By Michael W. Stevens, Jonathan A. Braunstein and Mark Casciari
Seyfarth Synopsis: Reversing course and overruling previous precedent, the Court of Appeals for the Ninth Circuit now holds that ERISA plan mandatory arbitration and class action waiver provisions are enforceable, and can require individualized arbitration of claims for breach of fiduciary duties.
In Dorman v. Charles Schwab Corp., No. 18-15281, 934 F.3d 1107 and 2019 WL 3939644 (Aug. 20, 2019), the Ninth Circuit reversed course, overruled precedent, and enforced an arbitration provision in an ERISA 401(k) plan that mandated individual, and not class, arbitration of ERISA § 502(a)(2) and (3) claims.
In Dorman, a 401(k) participant brought suit on behalf of a putative class of plan participants and beneficiaries, alleging that the fiduciaries had breached their fiduciary duties by investing assets in the funds affiliated with the defendant. However, nine months prior to the named plaintiff’s termination of employment and nearly a year before his account withdrawal, the plan was amended to expressly include an arbitration provision binding the plan to arbitration, and forbidding class actions.
The defendant moved to compel arbitration. The district court denied the motion on multiple grounds, ruling that ERISA claims cannot be subject to mandatory arbitration; the arbitration provision was added after the named plaintiff’s participation in the plan began; and the plaintiff’s claims were brought on “behalf of the plan,” rather than as an individual, and thus could not be subject to the plan’s arbitration clause.
Thirty-five years ago, in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), the Ninth Circuit had held that ERISA claims were not subject to arbitration. Amaro reasoned that an arbitral forum may “lack the competence of courts to interpret and apply statutes as Congress intended.” In Dorman, however, the Ninth Circuit recognized that later Supreme Court cases, including American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), had held that arbitrators were competent to interpret and apply federal statutes. Thus, Dorman expressly overruled Amaro.
In an unpublished companion opinion, the Ninth Circuit addressed and reversed other holdings by the Dorman district court. Although the Ninth Circuit had recently held, in Munro v. Univ. of S. Cal., 896 F.3d 1088 (9th Cir. 2018), that Section 502(a)(2) claims belong to the plan, rather than the individual (see our discussion of that case here), the critical difference in Dorman was that the plan had been amended to include an arbitration provision binding the plan. Thus, the Ninth Circuit found, the plan “expressly agreed” that all ERISA claims should be arbitrated. The Ninth Circuit also held, citing LaRue v. DeWolff Boberg & Assocs., Inc., 552 U.S. 48 (2008), that although a § 502(a)(2) claim may belong to the plan, losses are inherently individualized in the context of a defined contribution plan such as the one at issue. The Ninth Circuit reversed and remanded with instructions to the district court to compel arbitration.
The Dorman plaintiff recently filed a petition for en banc review, so it remains to be seen whether the latest Dorman decisions will stand.
The Ninth Circuit has been the most hostile to arbitration, so Dorman (unless vacated) is a monumental change that could be the start of trend favoring ERISA plan arbitration. As we have noted here and here, arbitration in lieu of court litigation has pros and cons that need to be considered carefully before mandating arbitration and a class action waiver in ERISA plans, even though the court most hostile to forced arbitration now seems to allow it.