Sixth circuit hits brakes on mandatory arbitration of certain ERISA benefit claims

J.J. Conway
J.J. Conway Law

Arbitration agreements are frequently required in the world of employee-employer relations, yet who is actually bound when an employee signs an arbitration agreement as part of a work relationship? A broadly worded arbitration provision in an employment agreement, which is otherwise compliant with state and federal law, requires that a case be resolved in an arbitral forum; however, the Sixth Circuit has recently pumped the brakes on the enforceability of an arbitration agreement relating to certain statutory claims. 

In a typical arbitration agreement, employees are required to arbitrate any of their individual employment and related claims against their employer. They waive the right to a jury trial and access to the civil court system. These agreements now customarily contain waivers of an employee’s right to bring class action litigation or to seek arbitration on a class-wide basis. In a recent decision of the United States Court of Appeals for the Sixth Circuit, Hawkins v. Cintas Corporation, ___ F.4 th __ (6th Cir. 2022), the limits of those arbitration agreements were put to the test in a putative class action over mismanagement of the employer’s 401(k) plan. The employees prevailed. 

The ruling is consistent with the way federal courts have interpreted benefits law. For more than forty years, the Employee Retirement Income Security Act of 1974 (ERISA) has been consistently interpreted to allow for two types of claims. One, a plan member may bring claims individually to enforce various rights and to recover benefits owed. Two, a plan member may bring claims, on a derivative basis, in the plan member’s own name, with the relief being owed to the employee benefit plan as a whole. This latter category of claims usually involves allegations that a plan fiduciary breached one or more fiduciary duties which are defined within the statute itself. 

Under this second category of claims, any relief is returned to the benefit plan in most cases, not to individual plan members. There are exceptions, but the case law recognizing these two independent pathways for claims has been consistently reaffirmed over time. Courts dismiss individual plan members’ claims whenever they blur the lines of these two paths and attempt to seek individual relief for claims ordinarily reserved for the plan. 

For decades, arbitration in ERISA cases was relatively uncommon, since federally-created judicial standards of review tended to favor plan sponsors and fiduciaries. However, a rise in the number of cases where employees sued their employers for mismanagement of their 401(K) plans resulted in the increased use of arbitration agreements to resolve benefits disputes. Hundreds of employers have been sued on the theory that their plans were overpaying for advisory and investment services from financial firms.

In Hawkins, a unanimous court held that the legal dividing line for individual and plan-based claims carries over into its interpretation of arbitration agreements. The Hawkins court held that an individual plan member cannot bind the plan as a whole to resolve its claims in arbitration. The court held that employers cannot use arbitration agreements to thwart class action litigation where the claims seek relief for the plan.  

What is also noteworthy about Hawkins is the court’s interesting phraseology in describing the nature and rights of the plan. The court referred to the lead plaintiff’s employee benefits plan as an “abstract entity.”  This unique and almost philosophical concept also explains why the court found it is difficult for an employer to require that plan-based claims be arbitrated. 

The Hawkins court’s descriptive phrasing of “what a plan is” makes sense. An employee benefit plan is a dynamic, ever-changing entity as employees come and go, especially at a large company like Cintas. Plans change as employees marry or have or adopt children or even when a family member dies. The plan members enrolled in a plan on the day that a fellow plan member signs an agreement to arbitrate may likely be different at the time a lawsuit is filed, so it follows that the employee may not have had the authority to bind those plan members. Furthermore, ERISA allows for still other entities to bring litigation, including plan fiduciaries and the Secretary of Labor. With so many different parties having standing to sue, it is difficult to argue that a lone employee can bind all of these interested parties in arbitration of their claims.

Ultimately, the Hawkins court affirmed the finding of the district court, holding that “§502(a)(2) claims are not covered by the arbitration provisions in the Plaintiff’s respective employment agreements and that the Plan’s consent is required for arbitration.” Still, Hawkins may not settle the debate entirely. As the court acknowledged, “a different sort of claim may change the analysis.”  

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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and founder of J.J. Conway Law in Royal Oak, Michigan.

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