Tenth Circuit: Effective Vindication Exception Invalidates Arbitration Agreement. ERISA Action Advances in Court

This article was first published on the Securities Arbitration Alert blog, here.

A U.S. Court of Appeals holds that the Supreme Court’s effective vindication exception to the enforcement of arbitration agreements applies to an arbitration agreement that prevents a defined compensation retirement plan participant from pursuing plan-wide remedies.

Robert Harrison, a participant in a defined contribution retirement plan of his former employer formed under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §1101 et seq., sued the fiduciaries of the plan in federal court in Colorado for allegedly enriching themselves at the plan’s expense. Among other causes of action, he sought relief under § 1132(a)(2) of ERISA that could potentially benefit the plan as a whole. Defendants moved to compel plaintiff to arbitrate his claims on an individualized basis under the terms of an arbitration clause in the governing plan document that prohibited participants from pursuing claims on a collective or representative basis.

The Effective Vindication Exception

As SCOTUS noted in American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235 (2013): “An arbitration clause will not be enforced if it prevents the effective vindication of federal statutory rights, however it achieves that result.” Although the High Court has never actually applied this doctrine to prevent arbitration, the District Court relied on this principle to deny the motion on the ground that the arbitration clause precluded plan-wide relief permitted by ERISA. Defendants appealed, but the U.S. Court of Appeals affirms in Harrison v. Envision Management Holding, Inc. Board of Directors, No. 22-1098 (10th Cir. Feb. 9, 2023). The Court expounds:

“The prohibition on class or collective actions, in our view, is not cause for invoking the effective vindication exception…. But the prohibition on a claimant proceeding in a representative capacity is potentially more problematic, at least where, as here, the claimant alleges that the named defendants violated fiduciary duties that resulted in plan-wide harm and not just harm to the claimant’s own account and the claimant seeks relief under § 1132(a)(2).”

The Exception Applies Here

In the case before it, the Court explains, the portion of the arbitration clause that prohibits representative actions, Section 21.1(b) of the Plan Document (which the Court usually calls “Section 21(b)”):

“is not problematic because it requires Harrison to arbitrate his claims, but rather because it purports to foreclose a number of remedies that were specifically authorized by Congress in the ERISA provisions cited by Harrison. Because Section 21(b), if enforced, would prevent Harrison from vindicating in the required arbitral forum the statutory causes of action listed in his complaint, we conclude that the effective vindication exception applies in this case.” In other words: “It is not Section 21’s prohibition on class actions that is problematic. Rather, it is Section 21’s prohibition of any form of relief that would benefit anyone other than Harrison that directly conflicts with the statutory remedies available under 29 U.S.C. §§ 1109 and 1132(a)(2), (a)(3).”

No Statutory Conflicts

Defendants further contended that the District Court violated both ERISA and the FAA. In response to Defendants’ argument that ERISA “requires that a plan document be enforced strictly according to its terms,’” the Court notes: “Nothing in ERISA states that a plan document can override statutory remedies that were afforded to claimants by Congress.” In response to their argument, “that the Supreme Court’s decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), requires a clearly expressed congressional intention to override the FAA and forbid arbitration,” the Court deems that decision:

“inapposite because it involved an argument by the party opposing arbitration that a different federal statute, i.e., the NLRA, conflicted with and effectively overrode the FAA…. Harrison is not arguing that the FAA and ERISA conflict in any way. Rather, he is arguing that the specific provisions of the arbitration section of the Plan effectively prevent him from vindicating statutory remedies that are outlined in ERISA.”

The Entire Arbitration Agreement is Unenforceable

Finally, Section 21.1(b):

“includes a non-severability clause that invalidates the entire arbitration agreement that reads as follows: ‘In the event a court of competent jurisdiction were to find these requirements to be unenforceable or invalid, then the entire Arbitration Procedure . . . shall be rendered null and void in all respects.’… Because we agree with the district court that the remedies limitation contained in Section 21.1(b) prevents Harrison from effectively vindicating his statutory remedies, that means that the entire Arbitration Procedure outlined in Section 21 of the Plan is ‘rendered null and void in all respects.’ In other words, Defendants are precluded from arguing that Harrison is required to submit his claims to arbitration without the remedy limitations outlined in Section 21.1(b).”

(*Seems right to us. **This Squib was prepared by Harry A. Jacobowitz, President of HAJ Research and Writing LLC. Mr. Jacobowitz, a member of the Pennsylvania bar, and his firm perform legal research and writing for attorneys and handle substantive searches of SAC’s Award database. Contacted him at harryjacobowitz@optimum.net.)


Harry Jacobowitz

Harry A. Jacobowitz is the owner and operator of HAJ Research and Writing LLC, a company specializing in researching and writing on legal issues and related subjects. A graduate of the University of Pennsylvania Law School with more than 30 years of experience in the legal and legal publishing fields,…

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