Back to the Thorny Issue of ERISA Arbitration

Grand Rapids, MIOn July 28, a three-judge panel for the Sixth Circuit heard arguments in Bradley Fleming v. Kellogg Co. a lawsuit that addresses, once again, the question of whether claims of fiduciary mismanagement against an ERISA plan can be forced into arbitration. It is significant that Fleming’s ERISA lawsuit advances claims against the Kellogg Company Savings and Investment Plan on behalf of the plan itself, as well as the plan’s individual participants. To date, the panel has not yet rendered a decision.

On August 20, however, another three-judge panel for the Sixth Circuit rendered a decision in Parker v. Tenneco, a similar ERISA lawsuit. In both cases, plaintiffs’ counsel relied heavily on a controversial legal theory called the “doctrine of effective vindication.” In Parker, the panel found for the plaintiffs on the strength of that argument.

The three-judge panels for Fleming and Parker are different, with one intriguing exception – U.S. Circuit Judge Julia Smith Gibbons, who authored the Parker decision, sits on both. The plot thickens.

But first, the facts.

Mismanagement harmed participants and the plan

Fleming worked as an accountant for Kellogg from 2006 to 2019 and participated in the company’s 401k retirement plan. In 2022, he brought an ERISA lawsuit, on behalf of:

• himself;
• other similarly situated participants; and
• the plan itself.

The lawsuit alleges that the Kellogg Company, its board of directors and two committees that help manage the 401k plan failed to act as prudent fiduciaries with regard to the plan’s recordkeeping fees and managed account services. As a result, the lawsuit claims, plan participants have lost millions in retirement savings that instead went to “high-cost recordkeepers,” Transamerica Retirement Solutions and Fidelity Investments.

He claims that the plan was also harmed. This kind of mismanagement typically reduces a retirement plan’s net assets. As a consequence, its potential investment gains are smaller and it is less able to negotiate advantageous terms with service providers.
In addition to damages for the individual participants, the lawsuit seeks restoration “to the Kellogg Plan all losses caused by their failure to adequately monitor individuals responsible for Plan managed account fees.” A participant’s claim on behalf of the retirement plan in which he or she participated is known as a “representative action” and is specifically authorized under section 502(a) of ERISA.

The added arbitration clause

After Fleming left his employment with the Kellogg Company, but while he remained a participant, the plan document was amended to require that all disputes be individually arbitrated. But an ERISA section 502(a) action brought on behalf of the plan as an entity itself cannot be individually arbitrated. It appears that the only possible forum in which it could be decided would be federal court. Fleming argues that the entire lawsuit should therefore be resolved in federal court under a legal theory known as “effective vindication.”

Effective vindication

The doctrine of effective vindication is a rule developed by courts that gives judges the power under federal law to decline to enforce arbitration agreements that eliminate statutory remedies. Fleming’s claims on behalf of the 401k plan are explicitly provided for under ERISA.

But whether that doctrine can rescue plan wide claims from arbitration in a particular lawsuit depends on the facts of each case. In Parker, the Sixth Circuit was apparently persuaded by the fact that the arbitration amendment contained a “severability” clause that prevented it from being considered separately from the plan as a whole. The Parker decision makes clear, however, that there are circumstances in which similar claims would have to be arbitrated.

Mixed results

At least in part because application of the doctrine is so fact-specific, plaintiffs who argue against being forced to arbitrate have had mixed results. However, the doctrine has been recognized in the Second, Third, Seventh and Tenth Circuits, as well as the Sixth. The Department of Justice has also argued it in an amicus brief in the Fourth Circuit case of Harrison v. Envision Management, Holding Inc.

A Hail Mary pass

Things have not gone well for the Fleming plaintiffs so far. In April 2023, U.S. District Judge Jane M. Beckering dismissed the ERISA lawsuit with prejudice. The phrase “with prejudice” means that it cannot be re-filed. It is about as close to a “never darken my doorway again” declaration as courts get.

Nonetheless, in July, he sought to reinstate the lawsuit. In oral argument, two of the three judges sitting on the panel, U.S. Circuit Judges Raymond M. Kethledge and Stephanie Dawkins Davis expressed concerns about the application of the doctrine. Judge Julia Smith Gibbons remains a wild card.

We shall see, likely in the near future.