By: Tom Horan and Sam Schwartz-Fenwick

Seyfarth Synopsis: A recent district court decision highlights the continued uncertainties about what it means to include an arbitration clause in an ERISA plan. While courts generally agree that such clauses are, in theory, enforceable, the extent to which courts will enforce a specific clause remains uncertain given divergent outcomes of decisions regarding motions to compel arbitration.

In Burnett v. Prudent Fiduciary Services LLC, et al., the Plaintiffs (current employees of Western Global Airlines who participated in the Company’s employee stock ownership plan (“ESOP”)) broadly allege that Defendants caused the ESOP to pay too much for shares of company stock. Plaintiffs assert claims under ERISA, purporting to do so individually, on behalf of a putative class of participants, and as representatives of the ESOP. Plaintiffs seek a number of remedies, including restoration of money to the ESOP as a whole, and removal of the Defendants as fiduciaries.

On January 25, 2023, a Magistrate Judge in the District of Delaware recommended that Defendants’ Motion to Compel Arbitration be denied. Although the Court found that “ERISA claims are arbitrable,” and said that it was not “declining to send this case to arbitration because of something unique about ERISA,” it ultimately found that arbitration could not be compelled because the ESOP’s arbitration provision operated to prospectively waive substantive rights provided for under ERISA. Specifically, the Court found the provision invalid as its language prohibiting ESOP participants from (1) bringing claims “in a representative capacity,” or (2) “seek[ing] or receiv[ing] any remedy which has the purpose or effect of providing additional benefits or monetary or other relief” to anyone other than the plaintiff, prevented participants from seeking substantive statutory remedies provided by ERISA.

The opinion, and the litigation that lead to it, presents a microcosm of the current state of the law with respect to arbitration clauses in ERISA plans. At a foundational level, courts—including the Courts of Appeals for the Second, Third, Fifth, Sixth, Seventh, Eighth, and Ninth Circuits—have consistently acknowledged that, generally speaking, arbitration clauses are enforceable as to ERISA claims. However, what that means in practice is often subject to extensive litigation (and related expense), with significant uncertainty and some growing inconsistency in the ultimate result of efforts to compel cases to arbitration. Indeed, on January 9, 2023, the Supreme Court declined to hear a case in which the petitioner argued that the differing rulings over enforcement of arbitration clauses in ERISA plans has created a circuit split on the issue.

Much of this uncertainty stems from the language of ERISA itself, and its empowerment of participants (and other identified individuals) to bring suit on behalf of the plan. As a result of this language, some courts have held that, to be enforceable, there must be evidence that the plan (and not, for example, the individual employee who filed suit) consented to arbitrate claims. And, as in Burnett, some courts have also held that the empowerment to sue on behalf of the plan carries with it the ability to seek plan-wide relief, such that provisions that limit claims to seeking only individual remedies are invalid (potentially limiting the benefit of enforceable class action waivers). Other courts have reached opposite results. All this serves to underlay that—for plan sponsors—there is much to consider when deciding whether to include an arbitration clause in a plan document, and—if one is included—what it should say.