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The ERISA Edit: District Court Roundup

Employee Benefits Alert

The Eastern District of Kentucky Enters the Fray, Compels Individual Arbitration

This week, the U.S. District Court for the Eastern District of Kentucky has added to the tangle of decisions addressing the enforceability of individual arbitration clauses in plan documents and employment agreements. In Merrow v. Horizon Bank, the plaintiffs brought a putative class action against Horizon Bank, the independent fiduciary trustee for the P.L. Marketing, Inc. Employee Stock Ownership Plan (the Plan) in which they participated, alleging that the trustee significantly overvalued the employer stock purchased by the Plan and ultimately caused them and the Plan to lose money. Merrow v. Horizon Bank, No. 22-cv-123, 2023 WL 7003231 (E.D. Ky. Oct. 24, 2023). The plaintiffs asserted:

  • Violations for fiduciary breach and prohibited transactions under ERISA § 502(a)(2), seeking losses on behalf of the Plan
  • Knowing participation in ERISA violations under ERISA § 502(a)(3)

The trustee moved to dismiss for lack of subject matter jurisdiction, pointing to the Plan document's mandatory arbitration clause and waiver of class-wide arbitration. Specifically, according to the Plan document:

[e]ach Claimant, whether pursuing a claim for benefits or other relief on behalf of the Plan as a whole, by participating in this Plan, is specifically waiving the right it otherwise would have had to sue the Company, Trustee, the Administrator or any party to whom administration or investment discretion is delegated hereunder in court and to have such claims decided by a judge or jury.

The Plan's class arbitration waiver stated that "[e]ach Participant and Beneficiary, or any party claiming for or through them, agrees that any Claims will be arbitrated individually and shall not be brought, heard, or arbitrated on a class or collective action basis – unless both parties agree, in writing, to the contrary."

The court agreed with the trustee that the Plan's waiver language was enforceable, following Sixth Circuit precedent that requires adhering to a presumption of arbitration and resolving doubts in favor of arbitration. According to the court, the employees failed to allege any facts that would render the Plan document's waiver provisions invalid, meaning that they were required to individually arbitrate their claims. Rejecting their argument that the Plan provisions operated as a prospective waiver of statutory remedies under ERISA, the district court, citing to the Supreme Court's decision in Viking River Cruises, reasoned that "[a]n arbitration agreement thus does not alter or abridge substantive rights; it merely changes how those rights will be processed."  

The court distinguished the Sixth Circuit's decision in Hawkins v. Cintas Corporation, 32 F.4th 625, 635 (6th Cir. 2022), cert. denied, 143 S. Ct. 564, 214 L. Ed. 2d 335 (2023), which held that a plaintiff cannot be compelled to arbitrate claims based on an arbitration agreement within their employment contract. Because the Merrow arbitration agreement was within the Plan document, the context was "completely different," and Hawkins did not apply. The court therefore compelled arbitration but denied dismissal of the claims as a whole. Instead, the court stayed the case pending arbitration, citing Arabian Motors Group W.L.L. v. Ford Motor Company, 19 F.4th 938, 941 (6th Cir. 2021).

Northern District of Ohio Holds Disability Policy is Governed by ERISA

In the context of a discovery dispute, in DiGeronimo v. UNUM Life Insurance Companies of America, No. 22-cv-773 (N.D. Ohio Sept. 26, 2023), the U.S. District Court for the Northern District of Ohio faced the question of whether a long-term disability plan was governed by ERISA. The plaintiff alleged that ERISA did not apply, while defendant Unum Life Insurance Companies of America (Unum), which had denied plaintiff benefits under the plan, argued that it did. The court ultimately sided with Unum.

The court applied the first prong of the three-part test established in Thompson v. American Home Assurance Company, 95 F.3d 429 (6th Cir. 1996), for determining whether a plan is covered by ERISA. More specifically, the court asked whether the so-called "safe harbor" regulations established by the Department of Labor (DOL) exempted the program from ERISA. According to the court, the safe harbor applies only when four criteria are satisfied:

  • No contributions are made by an employer or employee organization
  • Participation in the program is completely voluntary for employees or members
  • The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer
  • The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs

The court, however, only addressed the first requirement and held that the employer had, in fact, made contributions to the policy. Because that prong of the test was not satisfied, the safe harbor could not apply and the plan fell within ERISA's coverage.

Unum asserted that the plaintiff's employer paid the premiums for his coverage, rendering the safe harbor unavailable. Although the plaintiff acknowledged that premiums for the policy were initially paid by his employer, he argued that the contributions were "illusory": he was issued a Form 1099 for the premiums paid by his employer, making them part of his taxable gross income. The court held, however, that the regulations cited by plaintiff were inapposite; they addressed the taxability of benefits and did not "shed light on the impact of an employer's issuance of a 1099 form for the payment of insurance premiums on the applicability of ERISA's 'safe harbor.'" And, even if the court were to assume that the issuance of 1099s by the employer meant that plaintiff paid premiums in the amount listed on the 1099s, he had not presented or pointed to evidence of record "demonstrating that he paid the full amount of the applicable policy's premiums." Further, evidence showed that the employer contributed to the payment of premiums for the first 14 months of the policy's existence. "For the safe harbor exemption to apply, it requires that an employer make no contributions. Plaintiff cites no authority suggesting the contribution must be ongoing or rise to any specific threshold or percentage of the overall payment of premiums."  

Because all four of the criteria had to be satisfied for the "safe harbor" exemption to apply, the court did not address the remaining criteria. The court held that the policy was governed by ERISA.

Upcoming Speaking Engagements and Events

On October 31, Joanne Roskey and Dawn Murphy-Johnson will present, "State Legislative Activities Impacting Employee Benefits," an American Staffing Association webinar.

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