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Ninth Circuit Changes its Position on the Enforceability of Arbitration of Breach of Fiduciary Duty Claims Under ERISA §502(a)(2)

On Behalf of | Aug 22, 2019 |

The Ninth Circuit, in Dorman v. The Charles Schwab Corporation, modified its position on the enforceability of arbitration agreements to ERISA claims of breach of fiduciary duty on behalf of the plan under ERISA Section 502(a)(2). The Court found an arbitration provision in the plan document was enforceable against the plaintiff. The Dorman decision may encourage plan sponsors to amend plan documents to include arbitration provisions like the one in Dorman.

The Ninth Circuit ruled in Dorman v. The Charles Schwab Corporation, DC No. 4:17-cv-00285-CW, (9th Cir. August 20, 2019), that an arbitration provision in the SchwabPlan Retirement Savings and Investment Plan document stating “Any claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration” subjected plaintiff’s claims – alleging the plan’s Schwab-affiliated funds charged higher fees and performed more poorly than other investment options on the market – to binding arbitration.

The Court concluded that plaintiff “agreed to be bound” to the arbitration clause because the plaintiff participated in the plan while the arbitration clause was in effect. The Court also reasoned the class action claims of plan-wide breach of fiduciary duty applied to the scope of the arbitration provision because the claims were asserted under ERISA and alleged that plan fiduciaries breached their duties to the plan on the whole.

This decision was made in the wake of the Supreme Court’s decision in Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275, at *5 (U.S. Apr. 24, 2019) which found that an arbitration clause in the employment contracts of Lamps Plus employees forced individualized (not class) arbitration of a class action data breach complaint. The Dorman court applied the reasoning of Lamps Plus and other recent Supreme Court pro-employer arbitration cases, like Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018), to reach a similar result for ERISA Section 502(a)(2) claims.

ERISA, however, is its own unique animal. As a starting point, in the ERISA arena, typically participants bring two types of actions under ERISA Section 502(a). First, a participant can recover health, disability, or other types of promised plan benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under Section 502(a)(1)(b). Second, a participant can bring a claim under Section 502(a)(2) for breach of fiduciary duty on behalf of the plan to “make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan.” Sometimes too, a participant might bring a cause of action for equitable relief under Section 502(a)(3) as a tag-along cause of action or its own discrete claim.

Because Section 502(2)(2) claims are brought by an individual on behalf of the plan – not the individual himself – the availability of arbitration to those claims, has been at best, unclear. Indeed, the Court, in reaching the result in Dorman, was tasked with reconciling its own very recent decision in Munro v. Univ. of S. Cal 896 F.3d 1088, 1092 (9th Cir. 2018) that came to the opposite conclusion. The form of the arbitration agreement, and who agreed to arbitration -the plan versus the individual participant – proved to be the determinative factor to the Dorman three judge panel. The Court emphasized that “the relevant question is whether the Plan agreed to arbitrate the §502(a)(2) claims. Here, the Plan expressly agreed in the Plan document that all ERISA claims should be arbitrated.”

Critically, in Munro, the individual employees who sued were required to sign an arbitration agreement as part of their individual employment contractual agreements. The arbitration provision at issue in Dorman, in contrast, was in the plan document, and according to the Court, was, therefore, binding on the plan and its participants. This was the distinguishing fact that persuaded the Dorman court to rule opposite to Munro.

The Court’s holding, however, that the “parties here should be ordered into individual arbitration” and that “the arbitration must be conducted on an individualized basis” could pose a problem in allowing for the relief called for in ERISA Section 409 that provides expressly for relief “to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan.” The Court did not reference or explain how the restoration of plan-wide relief called for in ERISA Section 409 could be provided in an arbitration limited to the damages owed to one participant. Instead, the Court focused on the fact that the plan and participants acting on behalf of the plan could waive their litigation rights in the plan document through the arbitration provision.

To arrive at this outcome legally, the heart of the Ninth Circuit’s three judge panel opinion rested on its of interpretation of LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008). The panel stated, in reliance on LaRue that “although §502(a)(2) claims seek relief on behalf of a plan, the Supreme Court has recognized that such claims are inherently individualized when brought in the context of a defined contribution plan.”

But in Munro, Ninth Circuit Chief Circuit Judge, Sidney R. Thomas rejected this interpretation of LaRue. Judge Thomas specifically said that the Supreme Court, in LaRue, “made clear that it had not reconsidered its longstanding recognition that it is the plan, and not the individual beneficiaries and participants, that benefit from a winning claim for breach of fiduciary duty, even when the plan is a defined contribution plan.”

What’s more, in Munro, Judge Thomas found LaRue not to be controlling on the issue of arbitration because “the claims brought by the Employees arise from alleged fiduciary misconduct as to the Plans in their entireties and are not, as in LaRue, limited to mismanagement of individual accounts.” And, in such instances “the relief sought demonstrates that the Employees are bringing their claims to benefit their respective Plans across the board, not just to benefit their own accounts as in LaRue.”

In this respect, no distinction can be drawn between the core of the plan-wide claims in Dorman – that the plan offered proprietary Schwab investment options that charged higher fees and performed more poorly than other investment options on the market to the detriment of the plan and its participants – with Munro where plaintiffs alleged that the plans’ fiduciaries breached their fiduciary duties to the plans’ participants, by offering a high number of investment options that were excessive in cost thereby harming the plans and all affected participants and beneficiaries.

Courts’ considerations of these differing interpretation of LaRue and the form of arbitration agreements (plan documents versus employee contracts) will forge the future viability of arbitration of ERISA Section 502(a)(2) class claims. The three judge panel decision and its differences with Munro might create the grounds for an appeal to the Ninth Circuit en banc for a streamlined approach to the issue. Also, if other Circuits disagree with the Ninth Circuit’s conclusion that damages can be limited to individualized damages under LaRue, it will create a path to a likely appeal to the Supreme Court because of the prejudice to participants residing in the Ninth Circuit. The only Circuit to provide any guidance on the controversy as of yet was the Third Circuit in In Re Schering Plough Corp. ERISA Litigation, 589 F.3d 585 (3d Cir. 2009) which reached a very similar result to Munro in finding that Section 502(a)(2) claims belong to the plan and could not be signed away in a release signed by a participant.

Whether such a releases or agreements to arbitrate in plan documents will be enforceable remains an open question. However, whichever way future courts might rule, plan sponsors should recognize that ERISA arbitration might have its own pitfalls – the decision can generally not be appealed, an arbitrator might not have ERISA expertise, and there is often a tendency for an arbitrator to just find middle ground between a participant and fiduciaries. Even with this win for the defendants in Dorman, whether the industry as a whole adopts mandatory arbitration remains to be seen – even if the courts say it can be done. Plan sponsors should consult their ERISA counsel for guidance on this issue.