The U.S. District Court for the Southern District of Florida has issued an order in an Employee Retirement Income Security Act (ERISA) lawsuit filed against Baptist Health South Florida on behalf of participants in the hospital system’s 403(b) defined contribution (DC) retirement plan.
The ruling comes in response to the defense’s filing of three motions, including a motion to compel arbitration, a motion to stay and a motion to dismiss under the Federal Rule of Civil Procedure 12(b)(6). In its ruling, the court addresses only the defendants’ motion to compel arbitration, to which the plaintiffs filed a response in opposition and the defendants filed a reply in support. After careful review of the briefing and the relevant legal authorities, the District Court grants the arbitration motion.
The claims in the underlying lawsuit are typical of excessive fee suits, including that plan fiduciaries failed to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; that they maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and that they failed to control the plan’s recordkeeping costs. However, unlike some recently filed complaints, the suit also cites language from the plan’s investment policy statement (IPS) and argues that the committee fell short in carrying out its responsibilities.
In arguing that the arbitration agreement is not enforceable, the plaintiffs raised two challenges. First, they argued that the arbitration agreement and its waiver of certain plan-wide remedies violates the “effective vindication” doctrine. Second, the plaintiffs argued that the arbitration agreement is not binding, as the agreement was added to the plan by unilateral amendment in 2020. The ruling considers each argument in turn.
As the ruling spells out, the “effective vindication” doctrine is a judge-made exception to the Federal Arbitration Act (FAA) that seeks to balance the competing federal policies in enforcing arbitration agreements and in vindicating plaintiffs’ rights to pursue statutory remedies. Though rarely applied, the doctrine holds that courts may invalidate arbitration agreements that “operate as a prospective waiver of a party’s right to pursue statutory remedies.” Here, the plaintiffs argued that the plan’s arbitration agreement prevents the effective vindication of rights guaranteed in 29 United States Code Section 1109(a).
In particular, the plaintiffs argued that they seek plan-wide relief—such as removal of the plan’s fiduciaries and appointment of new fiduciaries, which is authorized under Section 1109(a)—but that the waiver provision of the arbitration agreement forbids such plan-wide relief. For their part, the defendants argued that such plan-wide relief is only available to those who bring a class action on behalf of the plan. And, the defendants argued, as courts have held that class-action arbitration waivers are permissible, any waiver of a remedy unique to representative or class actions is also permissible.
“Given the FAA’s pro-arbitration policy, as well as the rarity with which courts apply the effective vindication doctrine, the court declines to follow the [plaintiffs’] rationale and holds that the arbitration agreement at issue is valid and enforceable,” the ruling states. “While the arbitration agreement prohibits the recovery of some plan-wide monetary relief, such relief is only available to those who bring a representative or class action. … While the arbitration clause in [the cited precedent case] completely denied some types of statute-authorized relief to the plan, the clause here does not, as individual claimants can each recover the harm to their defined contribution accounts, and they can recover plan-wide relief that does not provide additional benefits or monetary relief to others. For this reason, the arbitration agreement here is valid and enforceable.”
The second issue is also weighed in favor of the defendants.
“Despite the unseemly nature of requiring plan-participant plaintiffs to arbitrate a claim that they never personally agreed to arbitrate, the plan agreed to arbitrate,” the ruling states. “Section 1109(a) claims belong to the plan. Therefore, the relevant inquiry is not whether individual participants agreed to the arbitration agreement but whether the plan agreed to arbitrate. Here, the plan consented to the 2020 amendment, which added the arbitration clause, as the plan expressly provided for unilateral amendment by the plan sponsor. As the plan consented to the arbitration agreement, the plan, and those that bring claims on its benefit, must arbitrate.”
The full text of the ruling is available here.