United States: Ninth Circuit Decisions Overrule 35-Year Precedent In ERISA Arbitration Disputes

Christopher Buch and Chelsea McCarthy are Partners in Holland & Knight's Chicago office
William Delany is a Partner in Holland & Knight's Philadelphia office

Highlights

  • The U.S. Court of Appeals for the Ninth Circuit issued two opinions on Aug. 20, 2019, that expressly overruled its 35-year precedent that Employee Retirement Income Security Act (ERISA) disputes were not arbitrable.
  • In a published opinion in Dorman v. Charles Schwab Corp., the Ninth Circuit's three-judge panel overruled its decision in Amaro v. Continental Can Co., which had held that ERISA claims could not be subject to arbitration.
  • In an unpublished, nonprecedential opinion, the same panel of the Ninth Circuit concluded that an arbitration provision contained in a 401(k) plan document required arbitration of an individual's claim.

In a pair of opinions issued on Aug. 20, 2019, the U.S. Court of Appeals for the Ninth Circuit expressly overruled its 35-year precedent that Employee Retirement Income Security Act (ERISA) disputes were not arbitrable. The Ninth Circuit required the arbitration of an individual's claim under ERISA that challenged the inclusion of certain investments in the company's 401(k) plan. In a published opinion issued in Dorman v. Charles Schwab Corp., a three-judge panel of the Ninth Circuit expressly overruled its decision in Amaro v. Continental Can Co., which had held that ERISA claims could not be subject to arbitration. The court concluded that U.S. Supreme Court authority issued after its decision in Amaro made clear that the decision was no longer good law. This is another decision in a line of recent decisions regarding the enforceability of arbitration clauses in ERISA matters. (See Holland & Knight alerts, "Courts Continue to Rule on Retirement Plan Mandatory Arbitration Provisions," March 19, 2019; "District Court: ESOP Arbitration Provision Doesn't Apply to "Cashed-Out" Participant," Aug. 13, 2018; and "Ninth Circuit: Individual Employment Provision Cannot Compel Arbitration of 409(a) Claim," July 31, 2018.)

In an unpublished, nonprecedential opinion, the same panel of the Ninth Circuit concluded that an arbitration provision contained in the 401(k) plan document required arbitration of the individual's claim. Because the plan document also included a class-action waiver, the court concluded that an arbitration could proceed only on the individual's claim, even though that individual was asserting a claim on behalf of the plan.

Factual Background and District Court Decision

The plaintiff was an employee of the plan sponsor from 2009 through 2015. He participated in the plan sponsor's 401(k) plan throughout the duration of employment. Two months after his employment ended, he withdrew his entire account balance and ended his participation in the 401(k) plan. Effective Jan. 1, 2015, after the plaintiff had become a participant in the 401(k) plan but before his participation ceased, the 401(k) plan was amended to include an arbitration provision and a class-action waiver that required individual arbitration. During his employment, the plaintiff also became a participant in a separate compensation plan of the same plan sponsor that included an arbitration provision.

The plaintiff filed a putative class action complaint claiming that the defendants breached their fiduciary duties of loyalty and prudence and caused the 401(k) plan to engage in prohibited transactions in violation of ERISA by including in the 401(k) plan's mix certain investment funds that were affiliated with the plan sponsor. The plaintiff claimed that those funds performed poorly but were kept in the 401(k) plan's mix to generate fees for the plan sponsor.

In response to the complaint, the defendants moved to compel arbitration. The district court denied the motion. The lower court concluded that neither the arbitration provision in the 401(k) plan nor the arbitration provision in the compensation plan applied. The court, apparently incorrectly, concluded that the arbitration provision in the 401(k) plan did not become effective until after the plaintiff's participation in the 401(k) plan ceased. As to the arbitration agreement in the compensation plan, the court concluded that it was unclear whether the plaintiff's claims arose out of his employment with the plan sponsor, as the arbitration agreement required.

The district court also concluded that even if the claims fell within the scope of the arbitration agreements, the arbitration agreements were unenforceable. The district court ruled that because the plaintiff's claims were brought "on behalf of the 401(k) plan" but without the 401(k) plan's consent, he could not waive rights that belong to the 401(k) plan, including filing the current lawsuit. The district court also ruled that the class action waivers were a violation of the National Labor Relations Act (NLRA) and therefore unenforceable. (The district court's decision predated the Supreme Court's decision in Epic Systems Corp. v. Lewis, which held that class-action waivers were not unenforceable under the NLRA.)

The Published Decision

In the published decision, the Ninth Circuit expressly overruled its prior precedent in Amaro, which had held that ERISA claims could not be subject to arbitration. One premise of the Ninth Circuit's prior decision was that the arbitrators lacked the competence to interpret and apply statutes.

In the years since that decision, however, the Supreme Court has ruled the opposite – arbitrators are competent to interpret and apply federal statutes. In light of this intervening Supreme Court authority, the Ninth Circuit concluded that its decision in Amaro was no longer good law.

The Unpublished Decision

In its companion, unpublished opinion, the Ninth Circuit reversed the district court's decision that the plaintiff's claims were not subject to arbitration. The unpublished opinion has no precedential effect under the Ninth Circuit's rules.

The unpublished decision found that the district court erred in concluding that the plaintiff was not bound by the 401(k) plan's arbitration provision, since the plaintiff was a participant at the time the arbitration provision became effective. The Ninth Circuit found that claims under ERISA Section 502(a)(2) belong to a plan, not an individual. Accordingly, the court reasoned, the question is whether the 401(k) plan agreed to arbitrate. Because the 401(k) plan expressly agreed to arbitrate in the plan document, the plaintiff's claims were subject to arbitration.

The court further concluded that the arbitration must be conducted on an individualized basis. The court relied on Supreme Court authority that no party can be compelled to arbitrate on a classwide basis unless specifically agreed in the parties' contract. In this case, the 401(k) plan document specified that arbitration must be on an individualized basis. The court recognized that claims under ERISA Section 502(a)(2) seek relief on behalf of a plan. But, in reliance on the Supreme Court's 2008 decision in LaRue v. DeWolff, Boberg & Associates, it concluded that such claims in the context of a defined contribution plan (such as the 401(k) plan at issue) were "inherently individualized."

Key Considerations

It is important to note that in the unpublished decision, the court's decision to compel arbitration was based upon the fact that the plan had agreed to arbitration of all claims (with the exception of claims for benefits). To the extent that a plan sponsor desires to have all claims arbitrated, this decision counsels plan sponsors to adopt an arbitration provision with a broad scope. In addition, in the unpublished decision, the court honored the plan's class-action waiver provision. This holding may mean that class- and collective-action waivers could be effective in limiting arbitration to individual claims, even though a claim is being asserted derivatively on behalf of the plan.

The above are only two of the considerations that an employer should take into account before deciding whether to implement an arbitration provision in an ERISA plan, a number of other factors could impact whether it is advisable to add an arbitration provision and class-action waiver to a plan. The unpublished decision is a nonbinding decision, even in the Ninth Circuit, which means that there is still uncertainty in other districts if a court will allow an arbitration provision in a plan document to stand. Before making a determination as to whether to incorporate an arbitration provision, plan sponsors should speak with their ERISA counsel before deciding which option would be best for them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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