Courts Often Enforce Arbitration Clauses in ERISA Plans



ERISA plan participants may face an uphill battle when challenging mandatory arbitration clauses, even when they force participants to share in the cost. 

A plan term providing for mandatory arbitration generally will be enough to make plan participants subject to such arbitration, by virtue of the participants’ (and beneficiaries’) plan participation, absent an agreement to the contrary. 

In a recent district court decision, Luciano v. Teachers Ins. & Annuity Ass’n of Am.—Coll. Ret. Equities Fund, D.N.J., No. 3:15-cv-06726-MAS-DEA, unpublished 7/29/16), a New Jersey district court judge held that standardized-test maker Educational Testing Service could force an employee's widow to arbitrate her claims against the company's retirement plan. 

The main issue in the participant’s challenge to the arbitration clause was the requirement that the participant and the plan “equally share” in the arbitration costs. The widow unsuccessfully argued that this cost-sharing provision violated ERISA. (See related story, Retirement Plan Can Mandate Arbitration, Cost-Sharing

In its decision, the court sided with the dissent in a 2002 Eighth Circuit decision (Bond v. Twin Cities Carpenters Pension Fund, 307 F. 3d 704 (8th Cir. 2002)), where the majority ruled that a cost-sharing provision in an arbitration clause violated ERISA Section 503(2), which requires a claimant to have an opportunity for a full and fair review of his/her claim. However, the dissent found that a fiduciary had given the claimant a full and fair review. The New Jersey district court in Luciano used the reasoning of the Bond dissent in finding that the widow had gone through the claims and appeal process with the relevant fiduciary, thus she had a full and fair review and 503(2) didn’t apply. 

William Daniels, an attorney at Laner Muchin, Chicago, told Bloomberg BNA Aug. 11, “I think Luciano is another good argument for all ERISA plans to consider arbitration clauses.”  While mandatory arbitration is more likely to be found in the multiemployer world against contributing employers, its potential applications and uses in the single employer plan world (especially the welfare side of benefits) is largely unexplored, he said. “Its greatest benefits may be for welfare funds that have large subrogation costs.  We have had some success in enforcing mandatory arbitration related to subrogation, and have found that just having the arbitration provisions can be a deterrent to outside counsel fighting the plan’s subrogation clauses or even going to arbitration.” 

A pending case is Tom v. Com Dev USA, LCC,  C.D. Cal., No. 2:16-cv-01363, complaint filed 2/26/16), where the plaintiffs alleged in a class action complaint that satellite manufacturer Com Dev USA LLC violated ERISA by requiring laid-off employees to sign an arbitration agreement before receiving pension benefits. 

Regarding the potential success of the case, Daniels said “Federal judges typically hate ERISA cases.  I would expect that if there is a legal precedent to enforce the mandatory arbitration provision, the judge will uphold such provision.  The issue is what the participant agreed to before benefits were incurred. At some point ERISA bows to contract law.  If the participant executed a subrogation agreement or participation agreement that outlined the mandatory arbitration provisions, I would be surprised if these requirements were not upheld.  Otherwise, if the participant did not execute anything agreeing to such mandatory arbitration provisions, it may be a more difficult argument for the plan to make to enforce such provisions.”  

In general, if there is a legal precedent to enforce a mandatory arbitration provision, the judge will uphold such provision, Daniels said.

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