United States: District Court: ESOP Arbitration Provision Doesn't Apply To "Cashed-Out" Participant

Gregory K Brown is a Partner in Holland & Knight's Chicago office.

Chelsea Ashbrook McCarthy is a Partner in Holland & Knight's Chicago office.

Christopher K Buch is a Associate in Holland & Knight's Chicago office.

HIGHLIGHTS:

  • The U.S. District Court for the Southern District of Ohio has ruled that the arbitration provision of an employee stock ownership plan (ESOP) does not apply to the plaintiff's class representative because she had "cashed out" of the ESOP before the arbitration provision was added and because she was not a "claimant" subject to the arbitration provision.
  • The case is different from a recent U.S. Court of Appeals for the Ninth Circuit decision on arbitration clauses because the clause in the Southern District of Ohio case was in an ESOP plan document, not in an individual employment agreement.
  • The District Court's decision did not address the question of whether the plaintiff has standing to challenge the arbitration provision if she is not subject to the arbitration provision.

Holland & Knight has recently published alerts on how the U.S. Supreme Court's decision in Epic Systems v. Lewis may affect an employee stock ownership plan (ESOP), as well as on the recent U.S. Court of Appeals for the Ninth Circuit decision that individual employment provisions cannot compel arbitration of a fiduciary claim based on Section 409(a) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). (See Holland & Knight's alerts, "The Potential Impact of Supreme Court's Epic Systems Decision on ESOPs," May 23, 2018, and "Ninth Circuit: Individual Employment Provision Cannot Compel Arbitration of 409(a) Claim," July 31, 2018).

The U.S. District Court for the Southern District of Ohio, Western Division, ruled on July 23, 2018, that an arbitration provision in an ESOP plan document did not apply to the plaintiff's class representative because the arbitration provision was added to the plan after the class representative was "cashed out" of the ESOP and because she was not a "claimant" subject to the arbitration provisions. The court, however, did not rule that the arbitration provision itself was impermissible.

Background

The case involved a class action brought by participants in the Henny Penny Corp.'s Employee Stock Ownership Plan (the "Henny Penny ESOP") against the Henny Penny ESOP's Trustee (the Trustee), alleging a breach of fiduciary duty under ERISA. Henny Penny Corp. (Henny Penny) and the Trustee filed motions to compel arbitration in accordance with the provisions of the Henny Penny ESOP plan document.

On Dec. 30, 2014, the Henny Penny ESOP purchased 100 percent of the outstanding stock of Henny Penny. The plaintiff class representative was employed by Henny Penny on that date but left her employment with Henny Penny in May 2015. In November 2016, she received a distribution of her account balance – i.e., "cashed out" of the Henny Penny ESOP.

The Henny Penny ESOP was amended in January 2017 to include a mandatory arbitration provision that required a "claimant" to individually arbitrate all "covered claims"; the arbitration provision prohibited group, class or representative arbitrations. The Henny Penny ESOP defined a "claimant" as an employee of Henny Penny, or a participant or beneficiary of the Henny Penny ESOP. The Henny Penny ESOP's definition of "participant" excluded individuals who were no longer employees of Henny Penny and who had been paid their entire plan benefit in a lump-sum distribution.

On July 27, 2017, the plaintiff filed suit against the Trustee on behalf of the Henny Penny ESOP and on behalf of a class of all other persons similarly situated, alleging that the Trustee paid more than the fair market value for the Henny Penny stock in the December 2014 transaction. Shortly thereafter, Henny Penny and the Trustee filed motions to compel arbitration under the Henny Penny ESOP's arbitration provision.

District Court Opinion

The District Court ruled that the class representative did not agree to arbitrate her claim because she had been completely cashed out of the Henny Penny ESOP before the arbitration provision was added to the plan.

The court also ruled that the plaintiff's claims fell outside the scope of the arbitration provision. This was because the plaintiff, as a cashed-out participant, was not a "claimant" under the terms of the Henny Penny ESOP. Accordingly, the court held that the arbitration provision of the Henny Penny ESOP did not apply to the plaintiff and the class she represented.

If the Henny Penny ESOP had used the ERISA definition of "participant" for purposes of standing to bring an ERISA claim ("any employee or former employee of an employee ... who is or may become eligible to receive a benefit of any type from an employer benefit plan which covers employees of such employer ... or whose beneficiaries may be eligible to receive such benefit"), this would not have been the case. The U.S. Supreme Court has interpreted the ERISA standing definition to include former employees who have "a colorable claim to vested benefits." Arguably, the plaintiff's claims in this case were for vested benefits.

It should, however, be noted that, in a footnote to the District Court's opinion, the court acknowledged the argument of Henny Penny and the Trustee that, if the plaintiff is not subject to the arbitration procedure, she does not have standing to invalidate the provision, which she sought to do through a claim in the complaint. This leaves open the possibility that this issue could be raised in a subsequent motion by Henny Penny and the Trustee. Thus, this matter is far from being resolved.

Despite the foregoing, the court did not invalidate the arbitration provision in the Henny Penny ESOP. While the court held that the arbitration provision was not applicable in this case, it did not hold that the arbitration provision itself was impermissible.

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.

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