Last week, a divided Second Circuit panel affirmed a district court ruling denying a motion to compel arbitration of a putative class action seeking classwide equitable remedies under ERISA for alleged mismanagement of an employee stock ownership plan.  The Second Circuit found the defined contribution plan’s mandatory arbitration clause unenforceable because it limited plaintiff’s ability to assert a claim that would result in any relief other than individual relief, and specifically prevented him from pursuing the plan-wide remedy authorized by ERISA Section 502(a)(2).  The Court’s decision extends the “effective vindication exception” and raises questions about the extent to which plans can force individual arbitration of ERISA claims that apply to an entire plan.  

In Cedeno v. Sasson, 2024 WL 1895053 (2d Cir. May 1, 2024), the plaintiff asserted claims under ERISA Sections 502(a)(2) and 409(a), alleging that defendants breached fiduciary duties by purchasing stock shares for purportedly more than fair market value, saddling the Plan with tens of millions of dollars of debt and decreasing its value. 

The defendants moved to compel arbitration, relying on a mandatory arbitration provision that required claimants like Cedeno to bring their claims solely in their “individual capacity and not in a representative capacity,” and prohibited them from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to any Employee, Participant or Beneficiary other than the Claimant.”  The district court denied the motion, concluding that the arbitration provision acted as a “prospective waiver[ ] of [a] statutory right[ ]” and thus was unenforceable.

In a 2-1 decision, the Second Circuit agreed, affirming the district court’s ruling.  Relying on Supreme Court decisions in Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134, (1985) and LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008), the Second Circuit concluded that ERISA sections 502(a)(2) and 409(a) work together to provide participants a remedy for breaches of fiduciary duties “on behalf of and for the plan.”  The majority thus concluded that the Plan’s arbitration provisions limiting claims to those for individual relief were unenforceable because they operated as a “prospective waiver of Cedeno’s right to pursue statutory remedies under Sections 409(a) and 502(a)(2),” which the court found only allow a claimant to bring relief in a representative capacity on behalf of an ERISA plan.

The dissent charged the majority with “manufactur[ing]” a conflict between the Plan’s arbitration provisions and ERISA, explaining that the case was a “straightforward” example of a plaintiff bringing a claim that was clearly prohibited by an enforceable arbitration clause.  The dissent disagreed that ERISA sections 502(a)(2) or 409(a) require a claimant to act in a representative capacity—noting that nothing in ERISA 502(a) prevents a plaintiff from seeking individual relief—and thus found no reason that Cedeno could not obtain individual relief in arbitration.  Though reaffirming that Cedeno’s rights were not curtailed by the arbitration provision, the dissent further cast doubt on the majority’s application of a rule that necessarily invalidates arbitration clauses if they prevent one from “effectively vindicating” a statutory right, arguing that such a rule is judge-made and finds no support in the Federal Arbitration Act. Though limited to ERISA sections 502(a)(2) and 409(a), the Second Circuit’s decision indicates that the court may continue to extend the effective vindication doctrine, and that class action plaintiffs may find success invalidating arbitration clauses that attempt to prevent individuals from bringing representative actions under ERISA.