Employers in New York, Connecticut and Vermont should revisit their employee benefit plan documents if they believe that any of their plans may have an arbitration clause for the resolution of Employee Retirement Income Security Act (“ERISA”) claims, after the U.S. Court of Appeals for the Second Circuit recently joined a growing list of federal courts around the country that have called into question the enforcement of such arbitration clauses.
In last month’s decision in Cedeno v. Sasson, 2024 WL 1895053 (2d Cir. May 1, 2024), the Second Circuit affirmed a ruling by the U.S. District Court for the Southern District of New York (“SDNY”) that a particular arbitration clause in an employee stock ownership plan (“ESOP”) was unenforceable under the Federal Arbitration Act because the arbitration clause restricted the plan participant’s broader rights under ERISA. In the Cedeno case, a participant in the plan sued his former employer, the plan’s corporate trustee, and others, alleging that the parties breached their fiduciary duties under ERISA by causing the plan to purchase shares of stock for above fair market value (a common concern with ESOPs). In response to the lawsuit, the participant’s former employer and the other defendants (collectively, the “employer”) filed a motion to compel arbitration of the participant’s claims, noting that the plan document provided for mandatory arbitration of claims under the plan.
The district court denied the employer’s motion to compel arbitration, despite the arbitration clause in the plan and the Federal Arbitration Act’s (the “Act”) general policy favoring the enforcement of agreements to arbitrate legal disputes. In denying the employer’s motion, the district court reasoned that the arbitration clause in the plan went beyond changing the forum for resolving claims, but in fact acted as a “prospective waiver” of a statutory right. The Act does not authorize such activity, the district court concluded.
In agreeing with the district court’s ruling, the Second Circuit noted that the Act is not intended to deprive parties from exercising “substantive rights and remedies,” but rather to facilitate arbitration as a forum for “vindicating” such rights and remedies through arbitration procedures in lieu of the public courts, when agreed to by the parties. The plaintiff in Cedeno brought a breach of fiduciary duty claim against his former employer under Section 502(a) of ERISA, a claim which by its nature sought plan-wide relief for the ESOP, the Court noted. The plan’s arbitration clause limited participants to bringing claims “. . . solely in the Claimant’s individual capacity and not in a representative capacity or on a class, collective, or group basis.” Because the plaintiff sought plan-wide relief for the ESOP as authorized under ERISA, but the specific terms of the plan’s arbitration agreement sought to prevent the plaintiff from doing so, the Second Circuit concluded that the arbitration agreement was unenforceable.
Other employee benefit plans may contain less onerous arbitration clauses, as well as shortened timeframes for bringing claims after the exhaustion of claims and appeals procedures under a plan. Nonetheless, Cedeno is a reminder that employers and benefit plan service providers should tread carefully when choosing to deviate from the procedures set out in the statement of ERISA rights that is required to be described in a benefit plan’s summary plan description.
