Goodwin Insights April 08, 2021

Seventh Circuit to Decide Whether Plans May Require Arbitration of Fiduciary Duty Claims

Key Takeaway: As plan sponsors more frequently begin to add, or consider adding, arbitration clauses to their plans’ governing documents, the Seventh Circuit is poised to decide whether adding mandatory arbitration clauses to plan documents enables the sponsor to compel arbitration of fiduciary breach claims.

On March 30, 2021, the Seventh Circuit heard oral argument regarding whether ERISA-governed plans can require individual arbitration of breach of fiduciary duty claims by plan participants. The appeal concerns whether participants must individually consent to an arbitration provision, and, if so, whether implied consent is sufficient. Defendants in the case have argued that, because breach of fiduciary duty claims belong to a plan, a plan’s consent to the arbitration provision is sufficient to bind all plan participants. They have further argued that even if individual consent is necessary, a participant’s continued participation in the plan after the plan is amended to add an arbitration provision constitutes implied consent to the arbitration provision. By contrast, the plaintiffs in the case have argued not only that individual consent to the arbitration provision is required, but that consent can only be inferred when participants are given notice of the provision and an opportunity to reject it. A decision is expected later this year.

If the Seventh Circuit rules that ERISA-governed plans can require individual arbitration of breach of fiduciary duty claims, it would become only the second circuit court of appeals, after the Ninth Circuit, to so rule. However, the Second Circuit recently ruled on March 4, 2021 in a different circumstance, involving arbitration agreements with employees outside of governing plan documents, that the defendant-employer could not compel arbitration of ERISA fiduciary duty claims through the arbitration agreements because mandatory individual arbitration ran contrary to the “public spirit” of ERISA. That holding may give some insight into how the Second Circuit would rule if presented with a similar fact pattern as that which is now before the Seventh Circuit. And, finally, even if plan sponsors can compel arbitration, plan sponsors should carefully consider whether to do so. In Cooper v. DST Sys., Inc. (No. 16-1900 (S.D.N.Y.)), DST successfully compelled arbitration and then had to defend itself against more than 800 individual arbitration suits. DST is now attempting to settle those claims in federal court on a class-wide basis.

The Seventh Circuit case is Smith v. Bd of Dir. of Triad Mfg., Inc., No. 20-2708. The Ninth Circuit’s decision on a similar issue was in Dorman v. Charles Schwab & Co., No. 18-15281, and is available here, and the Second Circuit decision referenced above was in Cooper v. DST Systems, Inc., No. 17-02805, and is available here.