THE BENEFIT TO AN EMPLOYER OF INCLUDING BOTH A RELEASE AND A COVENANT NOT TO SUE IN A SEPARATION OR SETTLEMENT AGREEMENT WITH AN EMPLOYEE

ERISA class actions have been plaguing corporate America for more than a decade.  There is no universally accepted application of the pleading standards for ERISA fee and performance cases, which makes prevailing on a motion to dismiss a hit or miss proposition.  Discovery is expensive, and cases often settle for seven figures (sometimes more, sometimes less).  As a result, new cases continue to be filed, and the cost of fiduciary insurance is on the rise. 

If you’ve read this far, you may be looking for additional ways to protect your company (and its benefit plan fiduciaries) from the scourge of ERISA class actions.   One easy method of improving your defensive posture is to check your normal form of settlement agreement for resolving employment issues.  Does it routinely include both the employee’s promise to release claims as well as her covenant (or promise) not to sue?   If not, you may be missing out on the unique incremental protection that a covenant not to sue can give an employer in the defense of an ERISA class action.  

Differences Between a Release and a Covenant Not to Sue

A release is often an employer’s primary “get” in a separation agreement with a departing employee.  A release is an operative provision in which an employee discharges the employer and related releasees from defined claims, legally extinguishing those claims as of the effective date.  I hereby release my claims against you.

A covenant not to sue, on the other hand, is a forward-looking promise by the employee to refrain from taking certain actions in the future, often phrased in terms of an agreement not to bring or participate in any lawsuit, arbitration or other legal proceeding with respect to any released claim.  I promise not to sue you in the future regarding the claims I released.

In many, if not most, disputes, a release and a covenant not to sue have the same practical effect, namely, preventing future legal proceedings over settled matters within their scope.  Indeed, some litigators believe that a covenant not to sue does the exact same work as a release and do not bother to include a covenant in agreements that already contain a release.  Other litigators routinely negotiate for both provisions to be included in settlement agreements, as a belt and suspenders approach; if one fails, the other holds the company’s pants up.  Who is right? 

A recent federal case suggests that a covenant not to sue performs extra work, above and beyond a release, at least in the context of preventing unwanted ERISA class actions.  See Esquivel v. Whataburger Restaurants LLC, et al., No. 5:24-cv-00310-XR (W.D. Tex. Nov. 8, 2024), appeal filed Dec. 9, 2024.

Why Focus on Agreements with Employees/Former Employees?

Before turning to the reasoning of the Whataburger case, let’s start by asking why it makes sense to focus on settlement/separation agreements resolving employment issues when trying to reduce exposure to ERISA claims. 

  • First, and foremost, the “E” in ERISA stands for “Employee.”  Almost all ERISA class actions are brought by a current or former employee or their beneficiaries.  So, a company’s employees are a target-rich environment for risk-mitigation techniques.
  • Second, though we have not seen data on this point, it certainly feels like a disproportionate number of named plaintiffs in ERISA class actions have, or have had, an employment-related dispute with the same employer, independent of their potential ERISA claim.  Such employees might be comfortable with the adversarial process and, furthermore, might be predisposed to believe their current/former employer is capable of wrongful conduct.  As such, they may be primed to say “yes” when encountering solicitation requests from ERISA plaintiff-side lawyers on social media platforms or websites touting ongoing investigations into specific retirement plans, by name, sponsor, and location.   
  • Third, when an employer and employee are already entering into a new contract – such as a settlement agreement or separation agreement – resolving some dispute or addressing terms of separation from service, it should be a non-controversial matter to include appropriate protective provisions designed to maximize finality.  A covenant not to sue is often viewed as boilerplate, and thus the employee and his or her counsel likely would not resist its inclusion in a settlement agreement that already contains a release.  

The Representative Capacity Issue

Section 502(a)(2) of ERISA allows plan participants and beneficiaries to sue plan administrators for breach of fiduciary duty under §409(a) of ERISA, which in turn makes breaching fiduciaries liable to “make good to such plan any losses to the plan resulting from each such breach.”   The combined effect of these two sections of ERISA is that an individual plan participant may bring claims for breach of fiduciary duty “in a representative capacity on behalf of the plan as a whole.”  Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134, 140, n. 9 (1985).

Questions arising out of this duality of capacities – individual versus representative – have been litigated in various contexts.  If an employee, in her individual capacity, signed a separation agreement with her employer before the ERISA dispute ripened, what effect does her agreement have when she later brings an ERISA claim on behalf of the plan as a whole, i.e., in her representative capacity?  For example, if an employee, in her individual capacity, signed an employment agreement containing an arbitration clause, are the §502(a)(2) claims she seeks to bring in a representative capacity subject to mandatory arbitration?  See, e.g., Tenneco, Inc. v. Parker,  114 F.4th 786 (6th Cir. 2024) (answering no), petition for certiorari pending.  Or if she signed a separation agreement in her individual capacity releasing any and all claims arising out of her employment, including claims under ERISA, is she prohibited from asserting representative claims on behalf of the plan?  See, e.g., In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 594 (3rd Cir. 2009) (answering no).

The Whataburger Court Draws a Distinction

In the Whataburger case, an employee signed a Separation and Release Agreement, which contained both a release and a covenant not to sue.   As noted by the Court, a covenant not to sue is “separate and distinct from the release,” and the two provisions must be analyzed independently. 

As for the release, the employee agreed to release the company and fiduciaries and others affiliated with the company’s 401(k) plan from “all claims of any type,” including claims under “the Employee Retirement Income Security Act.”  The Court agreed with various other courts that, as a matter of law, “an individual cannot release a plan’s claims and accordingly a release cannot bar an individual from bringing claims on behalf of a plan under 502(a)(2).”  The Court noted that a few courts disagree with this conclusion but found their reasoning lacking.  Thus, the Court held that the plaintiff’s §502(a)(2) claims against the plan could proceed, despite the release she had signed.

The Court then turned to plaintiff’s promise not to sue contained in the same Separation and Release Agreement.  The covenant provided, in part:  “A ‘promise not to sue’ means you promise not to sue any Releasee in court.  This is different from the General Release above.  Besides releasing claims covered by the General Release, you agree never to sue any Releasee for any reasons covered by the General Release.”  The covenant went on to say that plaintiff expressly agreed not to bring “claims for damages on behalf of another person or entity.”

The Court noted there is “very little authority” on whether a covenant not to sue is enforceable in the context of a claim brought in a representative capacity under §502(a)(2).  Focusing on the language of the covenant, the Court concluded the language was clear and unambiguous:  “Plaintiff expressly promised not to sue any Releasee.  Despite the Promise, Plaintiff has sued Whataburger, The Board of Directors of Whataburger Restaurants LLC and The Whataburger 401(k) Savings Plan Administrative Committee in this Court.” (Court’s emphasis.)

Accordingly, the Court concluded that, while the Plan might have ERISA claims, Plaintiff had contracted away his right to bring those claims on behalf of the Plan.  As a result, the covenant not to sue achieved something that the release did not – it prevented Plaintiff from bringing representative claims.  Of course, the lawyers could search for another participant to replace this Plaintiff (which is not always easy), but in the meantime, this Plaintiff, by virtue of his covenant not to sue, was neutralized.

Takeaways

  1. Though a release and a covenant not to sue may be redundant in many settings, when it comes to the high-stakes arena of ERISA fiduciary duty class actions, a court might find that a covenant not to sue is enforceable against a plaintiff who tries to bring claims in a representative capacity, even if a release given by the plaintiff in the same underlying agreement is not.
  2. Therefore, it pays to include both provisions – a release and a covenant not to sue – in settlement or separation agreements resolving employment issues.  Check your standard forms to see if they should be revised accordingly.