7th Circ. Ruling Offers Arbitration Clarity For ERISA Claims

Published date22 October 2021
Subject MatterEmployment and HR, Litigation, Mediation & Arbitration, Retirement, Superannuation & Pensions, Employee Benefits & Compensation, Employee Rights/ Labour Relations, Arbitration & Dispute Resolution
Law FirmWinston & Strawn LLP
AuthorMr Michael P. Roche, B. Aubrey Smith and Shannon Denise Lemajeur

On Sept. 10, the U.S. Court of Appeals for the Seventh Circuit ruled in Smith v. Board of Directors of Triad Manufacturing Inc. that an employee stock ownership plan's arbitration provision was unenforceable because it limited the relief available in arbitration to the individual claimant.

Citing the rarely used effective vindication doctrine, the Seventh Circuit decided that such individualized relief was incompatible with the statutory remedies1 available under the Employee Retirement Income Security Act Section 502(a)(2) for breaches of fiduciary duty under ERISA Section 409(a).2

Although the ruling found the particular arbitration provision was unenforceable, it was the circuit court's first decision that broadly approved arbitration of ERISA claims.

The decision provides helpful considerations for plan sponsors when incorporating arbitration clauses into ERISA plans. The decision also indicates, however, an increasing concern by courts that the limitations in many arbitration provisions are incompatible with the planwide relief available under ERISA fiduciary breach claims.


Former Triad Manufacturing employee James Smith brought an action alleging ERISA claims, including claims for breach of fiduciary duty, in the U.S. District Court for the Northern District of Illinois in April 2020 against the board of Triad, the company's three co-presidents and the trustee of the Triad Employee Stock Ownership Plan.

In his complaint, Smith alleges that Triad created the ESOP in December 2015. Prior to the creation of the ESOP, Triad was privately owned entirely by the three co-presidents, and there was no public market for the company stock.

Further, Triad employees were eligible to invest their retirement savings in a non-ESOP defined contribution plan, which included a variety of mutual funds invested in stocks, bonds and money market funds.

Smith alleged that on Dec. 17, 2015, the individual defendants sold the entirety of Triad to the ESOP at an inflated value of $58.05 per share — $106.2 million in total.

The company subsequently filed financial statements with the U.S. Department of Labor indicating that by the end of the same month, Triad's share value had fallen to $1.85, or around $3.3 million in total.

Under vesting provisions in the ESOP, no employee could receive a distribution from the ESOP until December 2016. Employees who were eligible for a distribution in December 2016 received only $1.15 per share of Triad stock allocated to their accounts.

According to Smith, this steep decline in share value was precipitated by the individual...

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