In Smith v. Bd. of Directors of Triad Mfg., Inc., No. 20-2708, __F.4th__, 2021 WL 4129456 (7th Cir. Sept. 10, 2021), Plaintiff-Appellee James Smith sued the fiduciaries of the Triad’s Employee Stock Ownership Plan (the “ESOP” or “Plan”), a defined contribution employee retirement plan, for breaches of fiduciary duty under 29 U.S.C. § 1132(a)(2) and (a)(3), for failing to monitor a co-fiduciary in violation of 29 U.S.C. § 1104(a)(1)(A) and (B), for engaging in prohibited transactions in violation of 29 U.S.C. § 1106(a), and for knowing participation in a fiduciary breach in violation of 29 U.S.C. § 1105(a)(1) and (a)(3). Smith sought wide-ranging relief, including removal of the ESOP trustee, appointment of a new independent fiduciary to manage the ESOP to be paid for by defendants, and other equitable relief.
The fiduciaries of Triad’s board (“board defendants”) moved to compel arbitration, or in the alternative, to dismiss Smith’s claims under FRCP 12(b)(3) or (b)(6). The arbitration provision that the board defendants sought to enforce was an amendment to the Plan which states that all “Covered Claims,” including claims for breach of any provision of ERISA, must be brought in a claimant’s individual capacity and not in a representative capacity or on a class basis. Further, each arbitration is limited to only individual relief and a claimant “may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to [others].” The amendment also expressly limits a claimant’s remedy for any claim brought under ERISA § 502(a)(2) which seeks appropriate relief under § 409. If a court finds the requirements of the provision to be unenforceable, “then the entire Arbitration Procedure … shall be rendered null and void in all respects as to the particular claim that is the subject of that court’s ruling.”
The district court denied the board defendants’ motion to compel arbitration on two grounds. The first ground was on the basis that Smith did not consent to the arbitration provision and it could not bind him. He ended work with Triad two years before the arbitration provision was added to the Plan and there was no evidence he was given notice of the amendment. The court rejected the Ninth Circuit’s analysis in Dorman v. Charles Schwab Corp. (Dorman II), 780 F. App’x 510, 513 (9th Cir. 2019) “which enforced a similar ERISA arbitration provision unilaterally added by the plan sponsor.” The second ground was that the arbitration provision was unenforceable because it prospectively waived Smith’s right to statutory remedies provided by ERISA; specifically, plan-wide statutory remedies permitted under §§ 1132(a)(2) and 1109(a). In so doing, the district court rejected the Ninth Circuit’s determination in Doman II that individualized arbitration for defined contribution plan claims was consistent with ERISA. Defendants appealed.
On appeal, the Seventh Circuit first examined the relevant ERISA provisions including § 1132(a)(2) (providing for a civil action to be brought for appropriate relief under § 1109) and § 1109 (imposing liability for any fiduciary who breaches their duties to the plan to restore losses to the plan). In LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248, 250 (2008), a case involving a defined contribution plan, the Supreme Court concluded that § 1132(a)(2) provides a remedy for plan injuries, including recovery for fiduciary breaches that diminish the value of plan assets in a participant’s individual account.
The court then determined the threshold issue of whether ERISA claims are arbitrable as a general matter. The Federal Arbitration Act (“FAA”) requires that arbitration agreements be enforced unless there is a contrary congressional command precluding arbitration. The court found that ERISA does not contain a contrary congressional command. The Seventh Circuit joined the Second, Third, Fifth, Sixth, Eighth, and Tenth Circuits in finding that ERISA claims are generally arbitrable.
However, on the pivotal issue of the enforceability of the arbitration provision in this case, the Seventh Circuit held that the arbitration provision, which precludes plan-wide relief, is unenforceable because it prohibits relief that ERISA expressly permits. The court relied on American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235–36 (2013), where the Supreme Court left the door open to an “effective vindication” exception, which is a judge-made exception to the FAA that allows courts to invalidate agreements that prevent the effective vindication of a federal statutory right. “All this is to say that the plain text of § 1109(a) and the terms of the arbitration provision cannot be reconciled: what the statute permits, the plan precludes.” Because the arbitration provision acts as a prospective waiver of a party’s right to pursue statutory remedies, the effective vindication exception applies. The court noted, however, that the issue is not the Plan’s prohibition against class actions, but the prohibition on plan-wide remedies, remedies which the Supreme Court authorized in LaRue. The court did not decide the issue of whether Smith consented to the arbitration provision, whether he received notice, or whether a plan’s sponsor can unilaterally amend the plan to include an arbitration provision. The court’s holding is only that the effective vindication exception bars application of the arbitration provision to claims under § 1132(a)(2).
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