Second Circuit Finds Arbitration Provisions Unenforceable under ERISA

On May 1, 2024, the Second Circuit declared provisions of an employee stock ownership plan (the Plan) that required participants to resolve any legal claims arising out of or relating to the Plan in individualized arbitration “null and void” because they amounted to prospective waivers of participants’ substantive statutory rights and remedies under ERISA.

The plaintiff, Ramon Cedeno, was an employee of Strategic Financial Solutions, LLC, and a participant in its Plan. Because the Plan had incurred substantial losses after its trustee, Argent Trust Company, purchased shares of Strategic Family, Inc. and their wholly owned LLCs, including Strategic Financial Solutions, Cedeno brought a class action suit against Argent in the United States District Court for the Southern District of New York. The suit alleged that Argent breached its fiduciary duties to Plan participants because it had purchased the shares for more than fair market value and sought several forms of relief under Section 502(a)(2) of ERISA, including restoration of Plan-wide losses, surcharge, accounting, constructive trust on wrongfully held funds, and disgorgement of profits gained from the transaction. 

The defendants moved to compel arbitration in the matter on the grounds that the Plan included mandatory arbitration provisions expressly limiting any relief sought under Section 502(a)(2) to the restoration of losses within a participant’s individual account and prohibiting any relief that would benefit any other employee, participant, or beneficiary, or otherwise bind the Plan, its trustee, or administrators. In support of their motion, the defendants argued that the Federal Arbitration Act (FAA) “requires courts to enforce arbitration agreements rigorously according to their terms.” 

The trial court denied the defendants’ motion and the Second Circuit affirmed that decision, holding that enforcing the Plan’s mandatory arbitration provisions would prevent Cedeno from effectuating the right to plan-wide relief guaranteed through ERISA. Accordingly, the Second Circuit also endorsed the trial court’s position that the “effective vindication doctrine,” which holds that provisions within an arbitration agreement that prevent a party from effectively vindicating statutory rights are not enforceable, rendered the FAA inapplicable to these provisions, notwithstanding that statute’s otherwise broad applicability to arbitration agreements in general. 

With its decision, the Second Circuit joins the Third, Seventh, and Tenth Circuits with its application of the effective vindication doctrine to ERISA plans that include mandatory arbitration clauses such as those in this case. Only the Ninth Circuit had enforced plan language requiring arbitration and limiting actions to individual arbitrations, though this was before the effective vindication doctrine had begun to evolve. Notably, the DOL has signaled its support of the effective vindication doctrine as amicus curiae to the Sixth Circuit by asking the court to apply the Second Circuit’s reasoning in this case to a pending appeal with similar facts. 

The effect of mandatory arbitration provisions in benefit plans subject to ERISA is a developing area of the law. Plan sponsors that already include such language in their plans or are considering including such language in their plans should consult closely with counsel.

Cedeno v. Sasson »