High Court 401(k) Suit Bid Targets Key Arbitration Exception (1)

Retirement plan sponsors facing mounting appeals court precedent quashing arbitration clauses that bar class actions are switching strategies, now aiming to dismantle the nearly 40-year-old judicial doctrine behind those cases.

Michigan auto parts maker Tenneco Inc. asked the US Supreme Court last week to reconsider the use in federal benefits law of its “effective vindication” precept, which establishes that litigants’ right to sue supersedes limits set by arbitration agreements.

The effective vindication principle “lacks a Congressional basis or a legal justification,” in the face of public policy that often favors the use of arbitration agreements, Tenneco’s lawyers wrote. They compared in their petition the “judge-made” principle to the recently overturned doctrine that required courts to defer to federal agencies when a statute is silent or unclear.

The Supreme Court’s elimination of Chevron deference in June has emboldened defense attorneys to take aim at yet another common law doctrine, especially as the window of opportunity to defend class-action waivers in arbitration agreements appears to be closing. For employers, the difference between handling 401(k) and other defined-contribution fiduciary breach disputes on an individual, case-by-case basis can mean hundreds of millions of dollars in fees or settlements, as massive, plan-wide lawsuits continue to pile up against them.

“It’s really a multibillion-dollar issue,” said Lindsey Camp, a partner at Holland & Knight LLP, whose firm filed the Supreme Court petition on behalf of Tenneco. “If these arbitration decisions don’t work out, it will disincentivize companies from offering these plans at all.”

The high court has repeatedly declined to hear cases challenging arbitration clauses related to private-sector retirement plans, most recently on Nov. 4, in a case brought by Argent Trust Co. challenging a decision by the US Court of Appeals for the Second Circuit. For the most part, those appeals were based on the applicability of arbitration agreements under the Employee Retirement Income Security Act of 1974.

Presenting the question as a broader challenge to decades-old judge-made legal doctrine touching almost all arbitration contracts might be enough to pique the justices’ interest, said Camp—particularly under a conservative-leaning high court primed to buck jurisprudence norms.

Associate Justice Clarence Thomas seemed to reject the principle of “effective vindication” in a 2013 concurrence in American Express Co. v. Italian Colors Restaurant, when he wrote that arbitration clauses should only be invalidated when there was a defect in their formation, such as fraud or duress. Under the Securities Act, Americans with Disabilities Act, and racketeering law, the high court has repeatedly protected arbitration clauses against attacks from consumer interest groups who view them as unfairly tilted in companies’ favor.

Tennoco’s petition depicts the appeal as a question about the effective vindication doctrine broadly, suggesting it doesn’t apply. That could give justices on the court an opportunity to adjudicate arbitration law without cumbersome ERISA minutiae.

“There are people who think that this is a court that’s ready to look at a distinction framed that way,” said Ian Taylor, a partner at Nixon Peabody LLP.

‘Last Best Chance’

In August, the US Court of Appeals for the Sixth Circuit upheld a lower court’s ruling that the class-waiver in Tenneco’s 401(k) plan was unenforceable based on the “effective vindication” doctrine.

Like the Second, Third, and Tenth circuits, the appeals panel held that plan documents requiring claims to be brought on an individual capacity and limiting monetary relief are at odds with participants’ rights to make claims under ERISA on a representative capacity and to vindicate losses suffered by the plan as a whole.

Earlier this month, the Sixth Circuit upheld that standard in a case challenging Kellogg Co.‘s arbitration clause.

“I’m just counting the circuits one-by-one, said Angel Garrett, a director at Trucker Huss APC. “There’s a circuit split, but it’s narrowing.”

The only remaining holdout appears to be the US Court of Appeals for the Ninth Circuit, which allowed arbitration to move forward in 2019 in a case involving Charles Schwab Corp. But attorneys representing Live Nation Entertainment Inc. workers are actively challenging a class-action ERISA plan arbitration waiver before the panel again, and the tenor of oral arguments earlier this year suggest the precedent may fall, said Camp.

Remaining Supreme Court petitions appear to be the “last best chance” to uphold employer retirement plan arbitration, Garrett said.

The US Court of Appeals for the Seventh Circuit also endorsed arbitration broadly in a 2021 decision that nevertheless rejected an arbitration request under the statute.

“That could be why the Supreme Court hasn’t taken the issue up yet,” she said. “It’s clear that most circuits are holding that these arbitration clauses are unenforceable.”

Mandatory arbitration clauses—especially those containing class-waivers— are becoming increasingly common amid a big spike in fee litigation challenging plans for alleged fiduciary misconduct. That’s correlated with a similar rise in companies inserting arbitration riders in their plan documents, said Taylor.

There are risks to imposing strict individual arbitration clauses in 401(k) plans because workers could choose to individually arbitrate en masse, which can come with its own hefty price tag.

Plans have to consider that threat when they choose to defend their position, Taylor said. Similarly, the array of different rulings have left plan sponsors picking and choosing how they word their agreements according to the jurisdiction where they’re located, he said.

“Clients are looking at these provisions on almost a case-by-case basis,” he added. “It’s confusing them.”

The case is Tenneco, Inc. v. Parker, U.S., Docket Number Unavailable, cert. petition filed 11/15/24.