Pension & Benefits News Plan provision requiring individual arbitration of ERISA claims enforceable
Monday, September 16, 2019

Plan provision requiring individual arbitration of ERISA claims enforceable

By Pension and Benefits Editorial Staff

A plan participant was required to subject claims for fiduciary breach to arbitration pursuant to a plan provision that required the individual arbitration of ERISA claims, according to the United States Court of Appeals in San Francisco (CA-9). In expressly ruling that the ERISA claims may be subject to mandatory arbitration, the Ninth Circuit, acknowledging an intervening Supreme Court decision, overturned the 35-year old precedent of Amaro v. Continental Can Company.

Plan requires arbitration of all claims. Charles Schwab Company maintains a 401(k) plan that authorizes plan participants to allocate their earnings among a number of investment funds. The 17 different investment options include funds affiliated with Schwab as well as unaffiliated funds.

In December 2014, the plan was amended to add an arbitration provision, effective January 1, 2015. Pursuant to the provision, any claim, dispute, or breach arising out of or in any way related to the plan must be settled by binding arbitration. In addition, the arbitration provision includes a waiver of class or collective actions that effectively requires any arbitration proceeding to be conducted on an individual basis only.

A Compensation Plan maintained by Schwab for financial consultants features a similar arbitration provision, requiring the arbitration of any claims arising out of or relating to employment, including any claims arising out of federal, state, or local law. The plan also contains the class action waiver. However, the plan’s arbitration provision includes a carve-out for benefit claims that allows claims for benefits to be resolved pursuant to procedures prescribed by the plan.

An individual who was employed by Schwab from February 17, 2009 until October 8, 2015 and participated in the plan until withdrawing his account balance on December 18, 2015, filed a class action suit against Schwab and various company officers (collectively, Schwab), alleging that they breached their fiduciary duties under ERISA by including underperforming Schwab affiliated funds in the 401(k) plan solely to generate fees for Schwab and its affiliates. In response Schwab moved to compel arbitration of the participant’s claims, pursuant to the arbitration requirements in the 401(k) plan and the Compensation Plan.

A federal trial court, in June 2018, denied Schwab’s motion, ruling that neither of the two arbitration provisions applied to the participant’s claims. Alternatively, the court held that, even if the participant’s claims did not fall within the scope of the arbitration agreement, the agreements were not enforceable.

Trial court fact finding errors. In a separate, unpublished memorandum filed concurrently with its main opinion, the appeals court highlighted errors in the trial court’s fact finding and legal analysis. Most significantly, the appeals court found that: (1) the participant was bound by the arbitration provision in the 401(k) plan because he participated in the plan for nearly a year while the provision was in effect; (2) the ERISA claims belonged to the plan (and not the participant) and the plan expressly agreed in the plan document that all ERISA claims should be arbitrated; (3) the amendment of the plan to include the arbitration requirement was not an effort to insulate the fiduciaries from liability, but was intended to expedite dispute resolution; and (4) the provision in the arbitration agreement waiving class-wide and collective arbitration and requiring arbitration to be conducted on an individual basis was enforceable.

ERISA claims may be arbitrated. In reversing the trial court, the appeals court first acknowledged that in Amaro v. Continental Can Co., (CA-9 (1984), 724 F. 2d 747) the Ninth Circuit ruled that ERISA’s minimum standards for assuring the equitable character of an ERISA plan could not be satisfied in an arbitration proceeding. The reasoning in Amaro effectively precluded, as a matter of law, the arbitration of claims brought under ERISA Sec. 409(a) for fiduciary breach.

The appeals court noted, however, that subsequent to Amaro, the United States Supreme Court ruled that arbitrators are competent to implement and apply federal statutes (American Express Co. v. Italian Colors Restaurant (U.S. Sup. Ct (2013), 570 U.S. 228)). According to the Supreme Court, there is nothing unfair about arbitration, as long as the arbitral forum allows individuals to vindicate their statutory rights.

The appeals court reasoned that the Supreme Court holding in American Express effectively overruled Amaro. The holding in American Express that federal statutory claims are generally arbitrable and arbitrators are competent to interpret and apply federal statutes, the court stressed, constituted intervening Supreme Court authority that is irreconcilable with Amaro. Accordingly, the trial court erred in refusing to compel the participant to arbitrate the ERISA claims. On remand, the trial court was instructed to order the arbitration of the participant’s claims limited to seeking relief for the impaired value of the plan assets in the participant’s individual account resulting from the alleged breach.

SOURCE: Dorman v. The Charles Schwab Corp. (CA-9).

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