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Arbitration and Class Action Waivers Upheld in ERISA Plans, but an Industry Shift Toward Arbitration Remains to be Seen

Posted on: September 26th, 2019

By: Justin Boron

The judicial trend in favor of arbitration and class action waivers continues—this time in employee benefit plans.

Last month, a Ninth Circuit Court of Appeals panel validated an arbitration and class action waiver agreement contained in an employee retirement plan, and in doing so, it overturned a 1984 precedent holding that fiduciary claims under the Employee Retirement Income Security Act (“ERISA”) could not be arbitrated.

In a pair of opinions issued in Dorman v. Charles Schwab Corp.,[1] the panel found that the reasoning in Amaro v. Continental Can Company,[2] was irreconcilable with recent opinions from the U.S. Supreme Court, including American Express Co. v. Italian Colors Rest., which had endorsed an arbitrator’s competence to interpret and apply federal statutes.[3]

The Dorman decision arose from a plan participant’s class action alleging a breach of fiduciary duty that resulted from the inclusion of Schwab affiliated investment funds in the 401k plan.  As yet another affirmation of arbitration and class action waiver agreements, it is sure to attract the attention of plan sponsors and plan fiduciaries.

But it might not necessarily be the game changer that previous class action waiver decisions have proven to be in the consumer and employment context, where companies have rushed to fold class action waivers into sales and employment agreements.

For one, several other circuit courts of appeal had already upheld arbitration agreements in plan documents.[4]  So at least in these circuits, plan sponsors have already been free to include arbitration agreements in employee benefit and retirement plans like the 401k plan at issue in Dorman.  Plaintiff also requested en banc rehearing earlier this month, so Amaro could still be revived.

Other reasons are more practical.  Including class action waivers in arbitration agreements might stave off a class action asserted in federal court.  But in contrast to their effect on wage-and-hour and consumer-protection class actions, class action waivers might not necessarily limit exposure on fiduciary claims under ERISA, which are themselves a kind of representative action brought on behalf of the plan for monetary relief.[5]  The Dorman and other appellate decisions have not expressly addressed whether a plan’s arbitration agreement could confine the action to individual monetary relief as opposed to plan-wide relief.  As a result, any judgment might benefit the plan and plan participants as a whole regardless of whether the action is styled as a class action.

Additionally, the cost savings attributed to arbitration of employment and consumer claims might not be present in ERISA claims, which are often decided on the papers in federal court. In contrast, arbitration likely requires the same amount of attorney time as in federal court, with the added costs of the arbitrator(s) and an arbitration hearing.  Combine the added costs with a limited standard of review, and it might not net a more favorable result than proceeding in federal court in a class action.

If you have any questions or would like more information, please contact Justin Boron at [email protected].

[1] Dorman v. Charles Schwab Corp., No. 18-cv-15281, 2019 U.S. App. LEXIS 24735 (9th Cir. Aug. 20, 2019), No. 18-cv-15281, 2019 U.S. App. LEXIS 24791 (9th Cir. Aug. 20, 2019).
[2] 724 F.2d 747 (9th Cir. 1984).
[3] 570 U.S. 228, 233 (2013).
[4] See, e.g., Williams v. Imhoff, 203 F.3d 758 (10th Cir. 2000); Kramer v. Smith Barney, 80 F.3d 1080 (5th Cir. 1996); Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, 7 F.3d 1110 (3d Cir. 1993); Bird v. Shearson Lehman/American Express, 926 F.2d 116 (2d Cir. 1991); Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, Inc., 847 F.2d 475 (8th Cir. 1988).
[5] 29 U.S.C. § 1132(a)(2); 29 U.S.C. § 1109.
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