Tenth Circuit Prohibits Class-Action Waivers in Benefit Plan Documents

It is no secret that many businesses minimize risk by requiring arbitration of disputes on an individual basis. The exposure created by a single claim pales next to that presented by a class claim, asserted under Rule 23, on behalf of numerous individuals. To implement this mitigation strategy, businesses typically include in their agreements an arbitration provision, coupled with a waiver of the right to bring a class or collective action.

The United States Supreme Court has generally validated this approach. Even when the cost of asserting an individual statutory claim far exceeds the amount of the relief, the Supreme Court has held that a class waiver is enforceable under the Federal Arbitration Act. See Am. Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235 (2013). The predicate of this holding, however, is that the contractual waiver cannot extinguish the federal right itself. “Where an arbitration agreement prevents a litigant from vindicating federal substantive statutory rights, courts will not enforce the agreement.” Hengle v. Treppa, 19 F.4th 324, 335 (4th Cir. 2021). Just last month, for instance, the Fourth Circuit relied upon this “prospective waiver” doctrine to rebuff a payday lending arrangement that attempted to substitute a ‘tribal remedy’ for federal statutory rights in arbitration. Williams v. Martorello, 59 F.4th 68 (4th Cir. 2023).

But what happens when the statute at issue expressly includes the right to assert a representative or derivative claim? We find that to be the case, for instance, with respect to certain claims arising under ERISA. As construed by the Supreme Court, see Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 142 n. 9 (1985); Larue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248, 256 (2008), ERISA § 409 gives an individual claimant the statutory right to assert a derivative claim for breach of fiduciary duty on behalf of the benefit plan. Does that mean that the benefit plan’s arbitration provision can limit the right of a plan participant to a purely individual recovery and preclude the individual from recovering relief on behalf of the plan?

“No,” said the Tenth Circuit in a decision earlier this month. Even though the arbitration provision can generally restrict the right to class relief, it cannot, the Tenth Circuit decided, eliminate the statutory right of a participant to secure the derivative relief provided in ERISA. See Harrison v. Envision Management Holding, Inc. Board of Directors, 2023 WL 1830446 (10th Cir. Feb. 9, 2023). In Harrison, the plaintiff filed a class action challenging the $150 million price paid by an ESOP for stock purchased from the founders of the company. Harrison asserted a claim for plan-wide relief under ERISA § 502(a)(2), which gives an individual the right to bring an action for a breach of fiduciary duty on behalf of the plan under ERISA § 409. Relying on an arbitration provision contained in the ESOP that limited class-wide or derivative relief, defendants moved to compel arbitration, which the district court denied.

Citing the Supreme Court’s observations that an arbitral forum must allow for “effective vindication” of the federal right, the Tenth Circuit affirmed, noting that the United States Department of Labor had filed an amicus brief on behalf of the plaintiff. Central to the appellate court’s decision was the fact that Section 409 of ERISA allows only representative relief on behalf of the plan: “Because [the class-action waiver], if enforced, would prevent Harrison from vindicating in the required arbitral forum the statutory causes of action listed in his complaint, we conclude that the effective vindication exception applies in this case.” As the appellate court observed, if this were not the case, it would be unclear “what remedies [the plaintiff] would be left with,” since only derivative relief is generally available for breach of the fiduciary duties set forth in ERISA § 404.

The lesson here is that you can limit class or representative relief in an arbitration agreement but not if that relief is built into the federal cause of action itself. Unless the Supreme Court intervenes, the holding in Harrison will serve to limit substantially the risk mitigation strategy adopted by numerous sponsors of employee benefit plans. And plan sponsors will need to amend their benefit documents to reflect this holding.