Employment discrimination claims under ERISA section 510: should courts require exhaustion of arbitral and plan remedies?

Author:Goldstein, Jared A.
Position:Employee Retirement Income Security Act of 1974


The Employee Retirement Income Security Act of 1974 (ERISA)(1) regulates employer-sponsored welfare and pension plans(2) in two distinct ways. First, it requires plan administrators to provide benefits according to the terms of the plans. If a plan administrator wrongfully denies a benefit guaranteed by the plan, the beneficiary can sue in federal court to recover the benefit.(3) Courts refer to such claims as "benefits claims."(4) These claims amount to breach-of-contract actions and require courts to construe the terms of Erisa-governed plans in order to determine whether the plan owes the plaintiff benefits.(5)

Second, ERISA establishes minimum standards to govern plans and the actions of plan fiduciaries. Minimum standards established by ERISA include vesting schedules that pension plans must meet(6) and broad fiduciary obligations to which plan administrators must adhere.(7) ERISA provides plan participants and beneficiaries a federal cause of action to enforce these standards.(8) Courts characterize such claims as "statutory claims,"(9) which require courts to interpret the provisions of ERISA itself.(10)

ERISA section 510,(11) the subject of this Note, provides one of the statutory rights guaranteed by ERISA. Section 510 prohibits employers both from discriminating against an employee on the basis of her eligibility for benefits and from retaliating against an employee for asserting her rights under ERISA:

It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan [or] this title ... or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan [or this title].(12)

Section 510 amounts to antidiscrimination legislation. One court has analogized the protection offered by section 510 to that offered by Title VII of the 1964 Civil Rights Act:(13) "As Title VII prohibits discrimination on the basis of race with respect to such employment, so does section 510 prohibit discrimination with respect to pension benefits on the basis of one's proximity to such benefits."(14)

Unlike Title VII, which prohibits discrimination on the basis of personal characteristics such as race, religion, and sex, section 510 explicitly prohibits employers from discriminating for purely economic reasons.(15) For instance, one employee established a prima facie case of discrimination under section 510 by showing that her employer fired her in order to prevent her from becoming eligible for substantial disability benefits.(16) In another case, an employee established a prima facie case of a section 510 violation by showing that his employer discharged him to prevent him from qualifying for an additional $550,000 in pension benefits.(17)

Although ERISA provides a federal cause of action to enforce section 510, ERISA-governed plans themselves may provide a private mechanism for reviewing the actions of plan administrators.(18) Additionally, employment contracts and collective bargaining agreements frequently specify private arbitration as the exclusive means for handling employment disputes.(19) In the context of plan remedies, courts typically defer to the determinations of plan administrators, upholding their conclusions unless they are "arbitrary and capricious."(20) Courts review the decisions of private arbitrators with even greater deference, upholding arbitral decisions unless the award is "completely irrational or evidences a `manifest disregard for law'"(21) or the arbitrator exceeds the scope of her authority.(22)

Federal courts disagree over whether to require plaintiffs to exhaust private dispute mechanisms before bringing section 510 claims to court. The Sixth, Seventh, and Eleventh Circuits generally require section 510 claimants to exhaust the appeal procedures provided by ERISA-governed plans before they may sue in federal court.(23) The Third, Ninth, and Tenth Circuits, on the other hand, have held that the text and legislative history of ERISA do not provide evidence of a congressional intent to require exhaustion of plan remedies.(24) The courts also disagree over whether plaintiffs must exhaust arbitral remedies.(25) The Ninth Circuit has held that section 510 claims are not subject to otherwise valid arbitration clauses on the grounds that only the federal judiciary can enforce the rights protected by section 510.(26) The Second, Third, Eighth, and Eleventh Circuits have concluded otherwise and have upheld arbitration agreements covering statutory ERISA claims such as section 510 claims.(27)

This Note examines whether courts should require section 510 claimants to exhaust either plan-based or arbitral remedies before seeking judicial relief. It begins by comparing the basis for an exhaustion requirement with respect to benefits claims with the basis for such a requirement with respect to statutory claims - like those under section 510. Part I examines the rationale courts have offered for requiring exhaustion of plan remedies for benefits claims. Part I concludes that federal courts have correctly determined that Congress intended individuals bringing benefits claims to exhaust the remedies provided by the plan before seeking judicial relief. Part II argues, however, that courts should not impose an exhaustion of plan remedies requirement for statutory claims such as section 510 claims because neither the text nor the legislative history of ERISA indicates that Congress intended to require exhaustion for statutory claims. Part II further argues that even if courts generally apply an exhaustion requirement to statutory ERISA claims, they should waive this requirement for most claims brought under section 510 by applying the judicially recognized exceptions to exhaustion for futility and inadequate remedies.

Having determined that ERISA does not require exhaustion of plan-based remedies before plaintiffs may bring section 510 claims, this Note then turns to the related issue of whether courts should require section 510 claimants to exhaust contractually agreed-upon arbitral remedies. Part III argues that under recent Supreme Court decisions the determination of whether section 510 claims are subject to arbitration depends on whether the arbitration agreement is governed by the Labor Management Relations Act or the Federal Arbitration Act. This determination, in turn, depends on the type of contract containing the arbitration agreement - whether the arbitration agreement appears in a collective bargaining agreement, a commercial contract, or an individual employment contract. Part Ill then concludes that under relevant Supreme Court precedent courts should not require those bringing a section 510 claim to exhaust arbitration specified by a collective bargaining agreement. Courts should, however, require exhaustion of arbitral remedies when the arbitration agreement is found in an individual employment contract or a commercial contract.

  1. The Exhaustion of Remedies Requirement

    All courts agree that those seeking to recover wrongfully denied benefits must exhaust the appeals procedures provided by the plan before bringing suit in federal court.(28) Some courts have expanded the reach of the exhaustion requirement beyond these benefits claims and apply it also to statutory claims.(29) These courts find that the rationale for requiring exhaustion in the context of benefits claims applies to all ERISA claims, including section 510 claims.(30) This Part examines the rationale for applying an exhaustion of remedies requirement to benefits claims in order to set the stage for a similar analysis of statutory claims in Part II. Section I.A explores the development of the exhaustion requirement in the context of benefits claims. Section I.B describes another aspect of exhaustion doctrine, the judicially recognized exceptions to the requirement. This Part provides the framework that will be employed in Part II to determine whether the rationale for requiring exhaustion in the context of benefits claims applies in the section 510 context as well.

    A. Foundation of the Exhaustion Requirement

    In the federal labor law context, courts have applied an exhaustion of remedies requirement as a means of accommodating two potentially conflicting policies - providing access to the courts and encouraging private resolution of disputes. On the one hand, section 301 of the Labor-Management Relations Act of 1947 (LMRA)(31) provides a federal cause of action to those claiming a violation of a collective bargaining agreement.(32) On the other hand, LMRA section 203(d) establishes a policy of encouraging the development of private grievance procedures to settle workplace disputes.(33) In Republic Steel Corp. v. Maddox,(34) the Supreme Court resolved the tension inherent in these provisions by requiring those claiming a violation of a collective bargaining agreement to exhaust the agreement's grievance procedure before bringing a federal cause of action.(35)

    Like the LMRA, ERISA provides access to courts but also encourages private resolution of disputes. ERISA itself declares that one of its primary purposes is to provide participants and beneficiaries "ready access to the Federal courts."(36) Section 502(a)(1)(B) helps implement this goal by creating a cause of action for plan participants and beneficiaries to recover wrongfully denied benefits.(37) Standing alone, section 502(a)(1)(B) creates no special procedural barriers for those bringing a claim for benefits. ERISA section 503, however, requires plans to include an internal procedure for reviewing denials of benefits.(38) In contrast to section 502(a)(1)(B), section 503 expressly anticipates private dispute resolution. Nothing in the text of ERISA indicates how, or if, Congress intended these two provisions to work together...

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