Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On August 20, 2019, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit issued an opinion in Dorman v. Charles Schwab Corp.,1 overturning its 1984 position in Amaro v. Continental Can Co.2 that lawsuits filed under the Employee Retirement Income Security Act (ERISA) are not arbitrable. The court found that subsequent U.S. Supreme Court decisions mean that Amaro “is no longer good law.”
Dorman is a shift for the Ninth Circuit. Further, though some courts outside the Ninth Circuit have recognized that ERISA does not prohibit arbitration of breach of fiduciary duty claims under ERISA,3 breach of fiduciary duty claims are not typically arbitrated. If Dorman becomes a guidepost for general acceptance of arbitrating fiduciary claims, the future of ERISA litigation will be significantly impacted.
The plaintiff in this case is a former employee of the defendant financial investment management company, and participated in the company’s retirement savings and investment plan (the “401(k) Plan”), a defined-contribution 401(k) retirement plan. In December 2014, the 401(k) Plan was amended to include an arbitration provision, which stated, “[a]ny claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration.” The provision also set forth a waiver of class or collective action, stating, “any arbitration would be conducted ‘on an individual basis only, and not on a class, collective or representative basis,’ and that Plan participants waive the right to be part of any class action.”
In 2014, the plaintiff was promoted to financial consultant and enrolled in the company’s Investor Financial Consultant Compensation Plan (the “Compensation Plan”). The Compensation Plan also included an agreement to arbitrate and stated that “claims for benefits” would be resolved pursuant to the procedures set forth in the 401(k) Plan. The plaintiff left his employment with the company in October 8, 2015, and two months later, ceased participating in both the 401(k) Plan and the Compensation Plan and received a full distribution of his benefits.
The Class Action
The plaintiff filed a class action complaint in 2017 against his former employer, the 401(k) Plan, alleged fiduciaries of the 401(k) Plan, and company executives, claiming, among other things, that certain defendants breached their duties of loyalty and prudence under ERISA and violated ERISA’s prohibited transaction rules by selecting for inclusion in the 401(k) Plan investment funds that were affiliated with the company. The plaintiff also claimed that members of the Board of Directors breached their duty to monitor the Plan fiduciaries.
The defendants filed a motion to compel arbitration based on the terms of the 401(k) Plan and the Compensation Plan.
The District Court’s Decision
The district court issued a decision in January 2018 denying the motion to compel arbitration, holding that neither the Plan nor the Compensation Plan required arbitration of the plaintiff’s claims. The district court reasoned: (1) the arbitration provision in the 401(k) Plan was inapplicable because it became effective after the plaintiff’s participation in the 401(k) Plan ended; and (2) it was “not clear” that the plaintiff’s claims “arose out of [his] employment” as was required by the Compensation Plan. The district court also found that his claims were “claims for benefits,” which were expressly carved out of the arbitration provision in the Compensation Plan.
The district court also held, in the alternative, that even if the claims in the plaintiff’s class complaint fell within the scope of the arbitration provisions in the two plans, the agreements would be unenforceable. The court explained the claims were brought “on behalf of the Plan,” and not on the plaintiff’s own behalf, and he therefore cannot waive rights that belong to the 401(k) Plan without the 401(k) Plan’s consent. The district court acknowledged that the 401(k) Plan did consent to arbitration “by virtue of its Plan Document’s arbitration provision” but held that consent was invalid because the 401(k) Plan fiduciaries added the arbitration provision to the 401(k) Plan document after they were sued.4 Thus, the court reasoned, plan fiduciaries cannot insulate themselves from fiduciary responsibility by amending a plan document.5
The Ninth Circuit’s Rulings on Appeal
On appeal, the Ninth Circuit overturned its own precedent and rejected all of the district court’s bases for denying the defendants’ motion to compel arbitration.
First, the court acknowledged that its 1984 Amaro decision “mandated ‘minimum standards [for] assuring the equitable character of [ERISA] plans’ that could not be satisfied by arbitral proceedings.” The court in Amara reasoned that arbitrators, “many of whom are not lawyers, lack the competence of courts to interpret and apply statutes as Congress intended.”6 The Ninth Circuit explained that in the 35 years since Amaro, however, the Supreme Court has held arbitrators are competent to interpret and apply federal statutes.
The Ninth Circuit found the Supreme Court’s holding in American Express Co. v. Italian Colors Restaurant—which had dismissed “concerns that the arbitral forum was inadequate . . . so long as a prospective litigant effectively may vindicate its statutory cause of action in an arbitral forum”7—is irreconcilable with Amaro. In light of this, the Ninth Circuit held that Amaro is no longer binding precedent.8
In a separate, unpublished Memorandum, the Ninth Circuit rejected all of the district court’s bases for denying the defendants’ motion to compel arbitration.9 Specifically, the Ninth Circuit stated that the district court erred by:
- finding that the plaintiff was not bound by the arbitration provision in the Plan because the record reflected that he was a participant in the 401(k) Plan for nearly a year while the provision was in effect;
- reasoning that the plaintiff was not bound by the 401(k) Plan’s arbitration provision on the basis that he did not agree to arbitrate his ERISA § 502(a) claims because the relevant question was whether the 401(k) Plan had agreed to arbitrate such claim, which it had with the addition of the arbitration provision;
- holding that the amendment adding the arbitration provision to the 401(k) Plan was an effort to insulate fiduciaries from ERISA liability, stating that provision does not relieve the fiduciaries of responsibility or liability but, instead, selects a forum for litigating fiduciary claims that offered “quicker, more informal, and often cheaper resolutions for everyone involved”;10 and
- relying on prior Ninth Circuit precedent for the position that the arbitration provision was unenforceable because a plan participant cannot agree to arbitrate ERISA § 502(a) claims without the 401(k) Plan’s consent because, as stated above, the 401(k) Plan did consent when the arbitration provision was added.
The court relied on three particular Supreme Court cases in support of its decision enforcing arbitration of the plaintiff’s ERISA claims: (1) American Express Co., which holds that claims alleging a violation of a federal statute are generally arbitrable absent a “contrary congressional command,” which ERISA does not contain; (2) LaRue v. DeWolff, Boberg & Assocs., Inc.,11 which the Court said confirms that ERISA § 502(a)(2) claims are inherently individualized when brought in the context of a defined contribution plan; and (3) the Supreme Court’s 2019 decision in Lamps Plus, Inc. v. Varela,12 which confirms that the parties here should be entered into individual arbitration, as they did not agree to class-wide or collective arbitration. Noting that “arbitration is a matter of contract,” the Ninth Circuit stated that the 401(k) Plan’s waiver of class-wide and collective arbitration must be enforced according to its terms.13
As a result, the Ninth Circuit reversed and remanded the case with instructions for the district court to order arbitration of individual claims limited to seeking relief for the impaired value of the plan assets in the individual’s own account resulting from the alleged fiduciary breaches.
The Significance of the Case
The holding in Dorman is momentous because it explicitly states that there is support in Supreme Court precedent for enforcing arbitration agreements and class and collective action waivers in cases involving breach of fiduciary duty claims where an ERISA plan contains such provisions and waivers. The decision, however, leaves unanswered whether claims of benefits in the Ninth Circuit may be subject to arbitration. Particularly notable is the Ninth Circuit’s finding that the 401(k) Plan “consented” to arbitration by the addition of the arbitration clause to its terms. As mentioned above, ERISA breach of fiduciary claims are not usually arbitrated. There has been an increase in recent years of ERISA class action litigation, particularly involving claims of breach of fiduciary duty, and should Dorman serve as a guide for ERISA-governed plans and a benchmark for other jurisdictions, the landscape of ERISA litigation could change substantially.
In light of Dorman, more sponsors of ERISA-governed plans may make efforts to adopt an arbitration provision and a class and collective action waiver as part of their plans’ terms. However, while the ability to compel arbitration of ERISA claims on an individual basis may be beneficial for some ERISA claims, some plans may prefer that certain claims, such as individual denial of benefits cases, be heard in court. It is advisable that plan sponsors consult with ERISA counsel to consider whether such an amendment would be beneficial to their particular plans or if a carve-out for claims for benefits is an option.
1 9th Circuit Case No. 18-15281, Dkt. No. 52-1.
2 724 F.2d 747 (9th Cir. 1984).
3 See, e.g., Bird v. Shearson Lehman/American Express, 926 F.2d 116 (2d Cir. 1991).
4 According to the Ninth Circuit in Dorman, the defendants sought leave to file a motion for partial reconsideration with the district court, after filing the Notice of Appeal, submitting evidence that the arbitration provision took effect while Dorman was still a Plan participant. The district court denied the motion, however.
5 The district court also relied on the Ninth Circuit’s decision in Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), in which the appellate court held that class action waivers required as a condition of employment violate the National Labor Relations Act, as justification for denying arbitration in the underlying case. The U.S. Supreme Court reversed and remanded Morris in 2018.
6 724 F.2d 747, 750, 752.
7 570 U.S. at 235-36 (2013).
8 The court noted that a three-judge panel may overrule prior circuit authority where “an intervening Supreme Court decision undermines an existing precedent of the Ninth Circuit, and both cases are closely on point,” citing Miller v. Gammie, 335 F.3d 889, 899 (9th Circuit 2003) (en banc).
9 Dorman, 9th Circuit Case No. 18-15281, Dkt. No. 53.
10 Citing Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018).
11 552 U.S. 248 (2008).
12 139 S. Ct. 1407 (2019).
13 Noting that the Federal Arbitration Act (FAA) states that once it is established that a dispute falls within the scope of an arbitration agreement, a court must order arbitration unless the agreement is unenforceable “upon such grounds as exist at law or in equity for the revocation of any contract,” the court stated that Dorman did not assert any generally applicable contract defenses.