The US Court of Appeals for the Ninth Circuit’s recent reversal of the district court’s decision in Dorman v. Charles Schwab & Co. has finally opened the door to arbitration of ERISA fiduciary breach claims in that circuit. Last year, district courts in California handed down two decisions rejecting motions to compel the arbitration of claims alleging violations of the fiduciary standards of the Employee Retirement Income Security Act of 1974 (ERISA). Munro v. University of Southern California, 2017 U.S. Dist. LEXIS 166135 (C.D. Cal. 2017), affirmed, 896 F.3d 1088 (9th Cir. 2018), cert. denied, 139 S. Ct. 1239 (Feb. 19, 2019); Dorman v. Charles Schwab & Co., 2018 U.S. Dist. LEXIS 9107 (N.D. Cal., 2018), reversed and remanded, 2019 U.S. App. LEXIS 24735 (9th Cir. Aug. 20, 2019) and 2019 U.S. App. LEXIS 24791 (9th Cir. Aug. 20, 2019) (memorandum opinion).
In some quarters, these district court decisions, handed down a few months apart, signaled an ominous resuscitation of judicial resistance to the arbitration of ERISA claims, particularly those arising from alleged violations of the statute rather than of the terms of the plan. In the early days of ERISA, many courts held that mandatory arbitration, whether imposed by plan provisions or by participants’ employment agreements, was incompatible with ERISA's civil enforcement provisions. In the words of the Second Circuit, "[a]ccess to a federal judicial forum" was "essential to assuring the minimum standards guaranteed pension participants by ERISA." Bird v. Shearson Lehman/American Express, 871 F.2d 292, 297 (2d Cir.), cert. granted, vacated and remanded, 493 U.S. 884 (1989). See also Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 940 (3d Cir. 1985); Amaro v. Continental Can Co., 724 F.2d 747, 750-53 (9th Cir. 1984); McLendon v. Continental Group, Inc., 602 F. Supp. 1492, 1503-4 (D. N.J. 1985); Lewis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 431 F. Supp. 271, 275-77 (E.D. Pa. 1977).
That line of cases reflected the US Supreme Court precedents that existed when ERISA was enacted, most notably Wilko v. Swan, 346 U.S. 427 (1953), which viewed arbitration as an inferior and disadvantageous forum for the vindication of plaintiffs' statutory rights. In time, though, the Court changed its perspective and began to give full effect to the Federal Arbitration Act of 1925, which provides that written agreements to arbitrate disputes "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. Wilko was overruled by Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). In the wake of that decision, the US Court of Appeals for the Second Circuit’s anti-arbitration case, which happened to reach the Court in the same term, was vacated and remanded. On remand, the circuit court held that requiring plaintiffs to arbitrate rather than litigate does not contravene ERISA. Bird v. Shearson Lehman/American Express, 926 F.2d 116 (2d Cir.), cert. denied, 501 U.S. 1251 (1991). That has since become the consensus of all circuits except the Ninth, which held to the position that where "there is only a statute to interpret," "[t]hat is a task for the judiciary, not an arbitrator." Amaro v. Continental Can Co., supra, at 751. See also Graphic Communications Union, District Council No. 2 v. GCIU-Employer Retirement Benefit Plan, 917 F.2d 1184, 1188 (9th Cir. 1990) ("The enforceability of an arbitration provision in this circuit turns on whether it is the statute or the plan that gives rise to the underlying claim.") Even there, judges expressed doubt that Amaro remained good law. See Munro v. University of Southern California, supra, 896 F.3d at 1094, fn. 3; Comer v. Micor, Inc., 436 F.3d 1098, 1100-1 (9th Cir. 2006).
The district court decisions in Munro and Dorman were apparent throwbacks to the Wilko era. They involved arbitration clauses with similar wording, and the claims that the defendants sought to have arbitrated included similar assertions that plan fiduciaries had acted imprudently in the selection of investment options available to participants. The district court decisions also shared the view that arbitration of ERISA claims is a device by which fiduciaries seek to evade liability for their misconduct. As the opinion in Munro (quoted, too, by Dorman) expressed it:
If the Court were to hold participants’ arbitration agreements controlled their §502(a)(2) claims, fiduciaries could mitigate their ERISA obligations to their plans and erect barriers to ERISA enforcement on behalf of plans by requiring employees to sign arbitration agreements – including provisions requiring confidentiality, expedited arbitration procedures, limited discovery, required splitting of arbitrators' fees, and mandatory payment of the prevailing party’s attorneys' fees – as a condition of employment. Given that §502(a)(2) actions are almost exclusively brought by participants, this would (1) guarantee fiduciaries would essentially never be held to account for their potential wrongdoings in court and (2) give fiduciaries many procedural advantages at the outset of any §502(a)(2) action that they would not be entitled to in a court proceeding. Allowing fiduciaries to limit their ERISA obligations in this manner would directly conflict with the Supreme Court’s holding that "Congress enacted ERISA to 'protect . . . the interests of participants in employee benefit plans and their beneficiaries' [and] 'provid[e] for appropriate remedies, sanctions, and ready access to the Federal courts.'" Aetna Health Inc. v. Davila, 542 U.S. 200, 208, 124 S. Ct. 2488, 159 L. Ed. 2d 312 (2004). Indeed allowing such arbitration agreements to control participants' §502(a)(2) claims would, in a sense, be allowing the fox to guard the henhouse.
2017 U.S. Dist. LEXIS 166135 at *22-*23.
There was nonetheless one difference between the plaintiffs' situations that turned out to be crucial: In Munro, which the circuit court affirmed, the plan was silent about arbitration. Agreements to arbitrate disputes arising out of the employment relationship were set forth in the participants' employment contracts. In Dorman, which the circuit court recently reversed, the plaintiff's employment agreement, like that in Munro, included an arbitration clause, but the plan itself also mandated arbitration of "[a]ny claim, dispute or breach arising out of or in any way related to the Plan," as well as barring class arbitration.
The nub of Munro's rationale (expounded by the circuit court in an opinion that avoided anti-arbitration rhetoric) was that the plaintiff's action was brought in a quasi-derivative capacity for the benefit of the plan and that the plan had not agreed to arbitrate. In Dorman, by contrast, the arbitration clause was included in the terms of the plan. The defendants moved to compel arbitration, relying on the Federal Arbitration Act.
In denying the motion, the district court reasoned as follows: First, it held, for the same reasons as Munro, that the arbitration clause in the plaintiff's employment contract did not apply to a claim brought on behalf of the plan. Second, the plan's arbitration clause did not apply to the plaintiff, because it was adopted after he terminated employment and received a distribution of his account balance. Third, if the employment contract’s arbitration clause did bind the plaintiff, it would be ineffective, because "the right to file a claim in court or the right to file a class action" belonged to the plan, and an individual plaintiff "cannot waive rights that belong to the Plan" (citing Bowles v. Reade, 198 F.3d 752 (9th Cir. 1999). Finally, the arbitration clause in the plan, even if binding on the plaintiff, was unenforceable:
Additionally, the Plan Document was executed unilaterally by the plan sponsor, Charles Schwab. . . . A plan document drafted by fiduciaries – the very people whose actions have been called into question by the lawsuit – should not prevent plan participants and beneficiaries from vindicating their rights in court. See Johnson v. Couturier, 572 F.3d 1067, 1080 (9th Cir. 2009) (citing ERISA §410(a) and holding that "if an ERISA fiduciary writes words in an instrument exonerating itself of fiduciary responsibility, the words, even if agreed upon, are generally without effect").
2018 U.S. Dist. LEXIS 9107 at *14.
The court also held that, even under an enforceable arbitration clause, the plaintiff could not be barred from arbitrating on a class basis. On that issue it followed Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016), which has since been reversed by Epic Systems Corporation v. Lewis, 138 S. Ct. 1612 (2018). Interestingly, the court never alluded to its own circuit’s precedents rejecting mandatory arbitration of ERISA statutory claims.
As already noted, Dorman was reversed on appeal and remanded with instructions to order arbitration. The circuit court’s decision was, quite unusually, split into two documents, one a precedential opinion overruling Amaro, the other a memorandum opinion rejecting the district court’s rationales for declining to order arbitration.
In the first opinion, the court concluded that Amaro's reasoning was "clearly irreconcilable" with subsequent Supreme Court jurisprudence. The court cited a recent decision, American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), as the nemesis of Amaro.
Given that the district court didn't rely on Amaro and that the precedent’s viability had long been dubious, overruling it may be viewed as judicial tidying up. The accompanying memorandum opinion succinctly – the slip opinion is only four pages – disposed of the live issues:
- The Ninth Circuit rejected the district court’s conclusion that the plaintiff ceased to be a participant before the plan's arbitration clause was added and therefore could not be bound by it. As the circuit court explained, "the record reflects that Dorman participated in the Plan for nearly a year while the Provision [the arbitration clause] was in effect." Citing Munro, the court also observed that breach of fiduciary duty claims "belong to a plan – not an individual." Since the plan had "expressly agreed in the Plan document that all ERISA claims should be arbitrated," when and whether the plaintiff had agreed to it was of no consequence.
- Similarly, it did not matter whether the plaintiff had entered into his own agreement to arbitrate. The plan clearly had.
- The district court was wrong to hold that the plan’s arbitration clause illegally relieved plan fiduciaries from liability:
The district court’s reliance on Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009), is misplaced because, in this case, the amendment was not an effort to insulate fiduciaries from ERISA liability. Instead of obstructing liability, a forum was selected for litigating fiduciary breach claims that offered "quicker, more informal, and often cheaper resolutions for everyone involved." Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1621 (2018).
The appellate court also devoted a few words to class action arbitration. The district court's unstated premise was that class actions are a plaintiff's natural right and that precluding them requires extraordinary measures. The correct view, said the court, is the opposite:
No party can be compelled under the FAA to arbitrate on a class-wide or collective basis unless it agrees to do so by contract. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010). The Supreme Court's recent decision in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), confirms that the parties here should be ordered into individual arbitration, as they did not agree to class-wide or collective arbitration. Because "arbitration is a matter of contract," the Provision's waiver of class-wide and collective arbitration must be enforced according to its terms, and the arbitration must be conducted on an individualized basis.
Hence, the plaintiff would have to submit to arbitration of his claim and would be "limited to seeking relief for the impaired value of the plan assets in the individual's own account resulting from the alleged fiduciary breaches."
The outcome in Dorman is not a great surprise. As the Circuit Court's memorandum opinion remarked, the lower court’s decision "was expressing precisely the type of 'judicial hostility' towards arbitration that the [Federal Arbitration Act] was designed to eliminate." Still, unsurprising cases can embody useful lessons. From Munro and Dorman, taken together, one can glean that the Federal Arbitration Act's support for arbitration agreements is alive and well, even in formerly hostile judicial territory. While the defendants failed to compel arbitration in Munro, their defeat was technical rather than substantive. The arbitration agreement on which they relied was with the wrong party. The Ninth Circuit's opinion notably eschewed the anti-arbitration effusions of the court below and instead concentrated on the question of what party's consent was needed to create an enforceable arbitration agreement. The obvious lesson is that arbitration clauses are most effective when included in the terms of the plan rather than left to individual participants' employment agreements.