Seventh Circuit Rules that Employer Cannot use Arbitration Agreement to Escape Shareholder Suit over Retirement Plan

The Seventh Circuit in a recently issued decision held that an employer cannot invoke an arbitration provision to evade a shareholder class-action lawsuit seeking broad relief under the Employee Retirement Income Security Act (ERISA), a federal law aimed at protecting participants in private employer retirement plans. In its decision, the Court found that claims under ERISA are generally subject to arbitration, but ultimately concluded that the District Court did not err in denying the defendants’ motion to compel arbitration of plaintiff’s class action under section 1132(a)(2) of ERISA due to a class action waiver in the arbitration agreement that would have precluded the plaintiff from asserting certain statutory rights.

The plaintiff, James Smith, worked for Triad Manufacturing, a shelving and fixture company, back in 2015 and 2016. While employed by Triad, he participated in the company’s employee stock ownership program, known as a “defined contribution plan” under ERISA. Triad’s board of directors created the plan for its employees in early December 2015.

According to his lawsuit, after forming the plan, three members of Triad’s board sold all Triad’s stock to the plan at a price of $58.05 per share, totaling more than $106 million. Four days later the board appointed GreatBanc Trust Company as plan trustee. GreatBanc then approved the transaction, seemingly after it had already occurred. Less than two weeks later, Triad’s share price dropped to $1.85, according to the plan’s financial statements. In effect, what had been valued at over $106 million plummeted in two weeks to just under $4 million. The suit alleges that the earliest the plan’s members could sell their shares was the end of 2016 due to vesting requirements, at which time the shares were worth only $1.15. By the end of 2018, the share price had dipped to less than $1 per share.

According to the complaint, the three board members who decided to sell the company’s stock to the plan benefitted from the transaction as the shares sold to the plan were owned by them or those related to them. The plan allegedly financed its purchase of the shares through loans the three board members provided. The plan thereafter made regular loan payments to the board members. The suit was filed on behalf of Smith and other members of the plan and alleged that the board members as well as GreatBanc breached their fiduciary duties to the plan members as well as engaged in transactions prohibited by ERISA.

In response, Triad and the other defendants sought to have the case either submitted to arbitration or dismissed. The District Court denied the motion on two grounds. First, the District Court found that Smith had not consented to the arbitration provision since he left the company in 2016 but the arbitration provision had not been added to the plan until 2018. Second, the District Court relied on the Supreme Court’s 2013 decision in American Express Co. v. Italian Colors Restaurant in finding that the arbitration provision was unenforceable because it prospectively waived Smith’s right to statutory remedies provided by ERISA. The arbitration provision contained a class action waiver that prohibited plan-wide remedies, which ERISA permits. The defendants appealed the denial of their motion.

On appeal, the Seventh Circuit began its analysis by finding that ERISA claims are “generally” arbitrable. However, the Court determined that the arbitration provision in the instant case was not enforceable due to the class action waiver. Citing the Italian Colors decision, the Court found that the class action waiver in the case triggered the “effective vindication” exception which renders arbitration agreements unenforceable if they preclude assertion of statutory rights. Although acknowledging that the instances when this exception applies, the Court found that this was one of the instances when it did.

Among the relief sought by Smith was to have GreatBanc removed as the plan’s trustee, a remedy that would necessarily have a plan-wide effect. Yet the class action waiver precluded participants from seeking this type of relief because it extended beyond their own immediate interest. “The terms of the arbitration provision cannot be reconciled” with ERISA, the Court concluded. The Court clarified, however, that the fatal flaw in the class action waiver is its prohibition on plan-wide remedies, not plan-wide representation.

The Court’s full opinion is available here.

Our DuPage and Cook County class-action litigation firm handles individual and class-action consumer protection claims involving deceptive advertising, data breaches, gift cards, lemon law, unfair debt collection, predatory lending, privacy rights, and other consumer rights cases that government agencies and public interest law firms such as the Illinois Attorney General may not pursue. Class action lawsuits our law firm has been involved in or spear-headed have led to substantial awards totaling millions of dollars returned to consumers and over a million dollars donated to organizations including the National Association of Consumer Advocates, the National Consumer Law Center, and local law school consumer programs.

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