Third Circuit Holds Class Action Waiver in ESOP Plan Arbitration Provision Is Unenforceable

In Henry v. Wilmington Trust NA, et al., No. 21-2801, __F.4th__, 2023 WL 4281813 (3d Cir. June 30, 2023), a case brought by Plaintiff Marlow Henry on behalf of a putative class of employee stock ownership plan (“ESOP”) participants alleging that Defendants breached their ERISA fiduciary duties, and seeking several forms of relief, the Court of Appeals addressed three issues: (1) whether the court has appellate jurisdiction to review the district court’s order denying Defendants’ motion to dismiss; (2) whether the class action waiver in the ESOP plan arbitration provision is unenforceable or invalid; and (3) whether the remaining portion of the arbitration provision is unenforceable in the absence of the class action waiver.

On the first issue, Henry argued that the court lacked appellate jurisdiction to review the district court’s motion to dismiss because the court’s statutory jurisdiction is limited to appeals from final decisions of the district courts of the United States. The Federal Arbitration Act (“FAA”), 9 U.S.C. § 16(a)(1)(B), authorizes the court to exercise jurisdiction in appeals from orders denying a petition under 9 U.S.C. § 4 to order arbitration to proceed. Though Defendants filed a motion to dismiss rather than bring a petition to order arbitration under 9 U.S.C. § 4, the court explained that it has appellate jurisdiction to review all orders that have the effect of declining to compel arbitration. “The substance of the motion and order, and not its form, determines its appealability.” Here, Defendants’ motion to dismiss was substantively a motion to compel arbitration because much of their brief in support of the motion was about why Henry’s claims were subject to arbitration. Defendants explained that they were pursuing a motion to dismiss rather than a motion to compel arbitration because the Delaware-based district court could not compel arbitration in Virginia as required by the plan’s arbitration provision. Because Defendants’ motion to dismiss was effectively a motion to compel arbitration, the court has appellate jurisdiction under 9 U.S.C. § 16(a).

On the second issue, the court did not address whether the district court erred in concluding that the arbitration provision was unenforceable because Henry did not consent to it. The court only addressed whether the class action waiver amounts to an illegal waiver of statutory remedies. The court agreed with Henry that the class action waiver is unenforceable because it requires him to waive statutory remedies. Here, Henry alleged that Defendants engaged in prohibited transactions and breached their fiduciary duties in violation of ERISA. Actions for breach of fiduciary duty brought under 29 U.S.C. § 1132(a)(2) are brought in a representative capacity on behalf of the plan as a whole and the statute authorizes certain remedies which serve to restore plan losses. The plan’s arbitration provision requires plan participants to waive rights to seek remedies expressly authorized by ERISA. For this reason, the class action waiver and ERISA cannot be reconciled. In such situations, the provision must give way to the statute. The court rejected Defendants’ arguments that the remedies sought by Henry can be constrained to him alone or that the Department of Labor could sue the ESOP for plan-wide relief. The court found that Henry’s complaint seeks forms of relief that are necessarily plan-wide and that it does not matter if the DOL can pursue plan-wide remedies on behalf of the ESOP if the class action waiver requires ESOP participants to waive their statutory right to pursue statutorily authorized remedies.

Lastly, the court concluded that because the class action waiver is unenforceable, the rest of the arbitration provision is unenforceable. The class action waiver is explicitly nonseverable from the rest of the arbitration provision; a point which Defendants conceded. The court affirmed the district court’s order declining to enforce the arbitration provision.

Henry is represented by the law firms of Feinberg Jackson Worthman & Wasow; Bailey & Glasser LLP, and Stris & Maher LLP (argued by Peter Stris).