:: Arbitration Of ERISA Claims Proves Expensive Dispute Resolution Alternative

The question before the court is whether the arbitration panel manifestly disregarded the law when it awarded Plaintiff almost $ 4 million in damages. Since the Panel provided no written findings on which it based its claims, the Court will determine if a rational means exists by which the Panel may have come to its decision. The Panel may have based its decision on one or all of the claims. Therefore, this Court will look at each claim seriatim.

Fitzgerald v. H&R Block Fin. Advisors, 2008 U.S. Dist. LEXIS 45472 ( E.D. Mich. June 11, 2008)

In this fascinating decision, the marked disparity between an arbitrated employee benefits dispute and the likely outcome were the issue litigated in federal court could not be more dramatic. The case encompassed, among other things, an ERISA Section 510 claim. One need not read ERISA cases for long before developing the impression that these claims often miss the mark.

In this decision, however, the district court confirmed an arbitration award of close to $ 4 million – thus suggesting that arbitration should not be uncritically accepted as the preferred dispute resolution mechanism for ERISA defendants.

The Dispute

The plaintiff held the position of Executive Vice President and Chief Operating Officer of Defendant H&R Block Financial Advisors, Inc. The plaintiff refused to execute an employment agreement that was being required for each senior executive employee in 2003.

Plaintiff’s refusal was based in part on a more restrictive than usual non-compete provision in the agreement and his demand for special treatment regarding accelerated vesting of stock options. Due to these issues and H&R Block’s desire to restructure HRBFA’s organizational scheme, discussions with Plaintiff over an orderly termination of his employment began in August 2003.

When by February 2004 a resolution was still not reached between Plaintiff and his employer concerning the proposed employment agreement, Plaintiff was informed that it was time to bring an end to the relationship, and on April 26, 2004, Plaintiff’s employment with HRBFA was terminated.

The plaintiff had signed a Form U-4 titled “Uniform Application for Securities Industry Registration” to become registered as an “Associated Person” of HRBFA. Form U-4 is the standard form that is required for all securities broker-dealers to register their representatives or “associated persons” with the securities’ industry’s self-regulatory organizations (”SROs”), the NASD (now the FINRA) and the NYSE.

Form U-4 contains a pre-dispute arbitration clause which requires that disputes between an employee and a member organization be arbitrated.

The Arbitration

On May 2, 2005, Plaintiff initiated arbitration against HRBFA and H&R Block before the dispute resolution division of the FINRA.

In his Statement of Claim in the arbitration, Plaintiff asserted claims of :

  • breach of contract,
  • fraud,
  • illegal retaliation,
  • civil extortion and
  • ERISA violations

Pursuant to the arbitration provision in Plaintiff’s Form U-4 and the NASD rules, Plaintiff and HRBFA were required to arbitrate these claims – H&R Block was not. Nonetheless, H&R Block, though not a member of the NASD and not a party to any arbitration agreement with Plaintiff, voluntarily agreed to arbitrate Plaintiff’s claims.

Plan Not A Party

HRBFA and H&R Block argued that some of the compensation and benefits Plaintiff was seeking were only obtainable from the H&R Block Severance Plan which is administered by HRB Management. Respondents further stated that the Plan and HRB Management are not FINRA members and are not parties to any agreement to arbitrate with Plaintiff.

The plaintiff petitioned the district court to enter an order and judgment compelling HRB Management and the Plan to arbitrate Plaintiff’s ERISA claims in the same arbitration forum with its affiliates, HRBFA and H&R Block. The district court denied the petition.

ERISA Claims Go Forward

Nonetheless, the plaintiff pressed ahead. HRBFA and H&R Block argued that, since the district court had held that the Plan and HRB Management could not be compelled to arbitrate, the Plaintiff’s ERISA claims could not be heard by the Panel.

On motion on the defendants, the district court reviewed its prior order, but determined that the terms of the order did not preclude the Panel from hearing the ERISA claims.

The parties completed arbitration and the Panel awarded Plaintiff $ 3,962,846.91 in compensatory damages, interest, and attorney fees. On February 25, 2008 Plaintiff filed the present Application with this court seeking to confirm the Award. HRBFA and H&R Block responded with a motion to vacate the Award.

Award Confirmed

The district court held that the Panel had not manifestly disregard the law. A cursory review of the court’s analysis conveys the idea of just how generous the review of potential remedies can be as opposed to the searching analysis that would be received in federal district court.

For example:

The Arbitration Panel May Have Awarded Damages to Plaintiff Against HRBFA and H&R Block on the ERISA Claims.

[Employer As Defendant]

The Court finds that the Panel may have properly based its decision in whole or in part or on Plaintiff’s ERISA claims against HRBFA and H&R Block.

Precedent exists in a number of the federal circuits — including the Sixth Circuit — for holding an employer to be the proper party to an ERISA benefits claim. See Sweet v. Consolidated Aluminum Corp., 913 F.2d 268, 272 (6th Cir. 1990); Musmeci v. Schwegmann Giant Super Markets, Inc., et al, 332 F.3d 339 (5th Cir. 2003); Mein v. Carus Corp., 241 F.3d 581 (7th Cir. 2001). In all of these cases, in order to determine if the employer was a proper defendant, courts have looked to the level of control the employer had over the retirement plan. Their analyses include factors such as the employer’s authority to decide the specific terms of the plan and its ability to determine requirements of membership to the plan (See Rosen v. TRW, Inc., 979 F.2d 191, 192 (11th Cir. 1992); Adamo v. Anchor Hocking Corp., 720 F. Supp. 491, 498 (W.D. Pa. 1989)(employer controls and influences plan decisions); Dubois v. Wal-Mart Stores Inc., 2005 U.S. Dist. LEXIS 43774, 2005 WL 1801977 at *2 (W.D. La. July 28, 2005) (employer made decision to deny benefits); Liston v. UNUM Corp. Officer Severance Plan, 2001 U.S. Dist. LEXIS 9334, 2001 WL 761228 at *5 (D. Me. July 6, 2001) (benefits are paid out of employer’s general assets); Hogan v. Metromail, 107 F. Supp. 2d 459, 475 (S.D.N.Y. 2000) (employer made final benefits decision)) and whether or not the employer funds the plan (See Harrison v. Digital Health Plan, 183 F.3d 1235, 1241 (11 th Cir. 1999)(self-funded plan); Mein, 241 F.3d at 585 and Neuma, Inc. V. AMP, Inc., 259 F.3d 864, 872 n.4 (7 th Cir. 2001)(plan was unfunded); Osbun v. Auburn Foundry, Inc., 2004 U.S. Dist. LEXIS 17944, 2004 WL 2402836, at n.5 (N.D. Ind. 2004) [*15] (plan funded by employer); Musmeci, 332 F.3d 339 (unfunded plan); Slaughter v. AT&T Information Systems, Inc., 905 F.2d 92 (5 th Cir. 1990)(plan unfunded; benefits paid by employer). In cases in which a high level of control is found, courts have gone so far as to hold that it is unnecessary for Plaintiff to name the plan or plan administrator as a defendant; rather, the Plaintiff may treat the employer as the de facto plan administrator. Law v. Ernst & Young, 956 F.2d 364 (1st Cir. 1992) (employer is proper party to benefits claim regardless of who is named as plan administrator in the plan document) . . .

[Exhaustion Of Administrative Remedies]

The next issue is whether Plaintiff exhausted his administrative remedies before he filed his claim in arbitration. Burds v. Union Pacific Corp., 223 F.3d 814, 817 (6th Cir. 2000) (requiring exhaustion of administrative remedies for claims under ERISA § 510); Miller v. Metro Life, 925 F.2d 979, 986 (6th Cir. 1991) (ERISA requires plaintiff to exhaust his administrative remedies before filing suit); Baxter v. C.A. Muer, 941 F.2d 451, 454 (6th Cir. 1991) (benefits claim dismissed because plaintiff did not exhaust his administrative remedies before filing suit). However, as Plaintiff correctly argues, the Sixth Circuit has held that, under ERISA, a Plaintiff need not exhaust his administrative remedies when to do so would prove futile. Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410, 419 (6th Cir. 1998).

Evidence was presented at the hearing that Plaintiff had contacted Mark Ernst concerning his complaints about the severance plan. Plaintiff contends that at the time of his termination, he repeatedly tried to obtain desired severance terms and that Defendants refused to grant them. Block’s own attorneys informed Plaintiff’s counsel that if the two parties could not come to an agreement, H&R Block would take the position that Plaintiff was not entitled to any benefits. The Court, therefore, finds that the Panel, presented with these facts, properly determined that, under Sixth Circuit law, Plaintiff was not required to exhaust his administrative remedies.

[Violation Of ERISA Section 510]

Next, the Court finds that sufficient evidence was presented at the arbitration hearing for the Panel to determine that Defendants had violated ERISA § 510. Section 510 prohibits discrimination against an ERISA plan participant and interference with protected rights under an ERISA plan. 29 U.S.C. § 1140. Two types of conduct are prohibited: (1) adverse actions in retaliation against a participant because of assertion of ERISA rights, and (2) interference with the attainment of ERISA rights. Mattei v. Mattei, 126 F.3d 794, 797 (6th Cir.), cert. denied 523 U.S. 1120, 118 S. Ct. 1799, 140 L. Ed. 2d 939 (1997). Even if the court finds that the conduct was in part motivated by business reasons, this does not preclude a separate finding that the conduct was also motivated by improper reasons and thus in violation of ERISA. Shahid v. Ford Motor Co., 76 F.3d 1404, 1411 (6th Cir. 1996).

At the arbitration hearing, Plaintiff presented evidence that his refusal to sign a two-year non-compete clause was based in part on his objection to a non-compete clause which was more onerous than other non-compete clauses Defendants had included in other severance plans with other employees. In Cirulis v. UNUM Corp., 321 F.3d 1010 (10th Cir. 2003), the court determined that the defendant had violated § 510 of ERISA when it refused severance benefits to an employee who refused to sign a non-solicitation provision. Professor Hylton testified that the selective amending of Plaintiff’s severance package to include a non-compete clause that was substantially more oppressive than those contained in other similar severance agreements which Defendants had offered to other employees was an “illegal plan amendment.” (See Plaintiff’s Response, Tx., Nov. 6, pp. 335, l. 22-336, l. 3). Based on the above evidence and testimony, the Court finds that the Panel could have determined that Defendants’ actions were a violation of § 510 of ERISA.

[Violation Of Fiduciary Duty]

Similarly, this Court finds that the Panel could have determined that Defendants’ actions amounted to breach of fiduciary duty in violation of § 409 of ERISA. ERISA authorizes civil actions for breach of fiduciary duty by individual plan participants directly against any plan fiduciary. Varity Corp. V. Howe, 516 U.S. 489, 512, 116 S. Ct. 1065, 134 L. Ed. 2d 130 (1996). ERISA defines a fiduciary as a person or entity which

(i) . . . exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) . . . renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) . . . has any discretionary authority or discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A).

Based on the fact that HRBFA and H&R Block exercised such great authority over the administration of the Plan, the Court finds that the Panel may well have determined that Defendants were in a fiduciary position with regard to Plaintiff. The same evidence that was used to prove the violation of § 510 would also prove a violation of § 409 since, if HRBFA and H&R interfered with Plaintiff’s ERISA rights it would necessarily constitute a breach of their fiduciary duty once the Panel had determined that Defendants were fiduciaries according to ERISA.

[Monetary Award]

The Court next finds that the Panel could have granted Plaintiff a monetary award on his ERISA claims. First, under a direct benefits claim, 29 U.S.C. § 1132(a)(1)(B), or a claim under § 510 of ERISA, Plaintiff could recover monetary damages if the Panel determined that Plaintiff had been denied benefits that were rightfully his. Admittedly, the law in this area is not well-settled. For example, in Eichorn v. AT&T Corp., 484 F.3d 644, 655 (3d Cir. 2007), the court determined that the “equitable” relief the plaintiff was seeking was in fact not equitable but in fact a disguised claim for compensatory damages and therefore not allowed. The subject of the controversy was pension [*24] benefits which the plaintiffs supposedly would have earned if they had remained employed. Id. at 648. However, the court went on to note that, [t]his is not to say that an ERISA plaintiff’s demand for money necessarily requires the conclusion that the relief sought is not “equitable” within the meaning of the statute. The Supreme Court has explained that some forms of equitable relief — such as constructive trusts, equitable liens, or accounting for the profits derived from wrongly held property-include the payment of money. Id., at 655, n. 6.

From the Eichorn analysis, the Panel could have concluded that a monetary equivalent for specific shares of stock was restitution, or equitable relief, and thus was a permissible remedy under ERISA. The Panel could also have distinguished Plaintiff’s claim from the claim in Alexander v. Bosch Automotive, 232 Fed. Appx. 491 (6th Cir. 2007). The court in Alexander held that restitution of a monetary amount was unavailable because the plaintiffs could not “identify particular traceable funds.” Id. at 501. In the present case, however, Plaintiff identified definite shares of stock which, under Plaintiff’s theory, were wrongfully withheld by Defendants.

Thus, the Panel’s Award falls outside the impermissible remedies as defined in Alexander. A monetary award is also available under § 409 of ERISA. As with § 510, ERISA allows only equitable remedies for violations of § 409. Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 210-11, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002). However, in Great West, the Court held that equitable relief under ERISA includes equitable relief in the form of a constructive trust, i.e. the employer is holding property which rightfully belongs to the Plaintiff and he should be made to give up this property to the plaintiff. Id. at 213. If the Panel determined that the stock Defendants had withheld from Plaintiff was rightfully Plaintiff’s property, it could have decided that the stock should be returned to Plaintiff, and, since Plaintiff was no longer employed by the Defendants, awarded him the monetary value of the stock. In any case, Defendants fail to prove that the Panel manifestly disregarded a clearly established legal principle; since the law in this area is open to reasonable debate, there was no clearly established legal principle for the Panel to disregard. However, it appears from the evidence and transcript that the Panel at least tried to act in conformance with the law as it now exists.

[Claims of Breach of Contract, Fraud, Illegal Retaliation, or Civil Extortion]

Defendants’ arguments in support of their motion to vacate based on manifest disregard of the law with regard to Plaintiff’s claims of breach of contract, fraud, illegal retaliation, and civil extortion do not meet the high burden of proof which must be met to vacate an arbitration award. In essence, Defendants are using this Court as a sort of “court of appeals” to review the Panel’s decision. In their motion, Defendants reargue the facts and legal issues of the case in an attempt to show how the Panel incorrectly applied the law. However, even if this were the case, it is not enough to vacate an arbitration award. In Dawahare, 210 F.3d at 669 [*27] (citing M & C Corp., v. Erwin Behr GmbH & Co., 87 F.3d 844, 851 n. 3 (6 th Cir. 1996)), the court noted that a mistake by an arbitration panel in the interpretation or application of the law is not a proper basis for vacating an arbitration award. Nowhere do Defendants present evidence which would support a finding that the applicable legal principle of any of the causes of action is a clearly defined and not subject to reasonable debate, or that the arbitrators refused to heed that legal principle. A mere misapplication of law is not enough to vacate an arbitration award. Id. at 851. . . .

[Attorney’s Fees]

The Panel included attorney fees in its $ 3.962 million award and, as Plaintiff correctly asserts, Michigan law allows for recovery of attorney fees if authorized by a statute. MCL 600.2405(6). Attorney fees may also be awarded under ERISA, 29 U.S.C. § 1132(g)(1) in some cases.

. . . Plaintiff argues that Defendants acted in bad faith in delaying arbitration in order to drive up Plaintiff’s fees. Plaintiff also argues that Defendants acted in bad faith in their interpretation of this Court’s decision denying Plaintiff’s motion to compel HRB Management and the Plan to arbitrate. If the Panel found these assertions valid, an award of attorney fees would not be a manifest disregard of the law. Since the Court can do nothing but speculate as to how the Panel determined the amount and availability of attorney fees, and since Plaintiff did provide evidence which could have given the Panel a basis upon which to award attorney fees, this Court affirms the Panel’s award of attorney fees.

Note: Probably the most unusual aspect of the award lies in (1) the scant attention to legal versus equitable relief and (2) the conjoining of state law claims in the same litigation as ERISA claims against fiduciaries.

The Federal Arbitration Act (”FAA”) – The procedure for confirming arbitration awards is nicely summarized in the case:

Plaintiff’s Application to confirm the Award is statutorily authorized by the Federal Arbitration Act (”FAA”), 9 U.S.C. § 9, and, as provided in 9 U.S.C. § 6, is heard by this Court in the same manner as a motion. “The FAA expresses a presumption that arbitration awards will be confirmed.” Nationwide Mutual Insurance Company v. Home Insurance Company, 429 F.3d 640, 643 (6th Cir. 2005). Only if arbitration awards are strictly enforced will the public policy favoring dispute resolution be upheld. “When courts are called on to review an arbitrator’s decision, the review is very narrow; [it is] one of the narrowest standards of judicial review in all of American jurisprudence.” Uhl v. Komatsu Forklift Co., 512 F.3d 294, 305 (6th Cir. 2008) (quoting Lattimer-Stevens Co. v. United Steelworkers, 913 F.2d 1166, 1169 (6th Cir.1990)). Recently, in Hall Street Associates, L.L.C. v. Mattel, Inc., U.S. , 128 S. Ct. 1396, 170 L. Ed. 2d 254 (2008), the Supreme Court stated that,

[o]n application for an order confirming the arbitration award, the court ‘must grant’ the order ‘unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.’ There is nothing malleable about ‘must grant,’ which unequivocally tells courts to grant confirmation in all cases, except when one of the ‘prescribed’ exceptions applies.

Id. at 1405 (quoting 9 U.S.C. § 9).


Grounds For Vacating An AWard –
9 U.S.C. § 10 lists four grounds for vacating an arbitration award:

(1) Where the award was procured by corruption, fraud, or undue means.

(2) Where there was evident partiality or corruption in the arbitrators, or either of them.

(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Grounds For Modifying An Award – 9 U.S.C. § 11 also lists three grounds for modifying an arbitration award:

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

Manifest Disregard Of The Law – In addition to these statutory grounds, a court may vacate an award if the arbitrators have “manifestly disregarded the law.” Dawahare v. Spencer, 210 F.3d 666, 669 (6 th Cir.), cert. denied 531 U.S. 878, 121 S. Ct. 187, 148 L. Ed. 2d 130 (2000). A court may find that the law has been manifestly disregarded if: “(1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrators refused to heed the legal principle.” Dawahare, 210 F.3d at 669 (quoting Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 421 (6th Cir.1995)). As the Supreme Court concluded in Mattel, supra,

[I]t makes more sense to see the three provisions, §§ 9-11 [of 9 U.S.C.], as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can ‘rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process . . . and bring arbitration theory to grief in the post-arbitration process. 128 S. Ct. at 1405 (quoting Kyocera Corp. v. Prudential-Bache Trade Services, 341 F.3d 987, 998 (9th Cir. 2003)).