A U.S. Court of Appeals determined that arbitration on an individual basis is the proper forum for a participant’s claim that Charles Schwab breached its fiduciary duties and engaged in prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA) by holding proprietary funds in its 401(k) plan.
The decision, Dorman v. Charles Schwab Corp., is significant in two ways: (1) in a published opinion, the Ninth Circuit Court of Appeals overruled its prior precedent regarding whether ERISA claims were subject to arbitration and (2) in an unpublished opinion, the court found that an arbitration provision in the plan document prohibiting class or collective action was enforceable against a participant seeking to bring ERISA fiduciary breach claims on behalf of the plan.
First, the Ninth Circuit held that Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984) was no longer good law. Amaro held that ERISA claims were not arbitrable. In light of intervening U.S. Supreme Court cases finding that federal statutory claims are generally arbitrable and arbitrators can competently interpret federal statutes, the court held that it was appropriate for a three-judge panel to overrule Amaro.
Second, the Ninth Circuit reversed the district court’s decision on whether Dorman’s claims were subject to arbitration, disagreeing with most of the court’s reasoning. The district court had first found that the provision was inapplicable to Dorman because it was added after he was no longer a participant. The Ninth Circuit disagreed with this conclusion, finding the provision was effective for almost a year while Dorman was a participant. Next, citing its recent decision in Munroe v. University of Southern California, 896 F.3d 1008 (9th Circuit 2018), the court found that the relevant question is whether the plan agreed to arbitrate. The court found the dispute fell within the scope of the arbitration provision in the plan. The Ninth Circuit criticized the lower court’s opinion for showing “judicial hostility” toward arbitration and found its reasoning was rejected by the Supreme Court’s intervening decision in Epic Systems Corp. v. Lewis, 138 S.Ct. 1612 (2018). Furthermore, the court found that although Ninth Circuit precedent dictates that a participant cannot agree to arbitrate ERISA § 502(a)(2) claims without the plan’s consent, here, the plan had consented.
In the final part of its decision, the Ninth Circuit applied Supreme Court precedent to find that plan’s arbitration provision that waives class-wide and collective arbitration must be enforced according to its terms. The court found this is even true for claims under ERISA § 502(a)(2) that seek relief on behalf of the plan.
The decision represents a major victory for employers. Adding arbitration provisions to plan documents may be a way to avoid class action claims, but there are many other factors plan sponsors should consider before taking this step.