ERISA Litigation United States
December 2013 Register for our 2013 webinar series, “Navigating U.S. and International Employment Laws and Related Challenges.” Want more ERISA news? Subscribe to Baker & McKenzie labor and employment publications. Author: James Baker firstname.lastname@example.org
A Sea Change for ERISA Litigation Twenty years from now there may no longer be Employee Retirement Income Security Act (“ERISA”) class actions. While this may sound far-fetched, the law, like everything else, is not immune from disruptive innovations. In our own lifetime, we have seen disruptive innovations from chemical photography to digital photography, from personal computers to smart phones and from snail mail to email. A series of recent U.S. Supreme Court decisions have established another legal sea change—employment class action lawsuits are no longer necessary. Taken together, these cases indicate that ERISA plan sponsors who adopt mandatory arbitration provisions with class action waivers for employee benefit plan disputes may be able to eliminate all future ERISA class actions. Accordingly, every employer should assess whether the protections afforded by arbitration agreements coupled with class and collective action waivers outweigh the potential disadvantages. Why Eliminate Class Action Lawsuits? In class action litigation, similarly situated legal claims are combined under a single lawsuit. The theory justifying the use of class actions is that they can be an efficient mechanism for resolving large numbers of relatively low-dollar value claims. The reality, however, can be quite different. Class actions can be notoriously inefficient, taking years to resolve and consuming a great deal of time and money along the way. Moreover, as Judge Henry Friendly recognized (and many judges agree), class actions can force defendants into "blackmail settlements." Faced with the unpredictability of a jury trial and enormous exposure, defendants are pressured to settle claims (even those that have little chance of success on the merits). In comparison with class action lawsuits, individual arbitration can be quicker, less costly and more effective at protecting the litigants’ rights. The adoption of mandatory arbitration language containing class action waivers also can have an “in terrorem” effect on plaintiffs’ lawyers because of the impact on fees. In the case of class actions, plaintiffs' lawyers can receive a significant share (20% to 40%) of any “common fund” recovery. In contrast, attorney’s fees for individual fiduciary breach claims under ERISA are subject to rigorous judicial scrutiny. The lodestar analysis applied to individual ERISA attorney’s fee applications multiplies the number of hours reasonably expended by a reasonable hourly rate. Hensley v. Eckenhart, 461 U.S. 424, 433 (1983); D’emanuele v. Montgomery Ward & Co., Inc., 904 F.2d 1379, 1383 (9th Cir. 1990) overruled on other grounds by Burlington v. Daque, 505 U.S. 557 (1992).
For further information please contact Chicago Doug Darch +1 312 861 8933 email@example.com Houston Rick Hammett +1 713 427 5016 firstname.lastname@example.org Scott Nelson +1 713 427 5027 email@example.com New York Rob Lewis +1 212 891 3532 firstname.lastname@example.org Palo Alto Jenni Field +1 650 856 5501 email@example.com Cynthia Jackson +1 650 856 5572 firstname.lastname@example.org Supreme Court Decisions Uniformly Enforce Mandatory Arbitration Clauses Over the last four years, the Supreme Court has decided six cases favoring mandatory arbitration clauses. Taken together, these decisions strengthen the case for including mandatory arbitration clauses with class action waivers in all ERISA-regulated plans and employment agreements. So long as the arbitration clauses and class waivers are properly drafted and the elements of contract formation are properly observed, employers can reduce or even eliminate their exposure to the runaway costs of class action litigation. American Express Co. v. Italian Colors Rest., 570 U.S. ___, 2013 U.S. LEXIS 4700 (2013) (“American Express III”) In Italian Colors, the Supreme Court ruled that an express waiver of class action claims in a written arbitration agreement is enforceable under the Federal Arbitration Act (“FAA”), even when the plaintiff can show that the cost of individually arbitrating a federal statutory claim would likely exceed any potential recovery. Oxford Health Plans v. Sutter, 569 U.S. ___, 2013 U.S. LEXIS 4358 (2013) In its second decision in the 2013 term regarding class action waivers, a unanimous Supreme Court reiterated that parties who agree to an arbitration clause that is silent on whether class arbitration of claims is allowed and who later agree to ask the arbitrator to decide whether or not class action claims are permitted, will be stuck with the arbitrator’s decision on that issue. CompuCredit Corp. v. Greenwood, 565 U.S. ____, 2013 U.S. LEXIS 575 (2013) In CompuCredit, the Supreme Court held that an arbitration clause in an agreement subject to the Credit Repair Organizations Act (“CROA”) may be enforced even though the CROA statute requires a disclosure telling consumers of their right to file a lawsuit for a violation of any rights provided by the CROA. AT&T Mobility v. Concepcion, 563 U.S. ___, 2013 U.S. LEXIS 3367 (2011) In Concepcion, the Supreme Court held that § 2 of the Federal Arbitration Act ("FAA") preempted the California rule that classified most collective arbitration waivers in consumer contracts as unconscionable. While employer enthusiasm over the decision was temporarily dampened by the National Labor Relations Board's decision in In re D.R. Horton Inc. holding that the employer's practice of requiring employees to sign an arbitration agreement that included a class action waiver as a condition of their continued employment violated the National Labor Relations Act, federal district courts largely have rejected the NLRB's decision and continued to uphold class action waivers.
Stott-Nielsen S.A. v. Animal Feeds International, 559 U.S. 662 (2010) In Stolt-Nielsen, the Supreme Court ruled that, absent a mutual agreement to participate in class-wide arbitration, a party could not be compelled to arbitrate class-wide claims. The parties in Stolt-Nielsen had stipulated that while their disputes were subject to binding arbitration, they had never reached an agreement on class arbitration. Relying on FAA § 10(a)(4), the Supreme Court vacated the arbitrators' decision approving class proceedings because, in the absence of such an agreement, the arbitrators had “simply . . . imposed [their] own view of sound policy.” Id. at 672. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. ___, 2010 U.S. LEXIS 4981 (2010) Who decides whether an arbitration agreement is unconscionable when the agreement expressly delegates that decision to the arbitrator? In Rent-A-Center, the Supreme Court ruled the arbitrator does. A district court can only intervene if a party challenges the validity of the agreement to delegate that decision to the arbitrator. Where an arbitration clause has a proper delegation provision, giving the arbitrator the power to determine all questions as to arbitrability, then employees or ERISA plan participants will be hard pressed to avoid arbitration. Accordingly, employers and plan sponsors should consider how to structure class action waivers and arbitration agreements to achieve the maximum benefits. Can Statutory Claims Be Subject to Arbitration? Again, the short answer is “yes.” As noted above, the Supreme Court has ruled that federal statutory claims may be arbitrated unless there is an express command to the contrary in the statute. The ERISA statute, 29 U.S.C. § 1132(e)(1), does not expressly preclude the arbitration of statutory (also known as fiduciary breach) claims. Nor does the Fair Labor Standards Act. It indicates that while both state and federal courts have concurrent jurisdiction over claims for benefits, federal courts have “exclusive jurisdiction” over statutory claims. Nowhere, however, does ERISA state that statutory violations cannot be arbitrated. Indeed, other parts of ERISA expressly embrace arbitration (such as for withdrawal liability disputes). See 29 U.S.C. § 1401. In the wake of the U.S. Supreme Court’s recent decisions, every Circuit Court of Appeals to consider whether FLSA (wage and hour) collective actions can be waived in an arbitration agreement has concluded that the FLSA does not preclude the waiver of collective action claims. Sutherland v. Ernst & Young LLP, 726 F.3d 290 (2d Cir. (N.Y.) 2013); Owen v. Bristol Care, Inc., 702 F.3d 1050, 1055 (8th Cir. (Mo.) 2013) and Quilloin v. Tenet Health System Phila., Inc., 673 F.3d 221 (3d Cir. (Pa.) 2012). The U.S. Supreme Court has repeatedly ruled that “federal statutory claims may be the subject of arbitration agreements that are enforceable pursuant to the FAA because the agreement only determines the choice of forum.” EEOC v. Waffle House, Inc., 534 U.S. 279, 295, n. 10 (2002). Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,
628 (1985)). Courts routinely enforce arbitration of ERISA disputes pursuant to arbitration provisions. See Chappel v. Lab. Corp. of Am., 232 F.3d 719, 725 (9th Cir. (Cal.) 2000); Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1122 (3d Cir. (Pa.) 1993) (“statutory ERISA claims are subject to compulsory arbitration under the FAA and in accordance with the terms of a valid arbitration agreement”); Arnulfo P. Sulit, Inc. v. Dean Witter Reynolds, Inc., 847 F.2d 475, 478 (8th Cir. (Mo.) 1988) (“our examination reveals no congressional intent to single out ERISA claims for exemption from the general federal policy favoring rigorous enforcement of agreements to arbitrate . . .”). Courts Enforce ERISA Class Action Waivers Federal courts have started to enforce ERISA class action waivers. In Tenet Healthsystem Phila., Inc. v. Rooney, 2012 U.S. Dist. LEXIS 116280 (E.D. Pa. 2012), the district court granted Tenet’s motion to compel an April 12, 2012 Arbitration Order finding that Mr. Rooney’s waiver of class action claims was enforceable. Similarly, in Luchini v. Carmax, Inc., 2012 U.S. Dist. LEXIS 102198 (E.D. Cal. 2012)), the court enforced Carmax’s motion to compel arbitration of plaintiff’s class action claims on an individual basis. The court explained, [A]rbitration does not negate Mr. Luchini’s substantive rights, it merely changes the forum. . . . In addition, Mr. Luchini’s claims that arbitration is more expensive than court litigation are unavailing. Litigation is expensive be it in court or arbitration. Arbitration is likely to cover as much or more of the costs than Mr. Luchini would face in a court action. Widespread cost savings associated with class and related litigation does not diminish the FAA’s pre-emptive effects. . . . Id. at 2012 U.S. Dist. LEXIS 102198, at *40. To have enforceable arbitration provisions under ERISA, Department of Labor regulations require certain “laboratory conditions.” See 29 C.F.R. § 2560.503-1. For example, benefit claimants may not be subjected to costs arising from arbitration procedures, and the mandatory arbitration procedure cannot preclude the claimant from seeking available remedies under the statute or the claimant’s subsequent right to challenge the arbitrator’s decision in court. One additional reason to consider adopting mandatory arbitration clauses in ERISA plans is because fiduciary breach claim denials brought under the claims review process may be subject to the abuse of discretion standard of review. Tibble v. Edison Int’l, 711 F.3d 1061, 1077 (9th Cir. (Cal.) 2013) (collecting cases). Arbitration can have numerous advantages over federal court litigation - it can be less costly, disputes are resolved quicker, and the Rules of Evidence, procedure and deadlines are more flexible. That said, arbitrating high stakes ERISA disputes comes with the risk that the arbitrator can make a bad decision. The problem is that there is little to no review of an arbitrator’s decision. The American Arbitration Association (“AAA”) has
tried to address this problem by offering the option of a new optional procedure for appellate review of arbitration awards. The appellate panels offered by AAA consist of former federal and state judges with strong appellate backgrounds. This option of appellate arbitration procedure can be adopted in an ERISA plan. Under the AAA’s Appellate Rules, the parties may agree that an appeal may be taken on the grounds that the underlying award is based on errors of law that are material and prejudicial and/or on determinations of fact that are clearly erroneous. Next Steps In light of the judicial trend strongly favoring mandatory arbitration, private sector employers should consider the benefits of adopting mandatory arbitration provisions in both their ERISA documents and employment agreements .
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ERISA Litigation United States
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