Court Treats Unilateral Amendment Provision as Consent to Plan’s Arbitration Provision

Current and former participants in a 403(b) plan filed a lawsuit claiming that the plan’s fiduciaries violated their ERISA fiduciary duties in selecting and reviewing the plan’s investment funds. In response, the fiduciaries asked the court to require that the dispute be arbitrated, pointing to a plan provision requiring that plan-related claims be resolved exclusively by binding arbitration. The provision also prohibited arbitrations on a representative or class basis, as well as any remedial or equitable relief providing additional benefits or monetary relief to anyone other than the claimant. The participants asserted that the arbitration provision violated the “effective vindication” doctrine, and that they had not agreed to its addition to the plan (by amendment in 2020).

The court acknowledged that an arbitration provision may be unenforceable under the effective vindication doctrine if the provision operates as a prospective waiver of a right to pursue a statutory remedy. In this case, however, the participants’ request for plan-wide nonmonetary relief—removal and replacement of the current fiduciaries—was not barred by the plan’s arbitration provision, so the court held that the effective vindication doctrine did not apply. The provision’s bar against plan-wide monetary relief was permissible because such relief was only available for claims brought on a class basis, and waivers of class-based claims have been held enforceable under applicable circuit precedent. Turning to the question of consent, the court acknowledged that it was “unseemly” for the participants to be bound by a provision they had never personally agreed to. But the fact that they had not agreed to it—and that one of the participants had terminated employment and received a distribution of her entire account before it was adopted—was irrelevant. The fiduciary breach claims were being brought on behalf of the plan, so what mattered was whether the plan had agreed to arbitrate. On that issue, the court held that the plan had agreed to the amendment because the plan document expressly permitted unilateral amendment by the plan sponsor.

EBIA Comment: While courts appear to be in broad agreement that ERISA cases are generally arbitrable, whether a particular binding arbitration provision is enforceable may depend on subtle differences in the facts, the particular claims made, and the wording of the arbitration provision. (Note that ERISA’s claims procedure regulations prohibit mandatory binding arbitration of adverse benefit determinations for group health and disability claims.) Some may be surprised that a plan can consent to an arbitration provision simply by permitting unilateral amendments. The idea that plans can consent to arbitration in their plan documents is not entirely new (see our Checkpoint article). And it has an internal logic: plans are entities, separate from their sponsors; they can sue and be sued, so they must also have the ability to form binding agreements regarding how those disputes will be resolved. Identifying the act of consent can be challenging, given that plans do not, in any conventional sense, consent to be amended, and provisions cited as evidence of consent may have been in the plan document from the outset. Whether (and how) other courts will address this consent issue will be something to watch. For more information, see EBIA’s 401(k) Plans manual at Sections XXXVII.H (“Claims for Breach of Fiduciary Duty”) and XXXVII.M (“Arbitration”). See also EBIA’s ERISA Compliance manual at Section XXVIII.I (“Fiduciary Liability and Litigation”).

Contributing Editors: EBIA Staff.