Second Circuit Holds Arbitration Agreement Is Unenforceable Because of Prospective Waivers of Participants’ Substantive Statutory Rights and Remedies under ERISA

In Cedeno v. Sasson, No. 21-2891-CV, __F.4th__, 2024 WL 1895053 (2d Cir. May 1, 2024), a putative class action seeking relief under ERISA Section 502(a)(2), the Second Circuit Court of Appeals joined the Third, Seventh, and Tenth Circuit Courts of Appeals in holding that an arbitration provision which operates as a prospective waiver of substantive, plan-wide remedies under ERISA is unenforceable.

Ramon Dejesus Cedeno sued his former employer and others for Defendant Argent Trust Company’s alleged breaches of fiduciary duty relating to the Strategic Employee Stock Ownership Plan’s (“the Plan”) purchase of shares of Strategic Family for more than fair market value. Cedeno, on behalf of a class of other Plan participants, sought various forms of relief under ERISA Section 502(a)(2), “including restoration of Plan-wide losses, surcharge, accounting, constructive trust on wrongfully held funds, disgorgement of profits gained from the transaction, and further equitable relief as the court deems necessary.” The Plan contains a provision for “Mandatory and Binding Arbitration,” which provides, in relevant part, that any claims for ERISA breach of fiduciary duty shall be settled by binding arbitration. Further, any claim must be brought solely in the claimant’s individual capacity and not in a representative capacity or on a class basis. The arbitration provision specifically states that for any claims under ERISA Section 502(a)(2) seeking relief under ERISA Section 409, the remedy is limited to alleged losses to the claimant’s accounts, a pro-rated portion of any profits allegedly made by a fiduciary through the use of Plan assets, or any other relief provided only that it results in just benefits or monetary relief to the claimant and is not binding on the Plan’s administrator or trustee with respect to any other person other than the claimant. In short, a claimant cannot seek to restore plan-wide losses that benefit other participants in the Plan. If any part of the arbitration provision is deemed unenforceable or invalid, then the entire arbitration procedure shall be rendered null and void in all respects.

The Second Circuit agreed with the district court that the arbitration agreement was unenforceable because it would prevent Cedeno from pursuing remedies available under Section 502(a)(2) that are, by their nature, Plan-wide. In coming to this conclusion, the court considered the reach of the Federal Arbitration Act (“FAA”) and caselaw establishing the framework for ERISA breach of fiduciary duty claims. See Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985) (concluding that Section 502(a)(2) claims can only be brought to pursue relief on behalf of a plan, and cannot be used as a mechanism to seek individual equitable relief for losses arising from the mismanagement of a plan); LaRue v. DeWolff, Boberg & Assocs., 552 U.S. 248, 256, 128 S.Ct. 1020, 169 L.Ed.2d 847 (2008) (holding firm to conclusion in Russell that Section 502(a)(2) provides no remedy for individual injuries distinct from plan injuries). The court also relied on the general principle recognized by the Supreme Court in Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 234 (2013) that provisions within an arbitration agreement that prevent a party from effectively vindicating statutory rights are not enforceable.

The court rejected Defendants’ arguments that Cedeno can effectively vindicate his statutory rights by pursuing individualized claims for relief that make him whole without impacting the rights of other participants and beneficiaries. In considering the enforceability of arbitration provisions that prohibit representational arbitration, there is a qualitative difference between waivers of collective-action procedures like class actions and waivers that preclude a party from arbitrating in a representational capacity on behalf of a single absent principal. See Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 653, 142 S.Ct. 1906, 213 L.Ed.2d 179 (2022). The court found that there is no legal way to provide many of ERISA’s equitable remedies sought by Cedeno without impacting the accounts of other plan participants and beneficiaries.

The court also found support in three sister circuit decisions in closely analogous cases. See Smith v. Board of Directors of Triad Manufacturing, Inc., 13 F.4th 613, 615 (7th Cir. 2021) (holding that arbitration provision could not be enforced because it would prevent a plaintiff from vindicating statutory rights guaranteed by ERISA under Section 502(a)(2)); Harrison v. Envision Management Holding, Inc., 59 F.4th 1090, 1094 (10th Cir. 2023) (same); Henry on behalf of BSC Ventures Holdings, Inc. Emp. Stock Ownership Plan v. Wilmington Tr. NA, 72 F.4th 499, 505-07 (3d Cir. 2023) (declining to enforce agreement requiring individual arbitration where plan participant sought plan-wide remedies under Section 502(a)(2)).

The court concluded that the Plan’s arbitration provision is null and void given the non-severability clause and affirmed the district court’s order denying the motion to compel arbitration. Judge Menashi issued a dissenting opinion.