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Petition For Rehearing and Supporting Amicus Briefs Filed In Schwab ERISA Arbitration Case

On Behalf of | Sep 26, 2019 |

In August of this year, a Ninth Circuit three-judge panel ruled in Dorman v. The Charles Schwab Corporation, DC No. 4:17-cv-00285-CW, 2019 WL 3939644 (9th Cir. August 20, 2019) that a plan document’s arbitration provision could bar class action allegations of breach of fiduciary duty brought on behalf of the plan under ERISA §502(a)(2). ERISA §502(a)(2) authorizes the Secretary of Labor, fiduciaries, and plan participants (like the Dorman plaintiff) to seek relief for their plans under ERISA §409(a).

Plaintiff Dorman, on September 10, 2019, filed a petition for a rehearing, and a rehearing en banc on the grounds that the decision of the Ninth Circuit panel conflicted with the full Ninth Circuit’s holding in Munro v. University of Southern California, 896 F.3d 1088, 1093-94 (9th Cir. 2018) (Thomas, C.J.), cert. denied, 139 S. Ct. 1239 (2019) and also conflicted “with the decisions of every other federal court of appeals to consider the question, each of which reached the same conclusion.” The Plaintiff additionally claimed that allowing fiduciaries to opt out of plan-wide liability creates an “upending” and “eviscerating” of ERISA’s regulatory scheme.

The petition and the likely counterarguments logically focus on the proper reading of LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008). The heart of the Ninth Circuit’s three-judge panel opinion rested on its application of LaRue to the facts of the case in concluding 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.”

Plaintiff’s petition argued that LaRue did “not purport to alter the representative nature of participant enforcement under §1132(a)(2)” and that “LaRue concerned a fiduciary breach that affected only one participant. The Supreme Court held that if a fiduciary breach affects only one defined contribution plan participant, that participant can still bring a claim for ‘plan injuries’ that ‘impair the value of plan assets in a participant’s individual account.”‘

The petition placed great importance on how the Dorman Court’s interpretation of LaRue conflicted with the Ninth Circuit’s earlier decision in Munro. In Munro, for example, Ninth Circuit Chief Circuit Judge, Sidney R. Thomas stated that 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.”

Additionally, 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.”

The Court’s findings in Munro are generally supported by other courts that have examined the policy importance of individuals acting on behalf of a plan to enforce their rights and the rights of other participants. As the Eighth Circuit explained in Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 598 (8th Cir. 2009), “Congress intended that private individuals would play an important role in enforcing ERISA’s fiduciary duties – duties which have been described as ‘the highest known to the law.”‘

The counterpoint, however, is that LaRue stands for the fact that when a participant in a defined-contribution plan brings a fiduciary-breach claim – even under ERISA §502(a)(2) – the participant is typically not seeking to protect the plan as a whole; instead, he is seeking to recover losses to his own individual account and potentially the individual accounts of whichever other participants also suffered from the breach. This was the defendants’ winning argument in Dorman.

The Supreme Court, since it issued its opinion in LaRue has not provided clarity on this point manifesting in the differing views of the plaintiff and Schwab defendants in Dorman. This might change when the Supreme Court could address LaRue in the context of its decision in Thole v. U.S. Bank. The Court in Thole will have the challenge of deciding whether a participant has standing to bring a breach of a fiduciary claim under ERISA §502(a)(2) when a defined benefit plan is overfunded.

Setting aside the dispute over LaRue, Plaintiff Dorman curiously left out a distinguishing fact from his core argument. Dorman did not address and attempt to distinguish a critical fact to which the court latched on in order to distinguish it and break it off from its holding in Munro: that is, in Munro, the individual employees who sued were required to sign an arbitration agreement as part of their individual employment contractual agreements, whereas the arbitration provision at issue in Dorman was contained in the plan document, and thus, binding on the plan participants.

Plaintiff briefly touched on this issue in claiming that the Federal Arbitration Act (“FAA”) does not permit enforcement of arbitration clauses that waive statutory remedies like ERISA §502(a)(2). But the Supreme Court has explicitly rejected that argument in other contexts and statutory schemes, and the Dorman panel also dismissed such reasoning. See e.g., American Exp. Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013).

The key factor that convinced the Dorman panel to rule as it did was the form of the arbitration provision. The Court in Dorman stated 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.”

The Dorman Court, in fact, believed it was correctly extending Munro because, according to the three-judge panel, if the claims of breach of fiduciary duty belong to the plan, then the plan document’s arbitration provision could serve to waive those claims. Thus, the form of the arbitration agreement, and who agreed to arbitration – the plan, as opposed to the individual participant – proved to be the determining factor to the Dorman three-judge panel in deciding how to interpret Munro.

Typically, in deciding whether a dispute is arbitrable under federal law, a court must answer two questions: (1) whether the parties agreed to arbitrate; and, if so, (2) whether the scope of that agreement to arbitrate encompasses the claims at issue. See Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). But nowhere in the statutory definition of a plan document or in its practical implementation, do the participant and the plan expressly agree to its terms like they would in a typical contract. The Dorman Court, however, found that plan participants implicitly agreed to the terms of the plan document and are bound to them through their participation in the plan.

The relevant questions if a rehearing is granted might be whether the plan itself, through a provision in the plan document, can agree to arbitration – and if it can, whether an arbitration provision in the plan document can serve to waive the rights to the remedies prescribed under ERISA §§ 409 and 502(a).

On September 20, 2019, two amicus briefs were filed in support of plaintiffs petition for rehearing. One by the AARP and one filed by the National Association of Consumer Advocates (NACA). Neither brief attempted to distinguish the critical fact of the form of the arbitration provision, i.e., in the plan document versus the individual arbitration agreement. Instead, both briefs focused on the Dorman Court’s interpretation of LaRue, the conflict with Munro, and the policy implications of the Dorman decision.

The NACA brief can also be viewed as self-serving for the submitting attorney, a plaintiff class-action attorney who regularly brings ERISA class-action suits that involve plan-wide alleged breaches of fiduciary duty pursuant to ERISA §§ 502(a)(2) and 409.

The amicus brief focused on the “devastating” policy implications of Dorman: “the panel’s decision has potentially devastating consequences for the retirement security of American workers. If left intact, employers could render ERISA’s stringent fiduciary protections virtually unenforceable by the simple expedient of amending their retirement plans to require individualized arbitration, thereby destroying participants’ statutory right to bring claims for the benefit of the plan as a whole.”

The NACA amicus brief went on to say that “nothing in LaRue suggests that the types of claims here-in which the same breach harmed thousands of participants-may properly proceed as thousands of individualized claims for individualized relief” and that “consistent with Munro, other courts of appeals have held, post-LaRue, that §§ 409(a) and 502(a)(2) continue to authorize only plan relief, not individual relief.”

The issue might not boil down to the differing interpretations of LaRue but whether LaRue is controlling at all. The Munro Court, for example, when faced with a similar interpretation of LaRue as the Schwab defendants made, simply found LaRue to not be controlling: “Even if LaRue held the meaning USC attributes to it, it would not control this case. 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” Munro v. Univ. of S. California, 896 F.3d 1088, 1093-94 (9th Cir. 2018), cert. denied, 139 S. Ct. 1239, 203 L. Ed. 2d 199 (2019).

Indeed, whether LaRue, an individual account case, controls or is even relevant in a case involving plan-wide allegations, could be fertile ground to accept a rehearing also to the issue of whether a plan document is subject to the FAA and can waive ERISA statutory remedies.

Time will tell if the Ninth Circuit will accept the rehearing petition and if it does, how it might rule. While some have forecasted that plan sponsors will rush to amend plan documents to include arbitration provisions if a rehearing is not granted, other factors to consider might cause that prediction not to come to fruition.

For example, if the Dorman decision stands, the Schwab defendants might be faced with hundreds of nearly identical individualized arbitrations with the same allegations that seek the same relief against the same defendants. This would not only be extremely costly and burdensome to the plan, it could also be risky because of the potential for inconsistent decisions with different arbitrators. That concern can be compounded by the fact that arbitration decisions can generally not be appealed and an arbitrator might not have ERISA expertise.

Plan sponsors would be best suited to consult with their ERISA counsel for guidance to determine if the arbitration remedy is prudent under their specific circumstances.