Thinking ESOPs: Courts Desperately Need Contextual Clues in Disputes Over Enforceability of Arbitration Provisions

Enforcement of an ERISA plan’s arbitration provision has become a hotly litigated issue. Plaintiffs and courts often raise two objections to arbitration provisions in ERISA plans, including ESOPs. The first is whether participants or the plan itself consented to the arbitration provision. The second is whether class-action waiver language, which requires individualized arbitration, is enforceable under ERISA.

There have been several important ERISA arbitration decisions in recent years, including many involving ESOPs. Interestingly, these decisions suggest that courts are struggling with the same statutory-interpretation problems that courts struggle with when addressing a number of issues raised by ESOP litigation. Many key ERISA provisions are difficult, if not impossible, to interpret based solely on their express language. This is a real problem in ESOP litigation because many disputes turn on a court’s interpretation of the opaque ERISA provisions that are implicated by the disputes.

The Supreme Court has a standard approach to interpreting an ERISA provision when parties contest the provision’s meaning. That approach includes reviewing ERISA’s legislative history, as well as principles of trust law, to the extent necessary, to ensure that the Supreme Court interprets ERISA’s express language consistently with Congress’ intentions. Often, the legislative history or principles of trust law provide contextual clues that are key to understanding what ERISA’s express language means. Often times those contextual clues tend to support defendants’ interpretations of ERISA, and dispute plaintiffs, and even the Department of Labor’s (DOL), proposed interpretations of statutory language.

On March 11, 2022, Faegre Drinker filed an amici curiae brief on behalf of the ESOP Association and the American Benefits Council in a pending appeal in the U.S. Court of Appeals Second Circuit. The principal issue on appeal involves the interpretation of one of ERISA’s authorized causes of action, found in ERISA § 502(a)(2). The district court interpreted that cause of action as creating a statutory right for an individual participant to recover all loss to an ERISA plan caused by a fiduciary’s breach of fiduciary duty. Based on that interpretation, the district court held that an individual participant could not be forced to arbitrate on an individual basis, because that would require the individual participant to waive a nonwaivable statutory right to recover all plan loss, not just loss the individual might have suffered.

The amici curiae presented the Second Circuit with ERISA legislative history and trust-law treatises to make the point that ERISA § 502(a)(2) does not, in fact, create a statutory right for an individual participant to pursue “all” loss to an ERISA plan. These contextual clues demonstrate that Congress intended for ERISA § 502(a)(2) perhaps to authorize an individual participant to pursue loss beyond her own individual loss, but not to create a statutory right to do so. In the absence of such a statutory right, an arbitration provision requiring individualized arbitration should be enforceable.

When litigating ERISA issues, it is worth investigating whether there are contextual clues in ERISA’s legislative history, principles of trust law, or cases in other contexts, that can assist with interpreting the implicated ERISA provisions. Often times, those contextual clues provide extremely helpful information of the type the Supreme Court itself routinely relies upon when interpreting ERISA.