We have seen in recent years a proliferation of lawsuits against 401(k) and 403(b) plans claiming excessive fees, poor investment performance, and other breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”). The monetary stakes for employers are high. Earlier in 2019, the decade-long ERISA fiduciary breach lawsuit in Tussey v. ABB finally concluded with a $55 million settlement, including approximately $20 million in legal fees to the plaintiffs’ attorneys.
But the dispute resolution landscape for ERISA fiduciary breach claims may be shifting. The Ninth Circuit’s decision in Dorman v. Charles Schwab Corp., 934 F.3d 1107 (9th Cir. 2019), upheld a provision in Charles Schwab’s 401(k) plan mandating individual arbitration, and waiving class actions, for certain types of fiduciary breach claims. The decision effectively shut down, for now, a class action lawsuit against Charles Schwab’s 401(k) plan claiming ERISA fiduciary breaches.
Should employers add a similar mandatory individual arbitration clause to their own plans? The answer requires a careful balancing of potential pros and cons of mandatory individual arbitration clauses, as discussed below.
Mandatory Arbitration Provisions in ERISA Plans
In Dorman, a former participant in the Charles Schwab 401(k) plan filed a class action lawsuit alleging that the defendants violated ERISA and breached their fiduciary duties by including poor performing Charles Schwab-affiliated investment funds in the plan. The plan included a mandatory arbitration provision, which also waived participants’ rights to bring any class or collective action. Therefore, the defendants moved to compel arbitration.
The district court in Dorman held that mandatory individual arbitration clauses in an ERISA plan were not enforceable under Ninth Circuit precedent, especially Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984). But a three-judge panel of the Ninth Circuit found that subsequent Supreme Court decisions called the Amaro decision into question. For example, the Supreme Court held that that federal statutory claims are generally arbitrable and arbitrators can competently interpret and apply federal statues in American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013). Similarly, in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), the Supreme Court held that individual mandatory arbitration provisions in employment agreements are enforceable based on the Federal Arbitration Act despite potentially conflicting provisions in the National Labor Relations Act. Based especially on the American Express decision, the Ninth Circuit panel overturned Amaro and found that the mandatory arbitration and class action waiver provisions in the plan could be enforced. The panel reversed the district court’s decision and remanded the case back to the district court for further proceedings.
The Ninth Circuit noted that claims related to breach of ERISA fiduciary duties belong to the plan, not individual participants. The Dorman decision seems to turn on the fact that the plan itself – through the addition of a mandatory arbitration and waiver of class action clause – waived any right to class action claims. The court found that participants were bound by the plan’s action reflected in the plan’s provisions. Dorman therefore likely does not help in the event the company is attempting to rely on an arbitration provision in a contract with an individual employee, such as an employment agreement. For example, in Munro v. Univ. of S. Cal., 896 F.3d 1088, 1092 (9th Cir. 2018), the Ninth Circuit held that an arbitration provision in an individual’s employment agreement did not bind the plaintiffs to arbitration in a breach of fiduciary duty case because such a claim belonged to the plan and not to any individual. Given the holdings in Dorman and Munro, a company wanting to compel mandatory individual arbitration should ensure that the plan document itself contains the arbitration provision.
Dorman also does not apply to individual claims for plan benefits. Disputes regarding those claims should continue to be addressed under the plan’s benefit claim procedures.
Is a Mandatory Arbitration Provision a Good Idea?
Employers should not necessarily race to adopt mandatory individual arbitration provisions in their ERISA plans just because the Ninth Circuit has authorized them. Rather, employers should carefully weigh the potential pros and cons of such provisions, including the following:
1. Deterrent effect on frivolous ERISA fiduciary breach class action claims
2. Potential cost and time savings
3. Potential for less negative publicity
1. Potential for mass filings of arbitration claims
2. Evolving legal authority
3. Decisions are not precedential
4. “Split the baby” decisions
5. Arbitrators need not follow law or rules of evidence
6. Very limited, if any, appellate review
The key potential benefit to a mandatory arbitration clause is the first “pro” listed above – i.e., the potential deterrent effect on frivolous ERISA fiduciary breach class action claims. Class action lawsuits are the economic engine driving breach of fiduciary duty claims under ERISA. A plaintiffs’ firm need only find a willing named plaintiff and, if it can make claims that can survive a motion to dismiss, it may negotiate a favorable settlement and legal fees. Employers and fiduciaries must consider the costs of fighting a class action lawsuit – both direct costs, like legal defense fees, and indirect costs, like management time and distraction. A mandatory individual arbitration clause would likely put a damper on the number of ERISA fiduciary claims that would be economically viable and would almost certainly minimize frivolous claims. And for those non-frivolous claims properly made, a mandatory individual arbitration provision likely eliminates the heightened risks and expenses of class actions.
The key potential risk to a mandatory arbitration clause is the first “con” listed above – i.e., the potential for mass filings of individual arbitration claims. Arbitration is less intimidating and there are lower barriers to entry than federal court. As a result, a plaintiffs’ firm may pursue a strategy of encouraging mass filings of individual arbitration claims by participants. Uber recently experienced this strategy first hand in connection with wage and hour claims, which Uber had required to be resolved through mandatory individual arbitration. According to Uber’s S-1 prospectus filed in April 2019, more than 60,000 such individual claims were made, each of which includes a potential filing fee of $1,500 that must be paid by Uber, in addition to costs of defense and potential awards by the arbitrator. Whether such a mass arbitration filing strategy would be viable in the context of an ERISA fiduciary breach claim remains to be seen. But an employer confronted by a mass filing of individual arbitration claims could incur greater costs and management distraction than from class action litigation. And a public company employer could face negative publicity to the extent it is required to disclose the mass arbitration claims in its SEC filings.
It is also not clear yet that the holding in Dorman will become the law of the land. Dorman could still be appealed before the Ninth Circuit en banc, and other circuits or the Supreme Court could reach a different result. An employer that adopts a mandatory individual arbitration clause now may have to fight for its enforceability.
An employer’s decision whether to add a mandatory arbitration provision depends on how the employer balances the pros and cons listed above. In particular, the employer will need to decide whether the potential deterrent effect on fiduciary breach claims outweighs the potential for mass arbitration filings. The judgment as to this balance will vary from company to company. The judgment may change over time as other courts consider Dorman, plan sponsors begin to experiment with these provisions, and plaintiffs’ firms consider whether to pursue mass arbitration strategies like at Uber. Members of the Troutman Sanders Employee Benefits and Executive Compensation team will continue to monitor these developments and are available to assist you in reviewing the dispute resolution provisions in your ERISA plans.