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Updated: December 2019

A recent Ninth Circuit decision has given plan sponsors a powerful new tool to limit plan-wide relief for fiduciary breach claims. Typically, plan participants can bring a claim in court for breach of fiduciary duty on their own behalf, as well as on behalf of the plan or a class of participants. Litigating these claims can be costly and time consuming. In response, some plan sponsors have amended their plans to require arbitration of claims on an individual basis only—that is, no class actions or claims on behalf of the plan. The legality of this requirement was recently challenged and approved of by the Ninth Circuit Court of Appeals in Dorman v. Schwab.1

In Dorman, a plan participant brought a claim on behalf of himself and similarly situated participants against his employer, Charles Schwab & Co., Inc., and plan fiduciaries. The participant alleged that plan fiduciaries breached their duties by including Schwab-affiliated investments in the Plan to generate fees for Schwab and its affiliates, despite the funds’ poor performance. The defendants moved to compel arbitration pursuant to plan terms, which required that “[a]ny claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration” and “on an individual basis only, and not on a class, collective, or representative basis.” Although the motion was denied by the district court, a panel of the Court of Appeals reversed on appeal.

The panel issued two opinions—one published and concerning mandatory arbitration in ERISA plans and the other unpublished and addressing the particular facts at issue in Dorman. In the former, the panel reversed Amaro v. Continental Can Company, a prior Ninth Circuit anti-arbitration opinion which held “ERISA mandated ‘minimum standards [for] assuring the equitable character of [ERISA] plans’ that could not be satisfied by arbitral proceedings.” 2 The Ninth Circuit’s rationale in Amaro was that arbitrators lacked “the competence of courts to interpret and apply statutes as Congress intended.” 3 However, in Dorman, the panel recognized that the United States Supreme Court has since held that arbitrators can competently interpret federal law, effectively overturning the prior anti-arbitration opinion. As a result, the panel held that ERISA plans can compel arbitration.

In the unpublished memo, the panel concluded that both the participant and the plan were bound by the plan’s individual arbitration requirement. First, the panel stated that “[a] plan participant agrees to be bound by a provision in the plan document when he participates in the plan while the provision is in effect.” 4 The panel then stated that if plan terms require individual arbitration then the plan has also agreed to individual arbitration.

It remains to be seen whether the panel’s holdings will be reversed. A petition for rehearing by the panel and rehearing en banc was filed, and several factors may warrant granting it. The panel’s written analysis was minimal considering its profound effect, and the panel also arguably misconstrued Supreme Court precedent on the nature of an ERISA claim for fiduciary breach. 5

[Update: Since this article was first published, the petition for rehearing was denied.]

There are also additional uncertainties resulting from this opinion which may be resolved in other cases going forward. For example, Dorman involved a breach for fiduciary duty, but the Schwab plan’s terms broadly applied to any claim. It’s unclear whether the holding in Dorman could also serve to limit claims for benefits, which have additional protections under ERISA and Department of Labor regulations. 6 The panel also acknowledged that the participant did not assert any generally applicable contract defenses. 7

Even if Dorman does remain good law, plan sponsors should carefully consider whether to include mandatory, individual arbitration clauses in their plans. Traditional notions that arbitration is less costly and faster may be untrue in the context of an ERISA plan.

Not intended as legal advice.

 

  1. Dorman v. Charles Schwab Corp., 934 F.3d 1107 (9th Cir. 2019); Dorman v. Charles Schwab Corp., No. 18-15281, 2019 WL 3939644 (9th Cir. Aug. 20, 2019) (unpublished).
  2. Dorman, 934 F.3d at 1111 (quoting and citing Amaro v. Cont’l Can Co., 724 F.2d 747, 752 (9th Cir. 1984), overruled by Dorman, 934 at 1111-12).
  3. Amaro, 724 F.2d at 750.
  4. Dorman, 2019 WL 3939644, at *1.
  5. In LaRue v. DeWolff, 552 U.S. 248 (2008), the Supreme Court considered whether a participant could bring a plan-wide claim for breach of fiduciary duty under ERISA section 502(a)(2) even though the alleged breach resulted in damages to only the participant’s account. The Supreme Court allowed the claim to go forward, recognizing that while ERISA § 502(a)(2) “does not provide a remedy for individual injuries distinct from plan injuries,” it does allow for recovery of “fiduciary breaches that impair the value of plan assets in a participant’s individual account.” LaRue, 552 U.S. at 256. The Supreme Court did not suggest that an individual’s claim could be bifurcated from a claim for plan-wide relief; it simply was the case that plan-wide relief in LaRue only resulted in a remedy to a single plan account. The panel in Dorman took LaRue a step further by directing a § 502(a)(2) claim for plan-wide relief to be split into individualized claims, even though multiple plan accounts were alleged to have been negatively impacted. Essentially, the panel’s holding forecloses a claim under § 502(a)(2) for plan-wide relief, arguably in contravention of LaRue’s holding that there is no remedy under § 502(a)(2) for individual injuries.
  6. ERISA § 502(a) gives participants a right to sue, and Department of Labor regulations require that plans establish and maintain reasonable procedures governing benefit claims. DOL Reg. § 2560.503-1. With respect to the claims procedures of group health plans and procedures applicable to disability claims, the regulations do not permit mandatory arbitration, except to the extent arbitration is one of the two levels of appeals permitted by the regulations before a civil action can be filed under ERISA § 502(a) and the claimant isn’t precluded from challenging the arbitration decision under § 502(a). Id.
  7. In her dissenting opinion in Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1636 n.2 (2018), Justice Ginsburg questioned whether the addition of a mandatory, individual arbitration term to an employment agreement truly results in a bilateral agreement when the arbitration agreement is emailed to employees and provides that the employee’s continued employment is deemed as acceptance of the agreement.