HR Management & Compliance

Rare Exception to FAA Kills Arbitration Clause

The Federal Arbitration Act (FAA) enforces certain arbitration agreements involving federal law, including some employment disputes and claims against employers under the Employee Retirement Income Security Act of 1974 (ERISA). But is an arbitration agreement that prohibits an individual from seeking relief provided by federal statute still enforceable? The U.S. 7th Circuit Court of Appeals (which covers Wisconsin employers) recently addressed the issue.


Congress enacted the FAA in 1925. The federal law enforces certain arbitration agreements entered into between parties.

ERISA is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to protect individuals subject to the plans. Specifically, Section 1132(a)(2) provides a civil suit may be filed for appropriate relief as listed under Section 1109, which in turn imposes liability for any fiduciaries who breached their duties to the plan. Notably, Section 1109 also authorizes “other equitable or remedial relief that the court deems appropriate.”


James Smith worked for Triad Manufacturing, Inc., and participated in the company’s employee stock ownership plan (ESOP), a contribution employee retirement plan covered under ERISA. Triad’s board later amended the plan to include an arbitration provision with a class action waiver, requiring arbitration for any claim related to the plan. The arbitration provision also severely limited the remedies available to anyone who filed an ERISA claim.

Smith filed a class action complaint for various violations against Triad’s board and its members under Sections 1132(a)(2) and (a)(3) of ERISA. The board asked the court to compel arbitration or dismiss the claims under the Federal Rules of Civil Procedure. The district court denied the request, holding the arbitration provision was unenforceable because it prospectively waived the employee’s right to statutory remedies provided by ERISA.

7th Circuit’s Decision

Triad and its board members appealed the district court’s decision to the 7th Circuit. The appeal centered on whether the arbitration provision was enforceable and thus required Smith to submit to arbitration.

The 7th Circuit first examined whether ERISA claims are arbitrable as a general matter, holding the FAA applies to claims under ERISA. The court determined the claims are generally arbitrable, a finding that every other circuit court has already recognized. Then, the court turned to the pivotal question: whether the plan’s arbitration provision is enforceable.

The 7th Circuit considered a rarely used exception to the FAA that prevents the enforcement of arbitration agreements: the “effective vindication” exception. The judge-made exception invalidates arbitration agreements if they effectively waive a party’s right to pursue remedies guaranteed by statute.

While several courts in the past have considered the effective-vindication exception, they declined to apply it to the issues before them. For example, The U.S. Supreme Court previously declined to invoke the exception when a class action arbitration waiver “merely limited the arbitration to the two contracting parties” but didn’t eliminate their rights to pursue statutory remedies. The Court also said, however, the effective-vindication exception would certainly apply in a scenario where the arbitration provisions forbid certain statutory rights.

The 7th Circuit concluded the Triad plan’s arbitration provision was precisely the scenario the Supreme Court had in mind. The court explained Smith asserted his claim under ERISA Section 1132(a)(2) and was entitled to relief warranted by Section 1109. By statute, the relief included other equitable or remedial relief as the court may deem appropriate, including the removal of a fiduciary.

The Triad plan’s arbitration provision, however, completely precluded removing a fiduciary. The court concluded the statutory remedies under Section 1109 and the arbitration provision’s terms couldn’t be reconciled. Therefore, the provision essentially waived Smith’s rights to pursue the remedies.

Thus, when a claim is filed under ERISA Section 1132(a)(2), the effective-vindication exception bars the application of the plan’s arbitration provision. Smith v. Board of Directors of Triad Manufacturing, Inc., et al., No. 20-2708 (7th Cir., Sept. 10, 2021).

Bottom Line

Although rare, the effective-vindication exception could invalidate your arbitration provisions. Under the exception, any arbitration agreements that forbid potential claimants from seeking any rights granted to them by ERISA or other federal statutes could be unenforceable. If you have concerns about whether an arbitration agreement is enforceable, you should consult with a qualified attorney.

Emilia R. Janisch is an attorney with Axley Brynelson, LLP, in Madison, Wisconsin. You can reach her at

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