Another Circuit Court Rules on ERISA Arbitration Rules

A new order issued by the 6th U.S. Circuit Court of Appeals sides firmly with the determination of the U.S. District Court for the Southern District of Ohio at Cincinnati, which ruled that arbitration agreements signed by the plaintiffs in the case could not stymie claims made on behalf of the plan as a whole.

The plaintiffs/appellees in the case have alleged that their former employer, Appellant Cintas Corporation, breached the fiduciary duties it owed to the company’s retirement plan. They brought a putative class action pursuant to Section 502(a)(2) of the Employment Retirement Income Security Act.

However, as noted in the appellate order, the plaintiffs had each signed employment agreements that contained arbitration provisions. As such, Cintas moved to compel arbitration, arguing that the plaintiffs were bringing individual claims covered by those provisions. The new order rejects these arguments, meaning the case returns to the District Court to recommence proceedings.

In their order, the 6th Circuit acknowledges that the case presented “issues of first impression for this Court.”

“The weight of authority and the nature of ERISA Section 502(a)(2) claims suggest that these claims belong to the plan, not to individual plaintiffs,” the order states. “Therefore, the arbitration provisions in these individual employment agreements—which only establish the plaintiffs’ consent to arbitration, not the plan’s—do not mandate that these claims be arbitrated. Further, the actions of Cintas and the other defendants do not support a conclusion that the plan has consented to arbitration. We therefore affirm the District Court’s denial of the motion to compel arbitration.”

The ruling notes that, in deciding whether a case belongs in arbitration, a court will typically ask whether the party bringing the claim has agreed to arbitrate.

“But sometimes it is difficult to discern exactly who is bringing what claim,” the order continues. “Here, individual would-be plaintiffs agreed to arbitrate certain claims, but the claim they seek to adjudicate is brought through an unusual procedure on behalf of an abstract entity.”

The order explains that the 6th Circuit has not previously determined whether statutory ERISA claims are subject to arbitration. But, as the order states, every other circuit to consider the issue has held that ERISA claims are generally arbitrable, including the 2nd, 3rd, 8th, 9th and 10th Circuits.

“We need not reach that issue, however, because neither party argues that plaintiffs’ ERISA claims could not, in theory, be subject to arbitration,” the order explains. “ERISA imposes high standards of fiduciary duty upon administrators of an ERISA plan. Relevant here, a civil action for breach of those fiduciary duties may be brought by the Secretary of Labor, or by a participant, beneficiary or fiduciary. Cintas contends that the plaintiffs agreed to arbitrate all ‘rights and claims’ relating to their employment, including the ERISA claims at issue here. The breach-of-fiduciary-duty claims and the ‘right’ to assert them ‘belong,’ it argues, to the plaintiffs alone, and therefore this case belongs in arbitration.”

Against this argument, the plaintiffs say it is irrelevant that they may have agreed to arbitrate certain claims, since the plan has not likewise consented to arbitration. The 6th Circuit fully agrees that the plaintiffs’ employment agreements do not force this case into arbitration.

“The derivative nature of these actions comes from common-law trust principles,” the order explains. “Section 502(a)(2) merely codifies for ERISA participants and beneficiaries a classic trust-law process for recovering trust losses through a suit on behalf of the trust. Although 502(a)(2) claims are brought by individual plaintiffs, it is the plan that takes legal claim to the recovery, suggesting that the claim really ‘belongs’ to the plan. And because 502(a)(2) claims ‘belong’ to the plan, an arbitration agreement that binds only individual participants cannot bring such claims into arbitration.”

According to the law firm Proskauer, this ruling means the 6th Circuit has effectively joined the 2nd, 7th and 9th Circuits in rejecting arbitration of ERISA Section 502(a)(2) claims based on a clause in an individual employment agreement. However, as the attorneys emphasize, the 6th Circuit did not directly rule on whether an arbitration clause in a plan document would compel arbitration of 502(a)(2) claims.