Schwab Arbitration Ruling Leaves Unanswered Questions

The effect of the 9th Circuit decision on ERISA lawsuits is uncertain, and arbitration is not the perfect option plan sponsors may think.

Art by Nick Little


The 9th U.S. Circuit Court of Appeals in August issued a ruling in the Michael F. Dorman et al vs. The Charles Schwab Corp. et al case that Schwab could enforce its retirement plan’s arbitration clause requiring participants to file individual claims and to waive class-action claims. Legal experts say the case raises questions that should give plan sponsors pause before including an arbitration clause in their plan.

The court ruled that the plan expressly said all Employee Retirement Income Security Act (ERISA) claims should be individually arbitrated and that the plan also included a waiver of class action suits. Dorman’s original suit accused Schwab of breaching its fiduciary duties by including poorly performing Schwab-affiliated funds in the plan. He brought the suit on his own, seeking class-action remedy for the plan in its entirety.

The 9th Circuit’s decision is “significant because it is the first case in the nation to explicitly permit the implementation of an arbitration provision in a plan document,” says Nancy Ross, a partner at Mayer Brown in Chicago. “However, the ramifications of this are still very much uncertain.”

First and foremost, the decision was made by a three-judge panel, and it is very unusual for a circuit panel to overturn an earlier full circuit decision, Ross says. In this case, the panel overturned the 9th Circuit’s 1984 position in Amaro v. Continental Can Co. that lawsuits filed under ERISA cannot be arbitrated. The panel reasoned that in the 35 years since that time, the Supreme Court has ruled that arbitration panels do have the expertise to hear ERISA breach claims.

Secondly, Ross says, Dorman has asked for the full court to conduct an en banc review of the case, due December 10. Thirdly, she adds, should the full court uphold the panel’s decision, it would still only apply to the 9th Circuit, which includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.

Joan Neri, counsel in Drinker, Biddle & Reath’s ERISA practice in Florham Park, New Jersey, says the case “does not address how a fiduciary breach claim seeking plan-wide relief aligns with the individual recovery sought in arbitration. This is something that advisers and sponsors should continue to watch in the litigation sphere before making any amendments to a plan.”

Neri further explains, “The 9th Circuit in Dorman focused on whether the plan or the individual had agreed to the arbitration. Because the arbitration provision was in the plan, the court concluded that the plan had expressly agreed that the ERISA claim could be arbitrated. This was a factor that distinguished this decision from the 9th Circuit’s earlier decision in Munro v. University of Southern California in which the arbitration agreement was signed by the individual as part of her employment agreement.”

What Dorman did not address was “how the relief provided in an individual arbitration, i.e. the participant’s individual damages, reconciles with the plan-wide relief for the breach of fiduciary claim,” Neri says. “That is the glaring unresolved issue. Can individual arbitration of fiduciary breach claims be brought on behalf of a plan? Until this issue is resolved, I am not rushing out to encourage my plan sponsor clients to adopt mandatory arbitration provisions for fiduciary breach claims.”

Arbitration not a perfect option

While, “generally, plan sponsors prefer arbitration to going to court,” there are some downsides to arbitration, notes Tad Devlin, a partner with Kaufman Dolowich & Voluck in San Francisco. “For non-experienced practitioners, the ERISA statute can be a labyrinth, so this would weigh some plan sponsors in favor of going before a federal judge who has heard these types of claims,” he says.

“Another disadvantage to arbitration is that it is confined to a limited review, and the arbitration award likely would be final and binding and can be very difficult to challenge or overturn,” Devlin continues. “It can be almost impossible to challenge at the judicial level on a petition to vacate the award. To do so, the sponsor would essentially have to show the award decision was fraudulent or corrupt. On the other hand, in a judicial setting, you have at your disposal the district court, the court of appeals and the highest court in the land.”

Ross adds that should a plan sponsor go the arbitration route to try to avoid class-action lawsuits, those could lead to “thousands of individual arbitrations, and some of these decisions could be inconsistent with one another. So, while on the surface the Dorman decision seems like a tremendous panacea for class-actions, that is not necessarily the case.”

Nonetheless, should a plan sponsor decide it wants to include an arbitration clause in its plan document, Neri recommends “it follow the Dorman approach, namely, it should require that the claims  be arbitrated on an individual basis rather than a class-action basis, and it should include a class-action waiver.”

Devlin says sponsors should go a step further by having “all participants specifically sign off and acknowledge the arbitration provision, rather than have a claimant contend the arbitration provision language was somehow not reviewed because it was included in a 25-page document. Make sure all participants are fully versed on the clause’s provisions, have them acknowledge that and send back to the sponsor a receipt that they agree to the language.”

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