Circuit Court Allows Arbitration for ERISA Breach of Fiduciary Duty Claims

September 4, 2019

On August 20, 2019, the U.S. Court of Appeals for the Ninth Circuit, in Dorman v. Charles Schwab Corp., held that claims relating to a breach of ERISA’s fiduciary duties may be arbitrated. As background, previously, the Ninth Circuit (in Amaro v. Continental Can Co.) held that ERISA lawsuits cannot be arbitrated. The Ninth Circuit found that as a result of post-Amaro U.S. Supreme Court decisions, Amaro is no longer applicable law; so, the Dorman decision overturns Amaro.

In Dorman, the plaintiff (Dorman) – a former Charles Schwab employee – had, as an employee, participated in the company’s 401(k) plan. In 2014, an amendment was added to the 401(k) plan that stated any claim, dispute, or breach arising out of or connected to the 401(k) plan “shall be settled by binding arbitration.” The amendment also provided a waiver of class or collective action — meaning that employees waive their right to be part of any class action. In 2014, Dorman was promoted to a consultant role, and he enrolled in a consultant compensation plan. That compensation plan also included an arbitration clause, and also stated that benefit claims would be resolved pursuant to the terms of the 401(k) plan. In 2015, Dorman terminated employment with Charles Schwab, and two months later ceased participation in both the 401(k) and the compensation plan, and received a full distribution of his benefits.

Then, in 2017, Dorman filed a class action complaint against Charles Schwab, the 401(k) plan, fiduciaries of the 401(k) plan, and company executives, claiming that those defendants had breached their ERISA fiduciary duties of loyalty and prudence by selecting 401(k) plan investments that were affiliated with Charles Schwab. Dorman also claimed that the board of directors had breached their ERISA fiduciary duty to monitor plan fiduciaries. In response, Charles Schwab and the other defendants filed a motion to compel arbitration (instead of resolving the case in court); their motion was based on the 401(k) and compensation plan terms relating to arbitration as the medium for resolving plan-related disputes, as outlined in the 2014 401(k) plan amendment.

In January 2018, the district court denied the defendants’ arbitration motion, holding that – despite the plans’ terms – neither the 401(k) nor the compensation plan required arbitration. The court reasoned that the 401(k) arbitration provision didn’t apply because it took effect after Dorman’s 401(k) participation ended, and that because Dorman’s claims were benefit claims, they were not included in the compensation plan’s arbitration provision. The court also concluded that even if Dorman’s claims were within the plans’ arbitration scope, because Dorman’s claims were brought on behalf of the plan (as a class action) and not on Dorman’s own behalf, he could not waive 401(k) plan rights without the plan’s consent.

On appeal, the Ninth Circuit found several reasons to disagree with the district court’s findings and reasoning, and ultimately overturned its own precedent (the Amaro case). The court relied on several U.S. Supreme Court rulings that arbitrators are competent to interpret and apply laws (one argument in denying arbitration was that arbitrators are incompetent). The Ninth Circuit (in an unpublished memorandum), reasoned that the district court’s reasoning was flawed in several ways.

First, the record showed that Dorman was actually a 401(k) plan participant for almost a year while the arbitration provision was in effect. Second, Dorman was actually bound by the 401(k) arbitration provision because the plan had agreed to arbitrate benefit claims. Third, arbitration was not a subterfuge for fiduciaries to avoid ERISA liability, but rather a quicker and cheaper form of resolution for benefit claim disputes. As a result, the Ninth Circuit sent the case back to the district court with instructions to order arbitration with regard to Dorman’s claims.

For employers, the case signals a bit of a shift in how courts might treat ERISA fiduciary claims where arbitration is outlined in the related plan documents. The court’s holding means that arbitration agreements and class and collective action waivers in ERISA fiduciary duty breach claims can be enforced, at least where the plan documents explicitly include those provisions and waivers. Generally speaking, ERISA fiduciary breach claims are not commonly arbitrated; rather, they are usually put before courts. As a takeaway, employers’ plan sponsors will want to discuss the issue with outside counsel. In some situations, adding arbitration provisions and class/collective action waivers to plan documents may help employers avoid costly court appearances; in other situations, court proceedings may be the best process to an equitable resolution.

Dorman v. Charles Schwab Corp. »