Michigan Federal Court Declines To Compel Arbitration Of ERISA Claims Due To An Unenforceable Class Action Waiver

By Gerald L. Maatman, Jr. and Derek Franklin

Duane Morris Takeaways: In Parker, et al. v. Tenneco Inc., et al., Case No. 2:23-CV-10816 (E.D. Mich. Aug. 21, 2023), Judge George Steeh of the U.S. District Court for the Eastern District of Michigan denieda motion to compel arbitration based on finding an ERISA class action waiver in an arbitration agreement unenforceable. The Court determined that Plaintiffs’ breach-of-fiduciary-duty claim under the ERISA “seeks relief for the [Benefits] plan as a whole,” and that “the harm (and the recovery) is to the Plan, rather than to plaintiffs specifically.” Id. at 14-15. In turn, the Court concluded that compelling arbitration and enforcing the class action waiver would prevent plan participants from seeking plan-wide remedies conferred by the ERISA statute. For these reasons, the Parker decision is instructive for employers seeking to implement an enforceable class action wavier and configure arbitration agreements that are best suited to account for the possibility of a class action waiver being nullified.

Case Background

The group of Plaintiffs in the Parker lawsuit were led by Tanika Parker, a current employee of DRiV Automotive Inc. (“DRiV”), and Andrew Farrier, a former worker for Tenneco Inc. (“Tenneco”). DRiV and Tenneco were two of several affiliated entities named as Defendants in the case. Parker and Farrier, participants in ERISA-covered 401(k) plans (the “Plans”) sponsored by their respective employers, alleged that Defendants breached their fiduciary duties under the ERISA by failing to prudently monitor and control the Plans’ investments and expenses. Defendants moved to compel arbitration of Plaintiffs’ claims on an individual basis, pursuant to an Arbitration Procedure adopted by the Plans containing language barring participants from bringing ERISA claims as a group or class. The Arbitration Procedure also provided that, if the class action waiver was found unenforceable or invalid by a court, the entire arbitration procedures would become null and void.

Eastern District of Michigan Opinion

In denying Plaintiffs’ motion to compel arbitration, Judge Steeth ruled that the class action waiver within the Arbitration Procedure was unenforceable because it “limits a participant’s substantive right under ERISA by prohibiting plan participants from bringing suit.” Id. at 15.

The Court’s reasoning cited an April 2022 Sixth Circuit decision in Hawkins v. Cintas Corp., 32 F.4th 625, 630 (6th Cir. 2022), which held that breach-of-fiduciary-duty claims under the ERISA are “brought in a representative capacity on behalf of the plan as a whole.” Id. at 10. The Court also quoted the explanation in the Hawkins decision that, although an ERISA breach-of-fiduciary-duty claim is typically brought by individual plaintiffs, “it is the plan that takes legal claim to the recovery, suggesting that the claim really ‘belongs’ to the Plan,” and that “an arbitration agreement that binds only individual participants cannot bring such claims into arbitration.” Id. at 12.

Consistent with that rationale, the Court in Parker held that the ERISA class action waiver in the Arbitration Procedure at issue was unenforceable because it would preclude Plan participants from pursuing “plan-wide remedies” provided for under the ERISA statute that cannot be waived by an agreement. Id. at 15. According to the Court, this would occur by the class action waiver “(1) prohibiting participants from bringing suit in a representative capacity on behalf of the plan, and (2) limiting relief to losses attributable to individual participant accounts, as opposed to plan-wide remedies.” Id.

Given that the Arbitration Procedure provided that it “shall be rendered null and void in all respects” if the class action waiver were to be “found unenforceable or invalid by the court,” the Court declared the entire Arbitration Procedure null and void and denied Defendants’ motion to compel arbitration. Id. at 15-16.

Implications for Class Action Defendants

As federal courts continue to issue decisions limiting the application of class action waivers relative to claims under the ERISA, it remains critical for businesses and employers to regularly review their arbitration agreements and class action waiver language to ensure legal compliance. Any business trying to implement an enforceable class action waiver should carefully consider the potential risks of extending that language to cover plan mismanagement claims under the ERISA. Businesses should also review their arbitration procedures to ensure they are best positioned to function independently of a potentially unenforceable class action waiver.

Georgia Federal Court Declines To Dismiss ERISA Prohibited Transaction Claims And Certifies Class Despite Differences In Class-wide Investment Choices

By Gerald L. Maatman, Jr., Brian W. Sullivan, and Jesse S. Stavis

Duane Morris Takeaways:  On August 2, 2023, Judge Clay Land of the U.S. District Court for the Middle District of Georgia granted a motion to certify a class of participants in an ERISA class action involving an employer-sponsored defined contribution plan in Goodman v. Columbus Regional Healthcare System, Inc., No. 21-CV-15, 2023 WL 4935004 (M.D. Ga. Aug. 2, 2023). The Court rejected defense arguments to deny certification of one large class in favor of smaller sub-classes based on differences in the investment choices and resulting injuries of putative class members.  Instead, the Court concluded that allegations that the asserted injuries were caused by Defendant’s common conduct warranted class certification without regard to such differences.  For these reasons, the Goodman decision is instructive for ERISA plans and fiduciaries defending putative class claims under the ERISA.

Case Background

Plaintiffs were participants in a defined contribution plan (the “Plan”) sponsored by their employer, Defendant Columbus Regional Healthcare System, Inc.  Plaintiffs alleged that Defendant violated its fiduciary duties under the ERISA by failing to prudently monitor and control the Plan’s investments and expenses and because it caused the Plan to engage in prohibited transactions with the Plan’s record-keeper and investment advisor (together, the “Service Providers”).  Goodman, 2023 WL 4935004, at *1-2.  Plaintiffs moved to certify a class under Rule 23(b)(1) consisting of all plan participants or beneficiaries of the plan with an account balance on or after February 2, 2015 through the termination of the Plan.  Id.

Class Certification Granted

Plaintiffs sought to certify a class with respect to their three ERISA claims that Defendant violated its duty to prudently monitor investments and expenses and had engaged in prohibited transactions.  Id. at *3.  Defendant opposed certification on the grounds that “the class proposed by Plaintiffs is so broad that Plaintiffs did not meet their burden to establish standing, commonality, and typicality” as required by Rule 23.  Id. at *4.

Addressing Defendant’s standing challenge first, the Court acknowledged that, to have standing, Plaintiffs and other Plan participants “must have suffered a decrease in value of their defined contribution accounts due to a breach of fiduciary duty.”  Id.  The Court rejected Defendant’s argument that “it is possible that some members of the putative class as presently defined did not suffer any loss due to the alleged breaches of fiduciary duties.” The Court reasoned that “this is not a standing problem but a liability issue.”  Id.  It explained that “[t]he possibility that some putative class members may not ultimately make a recovery does not eliminate standing for class certification purposes,” particularly where evidence of specific losses “should be readily ascertainable.”  Id.

The Court likewise rejected Defendant’s arguments that Plaintiffs failed to establish the commonality or typicality requirements of Rule 23(a).  The Court explained that commonality requires a showing that class members have suffered “the same injury” and that their claims depend on “common questions or law or fact” with common answers.  Id. at *5.  Typicality, the Court explained, requires evidence of “a sufficient nexus” between the claims of the Plaintiffs and those of the putative class as shown by claims or defenses arising “from the same event or pattern or practice” and “based on the same legal theory.”  Id.  Together, the Court opined that commonality and typicality require Plaintiffs and the class members to have the same interest and suffer the same injury, even though the Plaintiffs need not have suffered injury “at the same place and on the same day as the class members.”  Id.

Applying these principles, the Court rejected Defendant’s suggestions “that there must be a separate sub-class for each allegedly imprudent investment and that the named Plaintiffs cannot establish typicality for allegedly imprudent investments options in which they did not invest.”  Id.  Instead, the Court held that this “level of granularity” was not “required at the class certification stage” where Plaintiffs had alleged that Defendant employed “flawed selection and monitoring practices” that were the same for class members across all investment options.  Id.  The same was true of “the excessive fee and prohibited transaction claims,” which were based on Defendant’s “alleged failure to insist” that the Service Providers charge “no more than reasonable fees, which resulted in harm to Plan participants” invested in relevant funds.

As such, the Court concluded that “the alleged cause of the injury remains the same across all funds.”  Id.  On these allegations, the Court found that there were common questions capable of class-wide resolution and for which Plaintiffs’ claims were typical of the class – whether Defendant breached its fiduciary duties by offering imprudent investments and by allowing the Service Providers to collect unreasonable fees.  The Court determined that more granular issues concerning the specific investments and injuries of particular class members “relate to the degree of injury and level of recovery” such that the Court did “not see the benefit of dividing the proposed class into sub-classes by investment option.”  Id. at 5-6.  For these reasons, the Court granted Plaintiffs’ motion to certify the class.

Implications for Employers and Plan Administrators

Goodman is typical of federal court decisions in the last several years addressing motions to certify classes in cases asserting breach of fiduciary duty claims under the ERISA.  The ruling underscores that the focus for class certification of such claims remains on the existence of common, injury-producing conduct rather than the similarity of the resulting injuries.  Courts generally will not decline to certify a class based on differences in the investment options chosen or injuries suffered by class members so long as those investments or injuries are linked by a defendant’s common conduct, at even high levels.

Federal Court In Connecticut Certifies Over 25,000 Person Class In ERISA Class Action Lawsuit

By Gerald L. Maatman, Jr. and Jeffrey R. Zohn

Duane Morris Takeaways: On July 28, 2023, Judge Michael P. Shea of the U.S. District Court For The District Of Connecticut granted class certification for current and former employees of Yale-New Haven Hospital in Ruilova et al. v. Yale-New Haven Hospital, Inc. et al., Case No. 3:22-CV-00111 (D. Conn. July 28, 2023).  Plaintiffs alleged that their retirement accounts were not appropriately managed, which resulted in poor investment decisions and excessive fees.  Although many class action defendants are emboldened to fight on every aspect of plaintiffs’ claims, the Defendants in Ruilova took a different approach.  Prior to the Court granting certification, Defendants stipulated to the certification of an over 25,000-person class in order to streamline the litigation and efficiently manage the litigation.  Per Rule 23, the Court deemed that the motion satisfied the requirements for class certification.

Case History

In January 2022, Plaintiffs Kaity Ruilova and Eileen Brannigan (“Plaintiffs”) filed a class action lawsuit against Yale-New Haven Hospital, Inc. and its Board of Directors and Investment Oversight Committee (“Defendants”) alleging breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”).  Plaintiffs sought to represent over 25,000 former and current employees that participated in the Yale-New Haven ERISA Plan (“the Plan”).  The Plan had assets totaling approximately $1.66 billion.

The lawsuit alleged that Defendants failed to fully disclose the expenses and risks of the Plan’s investment options to participants, allowed unreasonable expenses to be charged to participants (at a rate around 33% higher than comparable plans), and accepted high-cost and poorly-performing investments.  Plaintiffs sought to recover all losses resulting from each breach of fiduciary duty.

Defendants filed a motion to dismiss that the Court granted in part and denied in part.  The Court dismissed the claims made against the Board of Directors because the Board of Directors was not a fiduciary of the Plan.  The Court denied the motion to dismiss as to the claim alleging that the Plan incurred excessive recordkeeping and administrative fees and the related failure-to-monitor claims.

While still denying that they are liable to Plaintiffs, approximately four months later, Defendants struck a deal with Plaintiffs to jointly file a stipulation to certify the class just as Plaintiffs articulated in the Complaint.  The Court certified the class in a brief half page order one month later. Per its duty under Rule 23, the Court analyzed the motion and determined that Plaintiffs met the prerequisites for class certification.

Implications for Class Action Defendants

While a court certifying a class does not always make headlines, this one is unique. Defendants proactively agreed to stipulate to the certification of the class that Plaintiffs’ counsel alleged in the Complaint.  The parties’ conversations and thought processes that led to this decision will never be known, but this strategy is a good reminder to always assess the merits of plaintiffs’ claims and only attack the weakest aspects of the case.  Doing more is a waste of everyone’s resources, may demonstrate a lack of good faith, and could damage credibility in the eyes of the court.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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