The Ninth Circuit’s recent decision forcing a 401(k) plan mismanagement lawsuit into arbitration is a significant ruling for plan sponsors. But it also leaves lingering questions about the enforceability of arbitration clauses written into plan documents. See Dorman v. Charles Schwab Corp., No. 18-15281, 2019 WL 3939644 (9th. Cir. Aug. 20, 2019).
Dorman is a putative class action involving allegations that the Schwab defendants breached their fiduciary duties by including Schwab-affiliated investment alternatives in its 401(k) plan, despite the funds’ alleged poor investment returns. Dorman, a former plan participant, sought monetary and other equitable relief on behalf of the plan under ERISA §§ 502(a)(2) and (a)(3). Schwab’s plan document included a mandatory arbitration provision for claims related to the plan and a waiver of class action lawsuits. Schwab filed a motion to compel arbitration, which was denied by the Northern District of California.
On August 20, 2019, the Ninth Circuit reversed the district court’s decision, overturning decades-old precedent. The court found that its decision in Amaro v. Continental Can Co. (9th Cir. 1984), which held that ERISA claims were not subject to arbitration, could not be reconciled with more recent Supreme Court precedent holding that federal statutory claims were, in fact, arbitrable because arbitrators are competent to interpret and apply federal statutes.
In an unpublished companion memorandum filed with its opinion, the Ninth Circuit addressed its specific disagreement with the district court’s findings, explaining that (1) Dorman was bound by the plan’s arbitration provision because it became effective prior to Dorman ceasing participation in the plan; (2) Supreme Court precedent establishes that ERISA claims can be arbitrated and that class action waivers do not violate the NLRA; and (3) the plan consented to arbitration of claims under ERISA § 502(a)(2) by including the arbitration provision in the plan document. The court also applied the Supreme Court’s finding in LaRue v. DeWolff, Boberg & Associates (2008) to justify individual arbitration of Section 502(a)(2) claims. LaRue recognized that such claims sought relief on behalf of the plan, but found they were inherently individualized in the defined contribution plan context. Thus a participant could pursue a Section 502(a)(2) claim for plan losses in his own account. The Court’s concurring opinions in LaRue differed as to whether the claim at issue there should be considered an individual “claim for benefits” under ERISA § 502(a)(1)(B) or a claim for plan losses under ERISA § 502(a)(2). The Ninth Circuit also relied on the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant (2013), to confirm that federal statutory claims are generally arbitrable, and Lamps Plus, Inc. v. Varela (2019), which confirmed that because arbitration is a matter of contract, the plan’s waiver of class-wide and collective arbitration must be enforced according to its terms and the parties must be ordered into individual arbitration.
Dorman is the first appellate decision allowing a fiduciary to compel individual arbitration of plan mismanagement claims brought on behalf of a defined contribution plan under ERISA § 502(a)(2), and it seems to provide a road map for plan sponsors seeking to compel arbitration of such lawsuits on an individual basis. Last year, in Munro v. University of Southern California (9th Cir. July 24, 2018), the Ninth Circuit refused to compel arbitration of similar allegations brought under ERISA § 502(a)(2) because the arbitration provision was contained in a separate employment agreement—not in the plan document itself. The Ninth Circuit reasoned that the plaintiffs could not consent to arbitration on the plan’s behalf through their individual employment contracts. The different result reached in Dorman hinged on the inclusion of the arbitration provision and class waiver in the plan document.
The holding in Dorman is significant in that the Court identified Supreme Court precedent for compelling individual arbitration of ERISA § 502(a)(2) claims. Plan sponsors should be aware, however, that there are sure to be challenges to Dorman, making its durability uncertain. A petition for review to the Supreme Court seems inevitable. While the Court declined to review the Munro decision earlier this year, and there is not yet a circuit split, the Court may take up the issue of whether the Ninth Circuit properly interpreted ERISA, LaRue, and other Supreme Court precedent to find that a plan participant can be compelled to arbitrate a Section 502(a)(2) claim for plan losses, with monetary recovery limited to losses sustained in his own individual account.
Plaintiffs’ attorneys will likely argue that even with individual arbitration, arbitrators should be able to award damages to the entire plan because the claims are brought on behalf of the plan. And there are numerous factors to consider when deciding whether mandatory arbitration is advisable for a plan, including the general inability to reverse arbitration decisions and the risk of numerous inconsistent decisions related to similar allegations. Plan sponsors should take note that the impact of the Dorman decision is not settled, and they should carefully weigh the pros and cons of individual arbitration before rushing to add such provisions to their plans.