Second Circuit Rejects Enforcement of Class Waiver and Arbitration Agreement Under FAA, Finds That Provisions Impermissibly Limited “Plan-Wide” Remedies Under ERISA

The plaintiff sued the trustee of his retirement plan, his former employer, and others for breach of fiduciary duties in connection with the plan’s purchase of shares of the employer’s parent company for more than fair market value. The plan was a defined contribution plan, with a separate individual account for each participant. The complaint sought relief under section 502(a)(2) of ERISA, including restoration of plan-wide losses, surcharge, accounting, constructive trust, disgorgement of profits, and other equitable relief.

The defendants moved to compel arbitration under the FAA on an individual basis, relying on plan provisions that required participants to resolve any legal claims solely in their “individual capacity and not in a representative capacity” and that prohibited participants from seeking or receiving “any remedy that has the purpose or effect of providing additional benefits or monetary or other relief to” other participants or beneficiaries. The defendants argued that compelling individual arbitration would not limit any substantive rights or remedies that the plaintiff “could personally achieve under ERISA section 502(a)(2),” as the plaintiff could only ever have recovered losses within his individual plan account.

The district court disagreed with the defendants and denied the motion, and a divided panel of the Second Circuit affirmed. The Second Circuit found, over a dissenting judge, that the above provisions were unenforceable because, as the Third, Seventh, and Tenth Circuits found in analogous cases, the provisions would prevent the plaintiff from pursuing remedies under section 502(a)(2) that were, by their nature, plan-wide. Analyzing U.S. Supreme Court precedent, the court explained that “the Section 502(a)(2) vehicle for enforcing Section 409(a) provides for only plan-wide remedies.” If the arbitration provisions prevented the plaintiff from pursuing the statutory plan-wide remedies, then it effectively prevented him from vindicating his substantive statutory rights under ERISA. Consequently, the above plan provisions (and the arbitration agreement as a whole) were unenforceable.

In reaching its decision, the court distinguished Supreme Court rulings, including Epic Systems, Italian Colors, Concepcion, and Gilmer, which enforced arbitration agreements containing a waiver of aggregated actions involving statutory rights. This case was different, the court explained, as precluding a representative action would deprive the plaintiff of the “full range” of statutory substantive rights and remedies. Drawing from another recent Supreme Court case, Viking River Cruises, the court highlighted a “qualitative difference” between waivers of collective action procedures, and waivers that purport to preclude a party from arbitrating in a representational capacity on behalf of a single absent principal (the plan). The court also observed that there would be “no legal way to provide many of the equitable remedies allowed by statute and sought by [the plaintiff] without impacting the accounts of other plan participants and beneficiaries or binding the Plan Administrator and Trustee vis-à-vis other participants.” The court affirmed the denial of the motion to compel arbitration.

Cedeno v. Sasson, No. 21-2891 (2d Cir. May 1, 2024).