13 F.4th 613
7th Cir.2021Background
- Triad Manufacturing created an ESOP-style defined contribution plan in December 2015; the plan purchased all Triad stock from controlling shareholders for ~$106 million but the stock value collapsed soon after and the plan remained invested exclusively in Triad stock.
- The sellers financed the sale via loans to the plan, Triad guaranteed the loans, and the plan required employer contributions sufficient to service loan payments.
- On July 17, 2018 Triad (the plan sponsor) unilaterally amended the plan to add a binding arbitration clause with a class-action waiver and a nonseverability clause; the amendment barred any arbitration remedy that "has the purpose or effect of providing additional benefits or monetary or other relief to any Eligible Employee, Participant or Beneficiary other than the Claimant."
- James Smith, a former participant, sued under ERISA §§ 1132(a)(2) and (a)(3), alleging fiduciary breaches and seeking plan-wide relief including removal of the trustee and appointment of an independent fiduciary.
- The board defendants moved to compel arbitration or dismiss; the district court denied the motion (finding lack of consent and that the arbitration clause prospectively waived statutory ERISA remedies); the board defendants appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are ERISA claims generally arbitrable? | ERISA claims can be arbitrated (participant assumes arbitrability) | FAA applies; arbitration of federal statutory claims is permitted | ERISA claims are generally arbitrable (joins other circuits) |
| Does the plan's arbitration clause that bars relief benefiting others preclude ERISA §1132(a)(2)/§1109 remedies? | Clause prospectively waives plan‑wide relief permitted by §1109 (e.g., removal of fiduciary), so it defeats statutory remedies | Individualized arbitration with class waiver can supply ERISA relief; FAA should govern and be harmonized with ERISA | Clause is unenforceable under the "effective vindication" exception because it forbids remedies §1109 expressly authorizes (plan‑wide relief) |
| Does Smith’s lack of consent/notice to the 2018 amendment bar arbitration? | Smith argues he did not receive notice and did not consent, so arbitration cannot bind him | Defendants rely on plan/sponsor amendment authority and FAA enforcement | Court expressly declines to decide consent/notice; decision does not rest on consent issue |
| Effect of the clause’s nonseverability provision? | Nonseverability means the invalid remedy‑limiting clause voids arbitration for the affected claim(s) | Defendants: even if some language problematic, arbitration should proceed for individual relief | Because the clause prospectively waives statutory remedies and is nonseverable, arbitration cannot be applied to §1132(a)(2) claims here |
Key Cases Cited
- Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985) (§1109 interpreted to provide plan‑wide remedies in defined‑benefit context)
- LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008) (defined‑contribution plaintiffs may recover individualized losses to their account under §1109/§1132(a)(2))
- Italian Colors Restaurant v. American Express Co., 570 U.S. 228 (2013) (class‑waiver enforceable absent effective‑vindication bar; recognized limited exception for waivers that preclude assertion of statutory rights)
- Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (noted public‑policy/possible prospective‑waiver concern about arbitration clauses that foreclose statutory remedies)
- Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (FAA establishes a liberal federal policy favoring arbitration agreements)
- Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987) (FAA mandates enforcement of arbitration agreements for statutory claims absent contrary congressional command)
Holding (concise): The Seventh Circuit affirmed the district court's denial of the motion to compel arbitration because the plan's arbitration clause—by prohibiting remedies that would benefit persons other than the claimant—operates as a prospective waiver of ERISA‑authorized, plan‑wide relief under §§1109 and 1132(a)(2), invoking the effective‑vindication exception and rendering the clause unenforceable for those claims.