Sixth Circuit Nixes Arbitration for ERISA Claims

Memphis, TNOn August 20, the Sixth Circuit refused to force participants in two related 401k plans, the "DRiV Plan" and the "Tenneco Plan,” to arbitrate claims that the plans wasted workers’ retirement money by offering sub-par investment choices. At first blush, Parker v. Tenneco, Inc., looks like one of many cookie-cutter ERISA lawsuits that allege sloppy financial management and the price that working folks pay.

The familiar argument that the claims must be arbitrated follows. Employers argue for arbitration because it favors them. Participants argue for emergency relief in federal court. Honestly, we’ve seen this one before.

Were this a movie, folks would begin to fidget, and someone would go for popcorn.

But wait, there’s a twist! To torture the movie metaphor--a mysterious stranger comes to town. The doctrine of effective vindication slowly moves down a dusty street. A buzzard perches watchfully above the saloon.

Hold off on the popcorn run for a minute.

Three groups of plaintiffs

This case involves two 401k plans – the "DRiV Plan" and the "Tenneco Plan." Under both plans, participants have a menu of investment options to grow their retirement nest egg.

Tanika Parker was originally a participant in the DRiV Plan. After a 2022 corporate merger she, like Andrew Farrier, was a participant in the Tenneco Plan. Together, Parker and Farrier brought a class action lawsuit in federal court on behalf of themselves, all others similarly situated and both plans.

Stop a moment to note that the lawsuit covers three groups:

• Parker and Farrier (the individual plaintiffs);
• other participants in the plans (the class action plaintiffs); and
• the DRiV Plan and the Tenneco Plan (a special group of representative plaintiffs, specifically protected under sections 409 and 502 of ERISA).

Stick a pin in this because it explains a lot about the appearance of the mysterious stranger.

Asleep at the switch – harm to workers

Parker and Farrier allege that the plan fiduciaries failed to live up to their legal obligations under ERISA because they did not have a prudent process for selecting, monitoring and removing underperforming options from the participants’ investment menu. Their dereliction hurt participants in two ways:

• The plans offered investment options that were nearly identical, yet higher in cost to other choices; and
• The fees charged for administrative services were higher than comparable fees and services available.

Ultimately, both failures wasted money that workers had counted on for retirement. The lawsuit asks that money be given back to them.

Harm to the plans

The plans also had to pay unnecessary fees. This also had bad consequences:

• It reduced their net assets;
• limited their ability to negotiate better terms with service providers; and
• reduced potential investment gains.

The harm to the participants and the harm to the plans count as two separate breaches of duty. In addition to asking that the participants be made whole, Parker and Farrier ask the fiduciaries to restore ill-gotten gains to the plans.

Changing the rules

Originally, neither plan contained a requirement that participants negotiate disputes or waive their rights to pursue a lawsuit on behalf of other participants or the plans, themselves. But in 2021, the plans’ administrative committee adopted Amendment 2021-1.

Amendment 2021-1 required binding arbitration of disputes. The arbitration procedure bars representative, group, class or plan-wide lawsuits. It permits only the arbitration of individual claims – nothing else.

Further, to metaphorically slam the door against lawsuits even harder, Amendment 2021-1 provides that it cannot be challenged separately, or severed (to use the legal term) from the rest of the plan.

That last slam was the last straw for the Sixth Circuit.

The doctrine of effective vindication

The doctrine of effective vindication is a judge-made rule that gives judges the power under federal law to decline to enforce arbitration agreements that eliminate statutory remedies. Neither the claims of the individual plaintiffs nor the class claims fall into that category.

But the representative claims on behalf of the DRiV and Tenneco plans do.

Except for Amendment 2021-1’s non-severability provision, it is possible that only the plan-wide claims would have survived. In Parker, however, the Sixth Circuit held that the non-severability provision undoes Tenneco’s effort to force arbitration for all plaintiffs and to bar claims on behalf of the plans entirely.

The doctrine of effective vindication effectively saved all three categories of claims – the individual, the class, and the representative claims.

A one off or a lasting principle?

Will the Sixth Circuit’s use of the effective vindication doctrine hold? Will the mysterious stranger return?

The fact that the rule is court-created may make it easier to reverse. Recent Supreme Court decisions in cases like Loper Bright suggest an unfriendly climate for judicially-created rules.

The evidence that the Sixth Circuit’s decision brings it into line with similar decisions in the Seventh, Tenth, and Second Circuits, on the other hand, argues for the conclusion that the doctrine of effective vindication may be here to stay.

Either way, Parker is certain to be challenged.

The buzzard lifts off

That practical bird, now seeing no prospect of an immediate lunch, heaves off and sails into an infinite blue sky. Back on the ground, however, the doctrine of effective vindication may be the character to watch in this drama.