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Ninth Circuit Changes Course, Sends Breach of Fiduciary Duty Claim to Individual Arbitration


· 5 minute read


· 5 minute read

Dorman v. Charles Schwab Corp., 2019 WL 3926990 (9th Cir. 2019)

Published Opinion

Unpublished Memorandum

The Ninth Circuit has overruled its own precedent prohibiting arbitration of ERISA claims and instructed the trial court to order individual arbitration of a 401(k) plan participant’s breach of fiduciary duty claims. Less than a year before he ceased participating, the plan had been amended to require “[a]ny claim, dispute or breach arising out of or in any way related to the plan” to be settled by mandatory binding arbitration conducted “on an individual basis only, and not on a class, collective or representative basis.” The participant filed a class action lawsuit on behalf of the plan and its participants, alleging that the plan’s fiduciaries had breached their ERISA fiduciary duties by including poorly performing employer-affiliated investment funds in the plan solely to generate investment fees for the employer and its affiliates. Citing the plan’s arbitration and waiver of class action provision, the fiduciaries argued that individual arbitration was required. The trial court held the arbitration provision unenforceable and dismissed the fiduciaries’ motion to compel arbitration. The fiduciaries appealed.

In response, the Ninth Circuit issued two decisions. In its published opinion, the Ninth Circuit explained that it had previously concluded that ERISA claims were not arbitrable because arbitrators “lacked the competence of courts to interpret and apply statutes as Congress intended.” That reasoning, however, has been undercut by subsequent cases, including the Supreme Court’s 2013 decision in American Express Co. v. Italian Colors Restaurant (570 U.S. 228), which held that arbitrators are competent to interpret and apply federal statutes. As that intervening authority is irreconcilable with the Ninth Circuit’s earlier ruling, that ruling is no longer binding precedent.

In a separate unpublished and nonprecedential memorandum, the Ninth Circuit held that the participant was subject to the plan’s arbitration provision because both parties had agreed to it—the participant by participating in the plan while the provision was in effect, and the plan by including the provision in the plan document. The court also considered, and rejected, objections based on the Federal Arbitration Act and the National Labor Relations Act. Finding no congressional command against arbitration in ERISA, the Ninth Circuit held that the plan’s arbitration provision applied and the parties should be ordered to arbitrate the participant’s claim. That arbitration, however, should be limited to claims for value lost by the participant’s own account due to the alleged fiduciary breaches, not claims on behalf of other participants or any other claims.

EBIA Comment: The Ninth Circuit’s change of course on arbitration was a long time coming—the rejected precedent dated from 1984—but it was not unexpected. Now that it has arrived, it seems likely that even more employers will consider adding mandatory individual arbitration provisions to their plan documents. Caution, however, still seems advisable. One reason is that the limits of mandatory arbitration in defined contribution plans have not been fully litigated. Beyond its recognition of arbitration as an option, all of the Ninth Circuit’s analysis, including its discussion of individual versus collective arbitration, and its acceptance of arbitration for breach of fiduciary claims in an ERISA context, appears only in an unpublished memorandum, so it cannot be relied on as precedent. Also, there might be scenarios in which arbitration is not a better option for a plan. Consequently, plan sponsors should seek the advice of legal counsel prior to adopting any mandatory arbitration provision. For more information, see EBIA’s 401(k) Plans manual at Section XXX.E.4.b (“Limitations on Using Arbitration in Appeals”) and XXXVII.H (“Claims for Breach of Fiduciary Duty”). See also EBIA’s ERISA Compliance manual at Sections XXXIV.J.2 (“Claims Procedures for Group Health Plans: Mandatory Arbitration May Not Be Binding or Require Cost-Sharing”) and XXXV.H.2 (“Claims Procedures for Disability and Other Non-Health Claims: Mandatory Arbitration May Not Be Binding or Require Cost-Sharing”).

Contributing Editors: EBIA Staff.

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