suffered by the plan generally, among other things. Because the relief sought would benefit the plan as a whole, rather than the plaintiff individually, the Tenth Circuit held that the provision was unenforceable, as it would foreclose a number of remedies that were specifically authorized by Congress under ERISA, including the right of participants to bring an action to recover any losses to the plan resulting from a fiduciary breach.

Our Take

Employer-sponsored plan documents that require a claimant to engage in the procedural mechanism of individual arbitration are not at issue under the Harrison holding, but rather, arbitration provisions that endeavor to prohibit an individual claimant seeking any form of relief that would benefit anyone other than the claimant may be problematic in the Tenth Circuit.