The Federal Arbitration Act is a broad and powerful legal tool for forcing disputes into mandatory arbitration in a wide, wide variety of contract contexts. So much so that it is notable when a Plaintiff (or a group of Plaintiffs) successfully fends off an attempt to bounce something out of the federal courts and into individual private arbitration. That was, however, the case in the recent decision in the case of Smith v. Board of Directors of Triad Manufacturing, Inc., No. 20-2708 (7th Cir. 2021).
The class action matter was brought on behalf of a group of employees and ex-employees of St. Louis-based Triad Manufacturing, and concerns a fairly complex web of alleged financial misconduct in their employee stock ownership plan, a defined contribution employee retirement plan. At direct issue here, though, was Arbitration Clause in the retirement plan itself, which Triad argued should force the Plaintiffs to arbitrate their claims rather than acting together as a class. They point to language in the retirement plan contract which requires that any disputes arising from ERISA be adjudicated in individual arbitration, and precludes providing relief to anyone besides the individual claimant.
The class action itself was brought primarily under the Employee Retirement Income Security Act (ERISA), which authorizes participants and beneficiaries of covered plans to bring suits against fiduciaries who breach their duties to the plan, and allows remedies including personal liability for losses and, importantly, non-monetary equitable remedies like removal of the fiduciaries from their position. In allowing private enforcement, the court distinguishes between defined benefit plans (where there is a set payout schedule set by the plan itself, like a defined pension) and defined contribution plans (where employees pay a certain amount into the plan which then pays out an uncertain amount based on the success of the plan’s investments). Courts have been more open to allowing private ERISA suits in defined contribution plans because individuals can show that they were directly harmed by the financial misconduct, unlike in cases where they are going to get a defined benefit regardless of the overall success of the plan.
Moving to Smith directly, the court found that the Arbitration clause of the Plan cannot prevent the lawsuit from moving forward, directly as a result of the narrowness of the clause itself. In an attempt to prevent class action, the arbitration clause explicitly says that the arbitration cannot provide relief to others besides the claimant. This means that the equitable remedies that are set forth in ERISA and requested by the Plaintiff, such as removal of the offending fiduciary from their position, cannot be covered by the Arbitration clause. This is because forcing the Plaintiff’s to arbitration would remove their ability to seek equitable remedy entirely, since, by the plan’s own terms, equitable remedy isn’t available in arbitration. The court points to caselaw stating that they should not enforce contracts that prevent the “effective vindication” of a federal statutory right like ERISA, and ruled that, as to the equitable remedies like removal, Smith can avoid arbitration. A small victory, but a real one nonetheless.
Attorney Travis Dunn