A federal district court in Florida sent a proposed ERISA breach of fiduciary duty class action to individual arbitration on the basis of a plan arbitration clause that allowed for individual relief and plan-wide injunctive relief.  The case is Holmes v. Baptist Health South Florida, Inc., No. 21-cv-22986, 2022 WL 180638 (S.D. Fla. Jan. 20, 2022).

Plaintiffs, a proposed class of current and former Baptist Health employees, sued the nonprofit health care organization in the Southern District of Florida, alleging that defendants breached their fiduciary duties in their management and selection of investments for the organization’s 403(b) retirement plan.  In response, defendants invoked the plan’s arbitration clause, which required individual arbitration of claims relating to the plan and prohibited individuals from receiving “remedial or equitable relief” that would provide “additional benefits or monetary relief to any person . . . other than the Claimant[.]”  The district court granted defendants’ motion to compel arbitration, holding that the clause was enforceable under the Federal Arbitration Act (the “FAA”).

In doing so, the court held that the arbitration clause did not fall within the “effective vindication” doctrine, a rarely invoked exception to the FAA.  The doctrine—a judge-made exception to the FAA—permits courts to invalidate arbitration agreements that prospectively waive a party’s right to pursue statutory remedies.  Plaintiffs argued that the exception applied because the clause prospectively waived plan-wide relief specifically authorized by ERISA.  The district court rejected this argument, finding that the Eleventh Circuit has never applied the doctrine and has expressed a hesitancy to do so.

In rejecting the application of the “effective vindication” doctrine, the district court distinguished the arbitration clause from one recently invalidated by the Seventh Circuit in Smith v. Bd. of Directors of Triad Mfg., Inc., 13 F.4th 613 (7th Cir. 2021).  Unlike the clause in Smith, which barred certain relief entirely, the clause in Baptist Health’s plan still allowed individual claimants to recover through arbitration the loss to their individual accounts, as well as plan-wide relief, so long as it would not provide “additional benefits or monetary relief” to any other person.

The district court also held that Baptist Health’s plan amendment adding the arbitration clause after the participant ceased being a plan participant did not render the clause unenforceable.  Instead, the district court noted that the relevant inquiry is whether the plan agreed to arbitration, because plaintiffs’ fiduciary-breach claims were brought on behalf of the plan under ERISA § 502(a)(2).  Here, because the plan expressly provided for unilateral amendment by the plan sponsor, the plan validly consented to the arbitration clause even if the plaintiffs did not.

Proskauer’s Perspective

The court’s decision in Holmes is significant in at least two respects.  First, the district court’s interpretation of the provision as permitting claimants to obtain non-monetary relief for the plan through arbitration may lead to outcomes that circumvent arbitration’s individual nature.  As discussed in a previous post, the Ninth Circuit previously enforced a similar arbitration provision in a 401(k) plan but limited any potential relief to only the losses to the plaintiff’s individual 401(k) plan account.  See Dorman v. Charles Schwab Corp., 780 F. App’x 510 (9th Cir. 2019).  Although the ruling in Holmes limits defendants’ monetary exposure, it allows for broader and potentially impactful non-monetary relief, such as the removal of a plan fiduciary or a particular plan investment option.

Second, insofar as the outcome here diverges from the outcome in Smith, an appeal of the district court ruling could give rise to a split between the Eleventh and Seventh Circuits regarding the application of the effective vindication exception.