On the same day the Ninth Circuit denied arbitration in Munro v. University of Southern California, a district also denied a motion to compel arbitration of a former employee’s ERISA breach of fiduciary duty and prohibited transaction claims in Brown v. Wilmington Trust, N.A., No. 3:17-cv-250 (S.D. OH July 24, 2018).
The plaintiff was a former employee of Henny Penny Corp. The family that owned the company sold all of its stock to an employee stock ownership plan (ESOP) on Dec. 31, 2014. The defendant served as trustee during the transaction and approved the $165 million stock purchase. In May 2015, the plaintiff left the company, and she cashed out her stock in November 2016. Effective Jan. 1, 2017, the ESOP added an arbitration provision, and later that year, the plaintiff filed her lawsuit against the trustee claiming the stock was overvalued.
The court found that the plaintiff’s claim was not subject to arbitration because the plaintiff did not agree to arbitrate and because her claim fell outside of the scope of the arbitration provision.
First, the court found that because the plaintiff had terminated and cashed out her benefit before the arbitration provision was added to the ESOP, she had not agreed to arbitrate. The court distinguished Smith v. Aegon Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014), in which the Sixth Circuit had found that a forum selection clause added after the employee terminated applied to his claim. In Smith, the employee was still receiving pension benefits and, thus, was still a participant under the plan. Here, the plaintiff was no longer a participant under the language of the ESOP. The court found the case more similar to Dorman v. Charles Schwab & Co., Inc., 2018 WL 467357 (N.D. Cal. Jan. 18, 2018), in which the district court had refused to enforce the arbitration agreement under similar circumstances.
Second, the court found that the plaintiff’s claims fell outside of the scope of the arbitration agreement. The provision applied to claims asserted by claimants, which was defined to include employees, participants and beneficiaries. The court found under the ESOP’s language, the plaintiff was no longer a participant because she had been paid all of her benefit. Henny Penny and the trustee argued, however, that if she was not a participant, she did not have statutory standing to sue under ERISA. The court disagreed. Precedent and ERISA’s statutory definition of participant allowed former participants to allege breach of fiduciary duty claims, the court found.
Although Munro and Brown combined to create a bad day for employers seeking to arbitrate ERISA claims, there are lessons that can be learned. Both decisions turned on the language of the arbitration agreement and whether it covered the claim. If an employer wants to include ERISA breach of fiduciary within an employee arbitration agreement, it would be wise to include language covering claims brought by the employee on behalf of third parties, including employee benefit plans. And any arbitration provision in a plan document should include language that covers claims brought by former employees and former participants. The Brown and Dorman courts were troubled by the fact that the arbitration provisions were added after the former participants cashed out of the plans. But proper drafting of the plan and arbitration provision may allow employers to broaden the scope of who assents to the agreement as well.