Goodwin Insights October 12, 2021

The Seventh Circuit Court of Appeals Voices Some Support for Arbitration Clauses, But Strikes Down the Clause Before It

Key Takeaway: The Seventh Circuit Court of Appeals indicated that plans may require arbitration of fiduciary duty claims, but declined to enforce a plan’s arbitration clause because it barred participants from seeking or receiving relief that would benefit other plan participants.

On September 10, 2021, the Seventh Circuit Court of Appeals affirmed the Northern District of Illinois’s denial of a motion to compel arbitration of breach of fiduciary duty claims. In an earlier ERISA Litigation Update, we previewed the issue before the Seventh Circuit and noted that, had the Seventh Circuit ruled that plans could require arbitration of breach of fiduciary duty claims, it would be only the second court of appeals to rule as such after the Ninth Circuit.

In its decision, the Seventh Circuit found that plans may require participants to arbitrate fiduciary duty claims, and may preclude participants from asserting putative class claims in arbitration, but nonetheless held that the arbitration clause in the at-issue governing plan document was unenforceable because it prohibited relief that ERISA permits. The specific plan language that the Seventh Circuit found objectionable was that “[e]ach 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.” The Seventh Circuit reasoned that this language improperly prevented participants from seeking certain forms of plan-wide relief permitted by ERISA, including the removal of plan fiduciaries, which would necessarily affect all plan participants. Finally, although the Seventh Circuit indicated general support for plan arbitration clauses, it declined to rule on whether a participant must consent to the plan’s arbitration clause for it to be effective as to that individual. A ruling on that issue could greatly impact the administrability and enforceability of arbitration clauses in plan documents in the Seventh Circuit and potentially other jurisdictions. 

The case is Smith v. Bd of Dir. of Triad Mfg., Inc., No. 18-2707, in the U.S. Court of Appeals for the Seventh Circuit. The decision is available here