Compliance July 29, 2003

Judge: Participant Not Bound By Arbitration Pact

July 29, 2003 (PLANSPONSOR.com) - A plan participant who filed a fiduciary breach suit against a financial advisor isn't bound by a mandatory arbitration provision of an agreement between the advisor and the plan's sponsor, a federal judge ruled.

Reported by

Fred Schneyer

>US District Judge Saundra Brown Armstrong of the US District Court for the Northern District of California denied Smith Barney Inc.’s request to compel arbitration since nonsignatories such as the participant were not bound by the pact. Even if the participant was an intended third-party beneficiary of the investment agreement between the plan sponsor and the investment adviser, his status did not result in application of the agreement’s arbitration provisions, Brown said, according to Washington-based legal publisher BNA.

Investment Agreement Kicks Off in 1999

In 1999, Smith Barney Inc. began providing investment advice for a fee to Micor Inc.’s pension and profit sharing plans pursuant to an investment management agreement. The agreement contained an arbitration provision.

According to the ruling, Smith Barney invested most of the plans’ assets in large capitalization equities, with most of the plans’ holdings concentrated in high technology and telecommunications equities. After the plans suffered large investment losses, Micor terminated Smith Barney as an investment advisor.

>Meanwhile, Kevin Comer, a former Micor employee who participated in the plans, sued Micor and Smith Barney alleging they breached their ERISA fiduciary duties by selecting poor investments. Pursuant to the arbitration provision, Smith Barney asked the court to force Comer to arbitrate his claims.

Denying Smith Barney’s request, Brown noted that no court other than the US 3 ^rd Circuit Court of Appeals has forced arbitration on a nonsignatory to an arbitration agreement. The district court said it found the 3rd Circuit’s decision unpersuasive.

Brown also found insufficient evidence or legal authority for the proposition that Comer was bound by the investment management agreement as a third-party beneficiary. Moreover, Brown said even if Comer was considered an intended third-party beneficiary, he still was not required to arbitrate his claims because Comer was not suing to enforce the terms of the agreement, but instead to enforce the plans’ rights.

The case is Comer v. Micor Inc ., N.D. Cal., No. C 03-0818 SBA, 7/21/03.