On August 20, 2019, a Ninth Circuit panel in Dorman v. Schwab, No. 18-15281, reversed the district court’s denial of Schwab’s motion
to compel arbitration and held that Schwab could force the plaintiff to individually arbitrate his fiduciary duty claims challenging the administration of Schwab’s 401(k) plan. In 2017, plaintiff Michael Dorman filed a putative class action in federal court alleging that Schwab had breached its fiduciary duties under ERISA by adding allegedly poorly performing in-house investment funds to its 401(k) plan investment lineup. In 2015 – two years before the lawsuit was filed – Schwab had amended its 401(k) plan document to include an arbitration clause stating that “[a]ny claim, dispute, or breach arising out of or in any way related to the Plan” had to be resolved by individual, rather than class or collective, arbitration. Based on this 2015 plan amendment, Schwab filed a motion in the district court to compel individual arbitration. The district court denied the motion because it concluded that the plan’s arbitration provision was unenforceable with respect to the plaintiff’s fiduciary duty claims.
In a surprise ruling, the Ninth Circuit reversed and held that the plan’s arbitration provision was enforceable and that Schwab could compel the individual arbitration of the plaintiff’s fiduciary duty claims. In so holding, the Court overturned its decades-old precedent in Amaro v. Continental Can Co., 724 F.3d 747 (9th Cir. 1984), that ERISA claims are not arbitrable in light of recent Supreme Court decisions affirming the arbitrability of federal statutory claims.1Turing to the Schwab plan’s arbitration provision, the Court held that, even though the plaintiff’s fiduciary duty claims belonged to the plan under ERISA § 502(a)(2), the claims were arbitrable because the plan had “expressly agreed in the Plan document that all ERISA claims should be arbitrated.”
In addition to being groundbreaking, the Schwab decision is noteworthy because, just last year, the Ninth Circuit refused to compel arbitration in Munro v. Univ. of Southern Calif., 896 F.3d 1092 (9th Cir. 2018). In Munro, the plaintiffs filed a similar suit against USC alleging that USC breached its fiduciary duties with respect to the administration of its retirement plan. Like Schwab, USC moved to compel arbitration but did so on the grounds that the plaintiffs had signed individual employment agreements containing arbitration agreements; the USC plan did not include an arbitration provision. This distinction proved dispositive because Munro and Schwab both reiterate the principle that fiduciary duty claims under ERISA § 502(a)(2) belong to the plan (as opposed to an individual participant) and cannot be signed away by a participant in an employment agreement or a release agreement.
Analysis: Although decisions affirming the enforcement of arbitration agreements are routinely lauded by employers, the Schwab decision does not, standing alone, provide a panacea for plan fiduciaries seeking to reduce their liability with respect to fiduciary duty claims. As an initial matter, it remains to be seen whether the full Ninth Circuit will review the decision en banc, and whether courts in other jurisdictions will enforce arbitration provisions in plan documents with respect to fiduciary duty claims. In addition, plan sponsors should keep in mind that the arbitration of ERISA claims may have its own drawbacks. Among other considerations, arbitrators have a tendency to split the difference rather than ruling in favor of one party. In addition, unlike courts, arbitrators are neither bound by precedent nor are their decisions precedential. Consequently, a plan fiduciary facing individual arbitration demands from multiple participants relating to the same fiduciary conduct may find itself on the receiving end of inconsistent and contradictory rulings. Such rulings could cause problems with respect to the future administration of the plan, particularly given that arbitration decisions generally cannot be appealed.
For plan sponsors considering amending their plans to include arbitration provisions, they should be prepared for participants to challenge the enforceability of such provisions. Plan sponsors should also evaluate the advantages and disadvantages of including an arbitration provision with respect to each of their plans, including whether to include a class action waiver. While most plan sponsors would prefer to avoid the uncertainty and potential damages associated with an arbitration class action, a class waiver can potentially backfire if a large number of participants are motivated enough to file individual arbitration demands.2This is because the cost of litigating individual arbitration demands en masse could exceed the cost of litigating a class action in federal court without the potential benefit of a binding judgment or class-wide release in case of a settlement.
Notwithstanding Schwab’s big win in the Ninth Circuit, we are still in the early rounds of the fight over the enforceability of arbitration provisions with respect to ERISA fiduciary duty claims. It remains to be seen whether other courts will enforce similar plan arbitration provisions and if there will be industry-wide movement to include such provisions in plan documents. Ultimately, the issue may wind its way to the Supreme Court. Until then, plan sponsors should carefully vet with their ERISA counsel the advantages and disadvantages of including a mandatory arbitration provision for fiduciary claims in their employee benefit plans.