The U.S. Supreme Court has rejected the petition for certiorari filed by Tenneco, an auto parts manufacturer, and its subsidiary, Driv Automotive, Inc., seeking to enforce an arbitration provision in its ERISA-governed retirement plan. Tenneco sought a resolution of the ongoing split in the circuit courts of appeal about the enforceability of arbitration provisions in ERISA-covered plans. The continuing split has left plan sponsors in limbo and still waiting for definitive answers about the enforceability of these arbitration clauses.
In their lawsuit, current and former employees of Tenneco alleged that the company had mismanaged its retirement plan, thereby violating its fiduciary duties under ERISA. The employees claim Tenneco’s retention of poorly performing investment options ultimately cost them millions in retirement savings.
Tenneco sought to enforce a mandatory arbitration provision in a 2021 amendment to its plan. However, the U.S. Court of Appeals for the Sixth Circuit ruled in August 2023 that the plan’s mandatory arbitration provision violated the effective vindication doctrine of the Federal Arbitration Act. Under the effective vindication doctrine, courts may reject arbitration provisions undermining statutory remedies. ERISA authorizes plan participants to seek plan-wide relief, and the Sixth Circuit found that the mandatory arbitration clause in the Tenneco plan undermined that remedy.
Arbitration provisions in ERISA-governed retirement plans are designed to streamline disputes. However, the uncertainty about whether these provisions are enforceable can leave plan sponsors increasingly open to legal challenges, which can be lengthy and costly, especially if they devolve into class action lawsuits.
Furthermore, employers operating in multiple states may have the added issue of some circuit courts enforcing arbitration clauses and others not enforcing them. This split causes inconsistency in interpreting a single plan from one state to the next.
The competing legal rulings on arbitration clauses also can result in higher administrative burdens and costs. Plan sponsors must repeatedly update plan documents to reflect new court rulings and may need to consult with legal counsel more frequently to manage risk. These burdens can take away from other priorities and necessary tasks for plan sponsors.
Pending legislation, such as the Employee and Retiree Access to Justice Act, aims to prohibit mandatory arbitration provisions in ERISA-governed plans altogether. The success of such legislation could lead to increased litigation costs.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution for your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
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