Arbitration Clause Pauses Excessive Fee Suit

The addition of an arbitration clause has—for the moment, anyway—paused an excessive fee suit. But what’s interesting is how the court applied the terms of that clause. 

The suit had been brought by plaintiffs Lawanda Holmes, Ani M. Miller and Brittany E. Roxbury (“by and through their attorneys”) against the fiduciaries of the $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan. Represented by Matthew Fornaro of Matthew Fornaro PA and Donald R. Reavey and Mark K. Gyandoh of Capozzi Adler PC, the suit claimed that the defendants breached their duties as ERISA fiduciaries by:

• “failing to objectively and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; 
• “maintaining certain funds in the Plan despite the availability of identical or similar investment options with lower costs and/or better performance histories; and 
• “failing to control the Plan’s recordkeeping costs.”

Those allegations aren’t unusual by any means in these type litigations (indeed, the foundational arguments have been literally copied and pasted across multiple filings)—but as you may (or may not) recall, there was an interesting step prior to the filing of the suit—whereby the Plaintiffs claimed to have exhausted their administrative remedies. More specifically, the suit notes that they delivered and received confirmation of their administrative demand—but got no response, and so they declared that the “failure to respond within the time prescribed by the SPD deems Plaintiffs’ administrative claim exhausted.”

Motions Made

But the filing of the suit led to a motion by the fiduciary defendants here, specifically a motion to compel arbitration, a motion to stay, and a motion to dismiss the case altogether. 

U.S. District Judge Robert M. Scola Jr. (Lawanda Holmes et al. v. Baptist Health South Florida Inc. et al., case number 1:21-cv-22986, in the U.S. District Court for the Southern District of Florida) dealt only with the first (the motion to compel arbitration). He explained that, in arguing that the arbitration agreement is not enforceable, the Plaintiffs raised two challenges: first that the arbitration agreement (and its waiver of certain Plan-wide remedies) violates the “effective vindication” doctrine, and second—that the arbitration agreement is not binding as the agreement was added to the Plan by unilateral amendment in 2020. 

With regard to the first—and relying upon the Federal Arbitration Act, Judge Scola explained that, while “rarely applied,” this doctrine holds that courts may invalidate arbitration agreements that “operate as a prospective waiver of a party’s right to pursue statutory remedies.” However, in dismissing that argument, he noted that the plaintiffs here pointed to no example in the Eleventh Circuit where that had been applied to avoid an arbitration clause—and, in fact, he discerned a “hesitancy to do so.” 

As to the second issue—basically that the arbitration agreement is not binding on the plaintiffs since it was adopted relatively recently, unilaterally, and without participant consent—Judge Scola noted that “despite the unseemly nature of requiring Plan-participant Plaintiffs to arbitrate a claim that they never personally agreed to arbitrate, the Plan agreed to arbitrate.” And this is where it gets “interesting.” He concluded that the “relevant inquiry” is not whether individual participants agreed to the arbitration agreement but whether the Plan agreed to arbitrate—and since the plan did, and since the plan “expressly provided for unilateral amendment by the Plan Sponsor,” and ultimately since the plan consented to the arbitration agreement, “the Plan, and those that bring claims on its benefit, must arbitrate.”

Arbitration ‘Cause’

Now, the participant-plaintiff in question wasn’t even in the plan at the time that arbitration agreement was implemented (she was terminated and removed all her funds in September 2018)—and thus argued that it shouldn’t apply to her. “However, as discussed above,” Judge Scola concluded, “the Plaintiffs’ breach-of-fiduciary-duty claims are brought on behalf of the Plan. While Plaintiff Holmes never agreed to arbitrate and was not put on notice of an agreement to arbitrate while she was a participant in the Plan, the Plan agreed to arbitration, and any claims on behalf of the Plan, including those brought by Plaintiff Holmes, must be brought in arbitration.”

And in so concluding Judge Scola granted the motion to compel arbitration, and stayed the case pending such arbitration.

What This Means

It’s not the first—or only—time that this type litigation has been “paused” for arbitration. Indeed, while it’s not clear from the available materials that this particular clause was adopted as a result of those cases, it seems entirely plausible. But what does seem unique—at least in this type of litigation—is the application/adoption of the arbitration clause by the plan, applied to those bringing suit on behalf of the plan.

That said, the likelihood of more such clauses appearing would seem to be ripe for increase—though their impact on cases in other circuits—or on the ultimate outcome (or probability of settlement) remains less so.