United States: The Potential Impact Of Supreme Court's Epic Systems Decision On ESOPs

Chelsea Ashbrook McCarthy is a Partner in our Chicago office.

Louis L Joseph is Senior Counsel in our Chicago office.

Jessica L Farmer is an Associate in our Washington DC office.

HIGHLIGHTS:

  • Although the Supreme Court's recent decision in Epic Systems Corp. v. Lewis was not a case under the Employee Retirement Income Security Act of 1974 (ERISA), the Court's analysis indicates that it would likely reject an argument that an arbitration provision with a class action waiver in an employee stock ownership plan (ESOP) is fundamentally unenforceable under ERISA.
  • However, the decision leaves open numerous questions about the practical effect of including such provisions in ESOPs.

The U.S. Supreme Court's long-awaited decision on May 21, 2018, in Epic Systems Corp. v. Lewis held that mandatory individualized arbitration clauses in employment agreements are enforceable, concluding that the Federal Arbitration Act (FAA) requires that arbitration agreements be enforced by their terms and that nothing in FAA's savings clause or the National Labor Relations Act (NLRA) provides otherwise. Although Epic Systems was not an Employee Retirement Income Security Act of 1974 (ERISA) case, the Court's analysis sheds light on how it would treat an argument that a class action waiver in an arbitration provision in an ERISA plan document are unenforceable. However, the Epic Systems decision leaves open many questions about the use of such provisions in ERISA plans, specifically employee stock ownership plans (ESOPs).

Background and Court Opinion

The Epic Systems case involved an agreement between an employee and employer entered into as a condition of employment, wherein the employee agreed to mandatory individualized arbitration that banned collective judicial and arbitral proceedings of any kind.

In 2012, the National Labor Relations Board (NLRB) released an opinion finding that class waivers violated Section 7 of the NLRA, reasoning that the class waivers limit employees' rights to engage in "concerted activities" in pursuit of their "mutual aid or protection." The U.S. Court of Appeals for the Seventh Circuit followed this reasoning in finding that the arbitration clause at issue was unenforceable. Epic Systems Corp. v. Lewis, 823 F.3d 1147 (7th Cir. 2016).

However, the Supreme Court reversed the Seventh Circuit and rejected this theory. The Court reasoned that the FAA instructs "federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings." It rejected the plaintiffs' argument and the NLRB's position that class waivers violate Section 7 of the NLRA, stating "the law is clear: Congress has instructed that arbitration agreements like those before us must be enforced as written. While Congress is of course always free to amend this judgment, we see nothing suggesting it did so in the NLRA—much less that it manifested a clear intention to displace the Arbitration Act."

The Court also found that the NLRA's protection of "concerted activities" did not override the FAA because the Court could give effect to both laws and there was no clear and manifest intent for the NLRA to displace the FAA. In rejecting the plaintiffs' theories, the Court noted that Congress "does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions."

Justice Neil Gorsuch delivered the opinion of the Court, in which Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito joined. Justice Thomas filed a concurring opinion explaining that the FAA's savings clause concerns the contract's formation. In this case, the challenge was not premised on the contract's formation, but on a public policy defense. Because "'[r]efusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made,' the saving clause does not apply here."

Justice Ruth Bader Ginsburg filed a dissenting opinion, in which Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined, arguing that the rights conferred by Section 7 of the NLRA take precedence over the FAA and noting an extreme imbalance between employees and employers.

Considerations

The Court's reasoning in Epic Systems indicates that, at least under its current composition, the Court would likely reject an argument that an arbitration provision with a class action waiver in an ERISA plan is fundamentally unenforceable under ERISA. However, the Epic Systems decision leaves open numerous questions about the practical effect of including such provisions in ERISA plans, specifically ESOPs.

One question is whether a class-action waiver/arbitration provision contained in a plan document would be binding on a plan participant where the participant did not expressly agree to the provision. Generally, participants in ESOPs do not opt-in to the plan; rather, assuming that the employees meet the general eligibility requirements, they are automatically included in the plan. This situation could subject an ESOP to the argument that there was no agreement to arbitrate in the first place. The Epic Systems decision did not directly address this issue, although a footnote in Justice Ginsburg's dissent questions whether the employees "agreed" to the provision at issue.

Another open question is whether including a class-action waiver/mandatory arbitration provision would change the impact of claims brought by plan participants. ERISA Section 502(a)(2) claims are derivative claims by their nature – they are brought for losses suffered by the plan, not the complaining participant individually. Thus, whether a participant brings a claim as a putative class-action or simply as a derivative claim may not change the amount of any damages award if there was a finding of a fiduciary breach.

These issues also raise the question of whether such an arbitration provision would always be in the plan's best interests. An arbitration of one participant's case would certainly be cheaper than defending a class action, but the economics are not so clear if multiple participants pursued separate arbitrations of similar issues. Such a situation also raises the question of how a plan fiduciary would administer the plan if separate arbitrations had conflicting results, or whether a plan fiduciary could or should rely on those results in determining how to administer the plan going forward.

The decision in Epic Systems leaves open many questions for plan sponsors, administrators and fiduciaries surrounding the inclusion and effect of class action waivers in arbitration provisions in ERISA plans, specifically ESOPs. For more information on this decision or specific considerations for your ERISA plan, contact the authors or another member of Holland & Knight's ESOP Group.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions