What Happens In A Small Town Stays In A Small Town … Until The Tenth Circuit Rejects ERISA Arbitration Provision

by Alex Smith

While case law regarding the enforceability of arbitration provisions in ERISA retirement plans has been mixed, since the Ninth Circuit’s 2019 decision in Dorman v. Charles Schwab Corp. enforcing a 401(k) plan’s arbitration provision, some employers and plan sponsors have given increased consideration to adding arbitration provisions to their retirement plans based on that decision and the proliferation of class action ERISA lawsuits.  However, following the Tenth Circuit’s February 9 decision in Harrison v. Envision Management Holding, Inc. Board, which appears to be the first time the Tenth Circuit considered the issue, employers based in the Tenth Circuit’s jurisdiction (Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming) may want to think twice before adding an arbitration provision to their plans.

In its recent decision, the Tenth Circuit rejected enforcement of an employee stock ownership plan’s (ESOP) arbitration provision in a lawsuit brought by a plan participant alleging that the ESOP’s fiduciaries overpaid for the employer’s stock, breached numerous ERISA fiduciary duties, and engaged in prohibited transactions.  The Tenth Circuit’s ruling focused on the ESOP’s specific arbitration provision, which precluded a claimant from obtaining plan-wide relief, rather than ERISA arbitration provisions generally.  The Tenth Circuit’s decision did not address whether another arbitration provision that permitted plan-wide relief could be permissible.

For employers based in the Tenth Circuit’s jurisdiction, the court’s recent ruling changes the calculation for whether to insert an arbitration provision in their plans as a participant lawsuit challenging the arbitration provision is now likely to be filed within the Tenth Circuit’s jurisdiction.  Even without a broad rejection of ERISA arbitration provisions, the Tenth Circuit’s decision is likely to at least make district courts within the Tenth Circuit pause when considering such a provision.  While the Tenth Circuit’s decision leaves the unanswered question of whether a narrower retirement plan arbitration provision could be permissible, as a practical matter, a significantly narrower arbitration provision may be unable to accomplish an employer’s goals of shifting potential ERISA litigation to arbitration or limiting potential exposure for fiduciary breach claims.