Will COVID-19 Spur the Use of Arbitration Clauses in ERISA Plans?

June 22, 2020Article

The COVID-19 pandemic crisis has put considerable stress on the U.S. retirement plan system. The uncertainty of ordinary business operations has led to questions of whether some companies are, for example, able to continue funding pension plans by making required contributions or whether plans will have sufficient assets to pay benefits when due. Short-term volatility in the investment markets and lingering questions over longer-term effects of the pandemic on those markets lead to questions over the propriety of investment decisions for retirement accounts. Employee furloughs or the reduction in hours for certain employees have implications for employee vesting rights in retirement plans, and impact 401(k) plan employer matching and safe-harbor contributions.[1] Employee-owned businesses, through their employee stock ownership plans (“ESOPs”), which are designed to be primarily invested in the securities of the company sponsor, are not immune to these concerns. This is especially so under circumstances in which the value of the employee-owned business has declined due to COVID-19 or for other reasons or where reasonable questions exist as to plan administration, regulatory compliance, and valuation issues.

Disputes are certain to increase as a result of the effects of the COVID-19 pandemic and employer-sponsors’ responses to the economic consequences of the pandemic. Federal regulatory oversight of ERISA plans continues through the United States Department of Labor’s Employee Benefits Security Administration (“EBSA”), the Pension Benefit Guaranty Corporation (“PBGC”) and the Internal Revenue Service. All of these agencies have implemented administrative guidance pertaining to COVID-19 and retirement plans[2] and additional regulations.

Private plaintiff litigation, led by plan participants and/or beneficiaries, is certain to increase, as it did after the 2007-2008 “Great Recession”. Retirement plan sponsors and fiduciaries bracing for this wave of litigation are now planning for the future. Do such potential defendants simply await the risks that private plaintiffs who bring claims on behalf of a plan or as a class action will do so in the federal court system (based upon federal question jurisdiction under 28 U.S.C. § 1331), or do they seek alternative ways to mandate that these private litigants resolve such disputes, given limited in-person court proceedings, significant delays in court trial schedules, “stay-at-home” orders, etc.?

Arbitration of ERISA Disputes is a Viable Alternative

The arbitration of class action disputes under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), is a viable alternative to federal court litigation. In Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013), the United States Supreme Court determined that “[c]laims alleging a violation of a federal statute such as ERISA are generally arbitrable absent a ‘contrary congressional command’”. ERISA contains no congressional command against arbitration and, therefore, an agreement to arbitrate ERISA claims is generally enforceable. See Dorman v. Charles Schwab Corp., 780 Fed. Appx. 510 (9th Cir. 2019); Williams, v. Imhoff, 203 F.3d 758 (10th Cir. 2000); Kramer v. Smith Barney, 80 F.3d 1080 (5th Cir. 1996); Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110 (3rd Cir. 1993); Bird v. Shearson Lehman/Am. Express, Inc., 926 F.2d 116 (2nd Cir. 1991); Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, Inc., 847 F.2d 475, 479 (8th Cir. 1988).

In Lamps Plus, Inc. v. Varela, 587 U.S. ___, 139 S. Ct. 1407, 203 L. Ed. 2d 636 (2019), the Supreme Court held that employees may bring class-wide claims in arbitration only if the underlying arbitration agreement explicitly authorizes class proceedings. Lamps Plus offers caution to any drafting of an ERISA plan arbitration provision.

Concerns Over Arbitration

The ERISA plan community – namely, company sponsors, ERISA fiduciaries, and their counsel – seem to be in flux over the advisability of implementing arbitration clauses in ERISA retirement plan documents. Some argue that arbitration is preferable given the private nature of arbitration (unless the results of the arbitration have to be enforced in public court filings), the ability to limit claims to individual participant/beneficiary accounts through class action waivers, and the deterrence of the participant having to share the costs of an arbitrator or a panel of arbitrators. Others argue that the uncertainty of the approach that will be taken by private arbitrators with no known history of ERISA rulings presents risks in the outcome of arbitration decisions, as does the tendency of arbitrators to choose a middle ground in reaching a conclusion. Other plan sponsors express concern over the negative public relations effect of forcing arbitration on employee-owner participants and their beneficiaries, and whether such provisions run contrary to the purpose of implementing and maintaining an ERISA plan in the first place. Such concerns are no different for the individual participants.

ERISA litigation is typically complex and lengthy. Cases in court typically take three to five years or more to resolve. Arbitration typically allows for a swifter resolution. Moreover, the COVID-19 pandemic has had a greater impact on slowing court actions – scheduled trial dates are being delayed with regularity – creating greater backlog.[3] Alternative dispute resolution providers, such as JAMS (formerly, “Judicial Arbitration and Mediation Services”)[4] and the American Arbitration Association (“AAA”)[5], have implemented appropriate protocols and guidelines for conducting arbitration remotely, including video conferencing for hearings. In short, arbitration providers appear to have been more flexible than the courts in responding to the COVID-19 pandemic. Moreover, given the public’s increasing familiarity and comfort with working remotely, preconceived beliefs against remotely conducted hearings have lessened. Finally, while the COVID-19 pandemic has brought new challenges for attorneys, the applicable Rules of Professional Conduct with respect to diligence, communications, confidentiality, and videoconferences afford sufficient flexibility and guidelines for attorneys representing any of the parties to an ERISA arbitration to protect their clients.[6]

Employers should carefully consider the pros and cons of arbitrating employee benefit disputes and, if so inclined, amend their plan documents and procedures accordingly. Arbitration may prove to be a cost-effective and efficient approach to resolving employee benefit plan claims.

Authors: David R. Johanson (Partner-in-Charge, Napa), Douglas A. Rubel (Of Counsel, Atlanta)

Hawkins Parnell & Young's national litigation team is helping businesses across the United States navigate unprecedented legal challenges arising from the COVID-19 pandemic. Visit our COVID-19 Resource Center for the latest insights and guidance.

[1] https://www.hpylaw.com/publications/the-risks-of-reduction-employee-furloughs/, “The Risks of Reduction: Employee Furloughs," June 10, 2020 – Article; https://www.hpylaw.com/publications/implementing-a-reduction-in-force-during-a-pandemic/, “Implementing a Reduction in Force During a Pandemic”, May 26, 2020 – Article]

[2] See, e.g., PBGC Disaster Relief Announcement, https://www.pbgc.gov/prac/other-guidance/Disaster-Relief#exceptionslist, last updated April 13, 2020, providing relief from certain reporting requirements, but not “filings that involve particularly important or time-sensitive information where there may be a high risk of substantial harm to participants or PBGC’s insurance program”; DOL COVID-19 FAQs for Participants and Beneficiaries, https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/covid-19.pdf, providing summaries of IRS and DOL guidance of relevance to plan participants in light of the pandemic.

[3] “Court Closures and Responses Due to COVID-19”

[6] See, e.g., American Bar Association, The ABA Coronavirus (COVID-19) Task Force, https://www.americanbar.org/advocacy/the-aba-task-force-on-legal-needs-arising-out-of-the-2020-pandem/; North Carolina Bar Association, “COVID-19 Update, A Letter to Lawyers”, C. Colon Willoughby Jr., President, North Carolina State Bar, Mar. 26, 2020, https://www.ncbar.gov/news-publications/news-notices/2020/03/covid-19-update-a-letter-to-lawyers/; California Lawyers Association, “Legal Ethics and the Coronavirus”, Neil J Wertlieb, Kevin Mohr and Suzanne Burke Spencer, https://calawyers.org/california-lawyers-association/legal-ethics-and-the-coronavirus/