Second Circuit Holds Plan Arbitration/Class Action Waiver Provision Unenforceable

The Second Circuit in Cedeno v. Sasson held an arbitration and class action waiver provision in an Employee Stock Ownership Plan document was unenforceable because it barred a form of relief guaranteed under ERISA to plan-wide remedies under Section 502(a)(2).

Ramon Cedeno sued his former employer, Strategic Financial Solutions, LLC, the trustee of the company’s Employee Stock Ownership Plan (“Plan), and other stakeholders, alleging that the Plan purchased shares of Strategic Family stock at more than fair market value. Cedeno sought relief under Section 502(a)(2) of ERISA, which allows participants to bring claims under ERISA Section 409 against plan fiduciaries who breach their ERISA fiduciary obligations. Such claims are effective only to allow participants to pursue relief on behalf of the plan as a whole, not to recoup losses on an individual basis. Cedeno sought such plan-wide equitable remedies, including restoration of Plan losses, surcharge, accounting, constructive trust on wrongfully held funds, and disgorgement of profits.

The Plan document contained a mandatory arbitration provision which applied broadly to any claim that, “arises out of, concerns or relates to the Plan or the Trust,” including claims “asserting a breach of, or failure to follow, any provision of ERISA...including without limitation claims for breach of fiduciary duty.” The Plan’s arbitration provision precluded any claims brought on a representative, class, or collective basis, and stated that a participant may not receive any remedy that, “has the purpose or effect of providing additional benefits or monetary or other relief” to anyone other than the individual claimant. Significantly, the arbitration provision also contained a non-severability clause providing that, if a court found any part of the arbitration clause unenforceable, the entire provision would be “null and void.”

When defendants moved to compel arbitration, the federal district court for the Southern District of New York denied the motion, concluding the agreement was unenforceable because it prohibited Cedeno from pursuing plan-wide statutory remedies under ERISA Section 502(a)(2).

The Second Circuit affirmed, concluding that the Federal Arbitration Act as interpreted by the U.S. Supreme Court in Viking River Cruises, Inc. v. Moriana, 596 U.S. 639, 653 (2022), does not require courts to enforce arbitration agreements to the extent they purport to prospectively waive substantive rights and remedies afforded by statute. Because the Plan’s arbitration provision prevented Cedeno from pursuing remedies on behalf of the Plan, and in a representational capacity, it operated as an unenforceable prospective waiver of his statutory rights and remedies under ERISA Section 502(a)(2). In so finding, the majority of the Second Circuit panel rejected all of defendants’ arguments and that of the dissent, including the “incoherent” argument that Cedeno could somehow obtain individual equitable relief that is plan-wide in nature, but not binding on any other participant.

Circuit Judge Menashi, in a strongly worded dissent, found that the Federal Arbitration Act did not conflict with the terms of ERISA, that Section 502(a)(2) does not require participants to act in a representative capacity to seek relief for fiduciary breaches, and that the arbitration provision in the Plan in fact would have allowed Cedeno to be made whole in his individual capacity. 

Notwithstanding the dissent, the Second Circuit now stands with the Third, Seventh and Tenth Circuits in holding unenforceable Plan arbitration provisions that prevent a participant from pursuing rights and remedies under ERISA Section 502(a)(2). The Ninth Circuit is the outlier, holding that Plan arbitration provisions may restrict participants from seeking class relief, even if claims are brought for plan-wide relief.

The Cedeno ruling means that ERISA employee benefit plans in the Second Circuit which have arbitration or class action waiver clauses - depending on severability and scope - may now be unenforceable in whole or in part. Importantly, Cedeno does not prohibit mandatory arbitration of all ERISA claims. For example, an arbitration clause in a plan may prevent federal court litigation of benefit claims under ERISA Section 502(a)(1)(B), and even breach of fiduciary duty claims (Bird v. Shearson Lehman/American Express, Inc., 926 F.2d 116, 122 (2d Cir. 1991)), provided that the arbitration provision does not impair the claimant’s right to pursue plan-wide relief or other ERISA statutory rights and remedies.  Plan sponsors should ensure arbitration provisions are carefully composed to avoid infringing upon the statutory rights provided by ERISA.

Peripheral, but important in considering whether to require mandatory arbitration of ERISA claims, is the issue of exhaustion of internal remedies. A plan sponsor who wishes to require mandatory arbitration of benefit claims under ERISA Section 502(a)(1)(B) may also impose a requirement that the claimant first exhaust his/her internal administrative remedies. However, after Cedeno, it is unclear whether the ERISA benefit plans in the Second Circuit may require a claimant to exhaust all internal administrative remedies prior to pursuing plan-wide relief under ERISA Section 502(a)(2). 

At this time, the circuit courts are split on whether exhaustion of internal remedies is required prior to a claimant pursuing ERISA Section 502(a)(2) statutory claims, with the Third, Fourth, Fifth, Sixth, Ninth, Tenth and D.C. circuits holding exhaustion is not required, and the Seventh and Eleventh Circuits requiring exhaustion. While the Second Circuit has not yet decided the issue of whether exhaustion of internal remedies for statutory ERISA Section 502(a)(2) claims is required, Cedeno makes clear that any ERISA plan provision that prevents a claimant from pursuing statutory remedies granted by ERISA is unenforceable.

In addition to demonstrating caution regarding arbitration and exhaustion clauses in ERISA plans, plan administrators should carefully consider the use of severability clauses that could render portions of the plan invalid. In Cedeno, due to a non-severability clause, the entire arbitration provision was rendered null and void following the determination that the two clauses which constituted a prospective waiver of plan-wide, representative claims were unenforceable.

For more information or to seek assistance regarding mandatory arbitration provisions in your ERISA benefit plans, please contact any member of the Hodgson Russ Employee Benefits Practice.

Cedeno v. Sasson, 2024 WL 1895053 (2d Cir.)

**Lachlan Macintosh, a summer associate at Hodgson Russ, also contributed to this alert.

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