CHICAGO — A federal appeals panel has determined a furniture company can’t invoke an arbitration provision to evade a shareholder class action seeking broad relief under a federal retirement account law, because the plaintiffs are seeking to replace the trustee overseeing the company's employee retirement plan, not just pursue payment on behalf of shareholders.
James Smith worked for Triad Manufacturing in 2015 and 2016, and participated in the company’s employee stock ownership program, a defined contribution plan under the federal Employee Retirement Income Security Act (ERISA).
According to his lawsuit, three members of Triad’s board created the plan in early December 2015, then on Dec. 17 sold all Triad’s stock to the plan at $58.05 per share, a deal worth more than $106 million. Four days later the board appointed GreatBanc Trust Company as plan trustee, and on Dec. 31 the company share price dropped to $1.85. Plan participants couldn’t sell their shares until they vested, which was no earlier than Dec. 31, 2016. At the end of 2018, the share price was less than $1.
The plan financed its purchase of the shares through loans the directors provided. Triad guaranteed the loans by charging against the company’s equity the plan had just purchased, and the plan required Triad to make retirement contributions to at least service the loan payments.
Responding to Smith’s April 2020 lawsuit alleging the 2015 transaction violated numerous ERISA provisions, Triad asked U.S. District Judge Ronald Guzmán to either agree a waiver provision added to the plan in 2018 should force the issue into arbitration or to dismiss the claims. Guzmán denied that motion, saying Smith hadn’t consented to the arbitration provision because he left the company in 2016, and further that if he accepted the provision and forced the issue to arbitration it might have deprived Smith’s right to pursue other legal remedies under ERISA.
Triad appealed Guzmán’s ruling to the U.S. Seventh Circuit Court of Appeals. Judge Michael Brennan wrote the panel’s opinion, issued Sept. 10; Judges Michael Kanne and Michael Scudder concurred.
Although ERISA claims are "generally" subject arbitration, Brennan wrote, that is only a given when both parties agree to contractual terms or if the agreement bars assertion of statutory rights.
The panel pointed to American Express Co. v. Italian Colors, a 2013 U.S. Supreme Court opinion, which involved a Federal Arbitration Act exception allowing courts to resolve conflicting federal policies by invalidating agreements preventing “effective vindication” of a right granted under federal law.
Calling such instances rare, the Seventh Circuit panel said Smith’s situation fits the criteria. Among other desired relief, Smith sought to have GreatBanc removed as the plan’s trustee, a remedy that would necessarily affect the entire plan. Yet the arbitration provision precluded plan participants from seeking relief beyond their own immediate interest.
“The terms of the arbitration provision cannot be reconciled” with the ERISA law, Brennan wrote. “What the statute permits, the plan precludes.”
The panel further clarified the arbitration provision's fatal flaw in this case is not that it prohibits class actions. Rather, they said, the arbitration provision comes up short in this case because it prohibits plan-wide remedies.
The panel opted not to rule on any of Smith's other claims in his lawsuit.
“We express no view on whether Smith consented to the arbitration provision, whether he received notice of that provision, or even whether a plan’s sponsor can unilaterally amend the plan to include such a provision,” Brennan wrote.
The panel affirmed Guzmán’s ruling denying the motion to dismiss or compel arbitration.
Smith has been represented by attorneys Michelle C. Yau, Mary J. Bortscheller, Daniel R. Sutter, Carol V. Gilden and Jamie L. Bowers, of the firm of Cohen Milstein Sellers & Toll, of New York, Chicago and Washington, D.C.
Triad has been represented by attorneys Matthew D. Grabell, Tiffany D. Downs and Benjamin P. Fryer, of the firm of Ford & Harrison, of Atlanta and Charlotte, N.C.