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Tenth Circuit: ERISA Plan Participant’s Breach of Fiduciary Duty Claims Are Not Subject to Plan’s Mandatory Arbitration Provision

Yesterday, the Tenth Circuit Court of Appeals issued a notable decision concerning the enforcement of arbitration provisions in Harrison v. Envision Mgmt. Holding, Inc. Bd. of Directors, No. 22-1098, __F.4th__, 2023 WL 1830446 (10th Cir. Feb. 9, 2023). Plaintiff-Appellee Robert Harrison is a participant in the Envision Employee Stock Ownership Plan (“the Plan”). He brought suit against Envision and its founders (Seller Defendants), Envision’s Board of Directors (the Board), the Envision Management Holding Inc. Employee Stock Ownership Plan Committee (ESOP Committee), Argent Trust Company (Trustee of the ESOP), Aaron Ramsay (a Board member), Tanweer Kahn (a Board member), and unnamed Doe defendants, under ERISA Section 502(a)(2), a provision of ERISA that allows plan participants to sue plan fiduciaries and recover all losses suffered by all plan participants, and other ERISA causes of action. As summarized by the Tenth Circuit, “Harrison alleges that the Seller Defendants, with the effective assistance of Argent, were able to financially benefit by selling Envision to the ESOP for significantly more than it was worth, while at the same time leaving the ESOP with a $154.4 million debt. Harrison further alleges that the Seller Defendants, notwithstanding the sale, were able, with the assistance of Argent, to retain control of Envision.” Harrison sought various forms of equitable relief for the Defendants fiduciary breaches. Defendants moved to compel arbitration based on the “ERISA ARBITRATION AND CLASS ACTION WAIVER” provision in the Plan document. The district court denied Defendants’ motion, “concluding that enforcing the arbitration provision of the plan would prevent Harrison from effectively vindicating the statutory remedies sought in his complaint.” Defendants appealed and the Tenth Circuit affirmed the district court’s decision.

In deciding the appeal, the Tenth Circuit first explained that the Supreme Court has long recognized and enforced Section 2 of the Federal Arbitration Act (“FAA”), which provides that agreements to arbitrate claims shall be valid, irrevocable, and enforceable save upon certain exceptions. One of these exceptions is the effective vindication exception, which rests on public policy grounds aimed at preventing the prospective waiver of a party’s right to pursue statutory remedies. An arbitration’s agreement preventing the assertion of certain statutory rights would be invalidated by the effective vindication exception. The court noted that the Supreme Court has yet to apply this exception in any case before it.

The Tenth Circuit considered whether the district court properly invoked the effective vindication exception to invalidate the arbitration provisions of the Plan Document. Harrison argued that the arbitration provision forbids remedies authorized by ERISA Sections 502(a)(2) and (a)(3). These ERISA provisions authorize suits by participants for plan-wide relief, including injunctive relief and removal and replacement of plan fiduciaries. Further, claims under ERISA Section 502(a)(2) can only be brought in a representative capacity. The arbitration provision here prevents participants from bringing any claim in a representative capacity and any remedy that has the purpose or effect of providing benefits or other relief to any other participant. The Department of Labor filed an amicus brief in support of Harrison.

In affirming the district court, the Tenth Circuit first identified the statutory remedies Harrison sought in his complaint and went through his six specific causes of action and claims for relief. The court then considered whether the arbitration provision prevents Harrison from obtaining the statutory remedies identified in his complaint. The arbitration provision is written in a manner which forecloses plan-wide relief and purports to foreclose several remedies that were authorized by Congress under ERISA. If enforced, the arbitration provision would prevent Harrison from vindicating the statutory causes of action listed in his complaint so the effective vindication exception applies. The court found support in the Seventh Circuit’s decision in Smith v. Bd. of Directors of Triad Mfg., Inc., 13 F.4th 613 (7th Cir. 2021) (finding arbitration provision unenforceable where it precluded plan-wide remedies). The court stressed that the issue is not the arbitration provision’s prohibition on class actions that is the problem, it is the prohibition on any form of relief that would benefit anyone other than Harrison that directly conflicts with the statutory remedies available under ERISA. The Plan document contains a non-severability clause that renders the entire arbitration procedure void if a court were to find any of the requirements unenforceable or invalid. As such, the court concluded that the entire arbitration procedure in the plan is rendered null and void in all respects.


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*Please note that this blog is a summary of a reported legal decision and does not constitute legal advice. This blog has not been updated to note any subsequent change in status, including whether a decision is reconsidered or vacated. The case above was handled by other law firms, but if you have questions about how the developing law impacts your ERISA benefit claim, the attorneys at Roberts Disability Law, P.C. may be able to advise you so please contact us.

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