(Article from Securities Law Alert, March 2023)
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On February 9, 2023, the Tenth Circuit affirmed a district court’s denial of a motion to compel arbitration in a lawsuit brought by an ESOP (Employee Stock Ownership Plan) participant, alleging that the plan fiduciaries breached their fiduciary duties to the plan under ERISA. Harrison v. Envision Mgmt. Holding, 59 F.4th 1090 (10th Cir. 2023) (Briscoe, J.). The Tenth Circuit held that enforcing the arbitration provisions in the plan document would prevent plaintiff from vindicating the statutory causes of action listed in his complaint, and concluded “that the effective vindication exception applies in this case.”
Background
Plaintiff filed a lawsuit in the district court, alleging that the plan fiduciaries engaged in a prohibited transaction in which the company’s founders retained control of the company while selling their shares of the company to the ESOP for more than they were worth, causing the ESOP to incur substantial debt. Defendants moved to compel arbitration based on Section 21 of the plan document entitled ERISA Arbitration and Class Action Waiver. After the district court denied defendants’ motion to compel arbitration based on the effective vindication exception, defendants appealed.
The Court Sets Out the Effective Vindication Exception Standard
On appeal, the Tenth Circuit held that the district court properly invoked the effective vindication exception to invalidate the arbitration provision, explaining that the exception “finds its origin in the desire to prevent prospective waiver of a party’s right to pursue statutory remedies” (quoting Am. Express v. Italian Colors Restaurant, 570 U.S. 228 (2013)). The court stated that under American Express, the “key question is whether ‘the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum.’” The court explained that, to determine whether the effective vindication exception applies, it “must first identify the statutory remedies [plaintiff] is seeking” and “then determine whether the arbitration provisions contained in the Plan Document effectively prevent [plaintiff] from obtaining those statutory remedies in the arbitral forum.”
The Statutory Remedies Plaintiff Sought
The court noted that the statutory remedies plaintiff sought were under ERISA subsections 502(a)(2) and (a)(3),[1] and included a declaration that defendants breached their fiduciary duties under ERISA; an injunction of further fiduciary duty violations; the appointment of a new fiduciary to manage the ESOP; removal of the ESOP trustee; and an order directing the ESOP trustee to restore all losses to the plan that resulted from the fiduciary breaches and to disgorge all profits made through use of the ESOP’s assets.
The Arbitration Provisions Would Prevent Vindication of the Statutory Remedies
As to whether the arbitration provisions effectively prevented plaintiff from vindicating the statutory remedies, the court focused on the language in the plan document stating that “each arbitration shall be limited solely to one Claimant’s Covered Claims, and that Claimant may not seek or receive any remedy which has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible employee, Participant or Beneficiary other than the Claimant.” (emphasis in original). The court found that the “this sentence would clearly prevent [plaintiff] from obtaining at least some of the forms of relief that he seeks in his complaint pursuant to [Section 502(a)(2)],” including, among other things, a declaration that all defendants breached their fiduciary duties under ERISA, an order removing the trustee, and an order enjoining all defendants from further violations. The court explained that these forms of relief would provide additional benefits to the plan as a whole or to all of the plan participants and beneficiaries and would thus be barred by the arbitration provisions. The court concluded that “Section 21(b) is not problematic because it requires [plaintiff] to arbitrate his claims, but rather because it purports to foreclose a number of remedies that were specifically authorized by Congress in the ERISA provisions cited by [plaintiff].”
[1] Subsection 502(a)(2) provides, in relevant part, that a civil action may be brought “for appropriate relief under section 1109 of this title.” 29 U.S.C. § 1132(a)(2). Section 1109(a) provides that a fiduciary who breaches their duties shall be personally liable to make good any losses resulting from the breach, to restore any such profits, and shall be subject to such other equitable or remedial relief as the court may deem appropriate. 29 U.S.C. § 1109. Subsection 502(a)(3) provides that a civil action may be brought “to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan . . . .” 29 U.S.C. § 1132(a)(3).