United States: Ninth Circuit Finds ERISA Fiduciary Duty Claims Not Arbitrable

But decision leaves open many questions . . .

With the Supreme Court's Epic Systems decision laying to rest many of the primary arguments used to avoid arbitration, case law continues to develop regarding how arbitration may apply for claims under the Employee Retirement Income Security Act of 1974 (ERISA). [We blogged the Epic Systems decision here.] It isn't all that surprising that the Ninth Circuit would hold that certain types of ERISA claims might not be arbitrable, but its July 24, 2018, decision in Munro v. University of Southern California, Case No. 17-55550, may represent something more than that court's traditional hostility toward arbitration provisions.

The Munro case was a fairly typical ERISA dispute over the fees and investment options offered by two university-sponsored plans, with the participants and beneficiaries contending generally that the fees were unnecessarily high. Significantly, these claims were characterized as being brought solely under Section 502(a)(2) of ERISA, seeking recovery on behalf of the plans for plan losses caused by the breaches of fiduciary duty. The district court decision below made clear that the employees sought only recovery on behalf of the plans themselves against the employer and the committee overseeing the plans' operation (more about that in a minute).

The employer moved to compel the claims to individual arbitration, citing arbitration agreements containing class action waivers that each employee had signed as part of his or her individual employment agreement. The district court refused to refer the case to arbitration, and the Ninth Circuit affirmed.

As the Ninth Circuit noted, the arbitration agreements were between the employer and the employees, and did not purport to bind the plans. The court likened a 502(a)(2) claim to a qui tam claim, stating that the claims were being brought on behalf of the plans, and not the individual employees, and that the plans would benefit from any recovery.

There are several problems with the appeals court's analysis, including how it may square with the claims actually alleged in the complaint, but the decision leaves open several important questions. First, the claims here were brought under Section 502(a)(2) of ERISA. The decision notes prior Ninth Circuit case law on ERISA claims generally, leaving open the issue of whether the employer (or plan) could require arbitration of other types of ERISA claims, such as individualized claims for appropriate equitable relief brought under ERISA Section 502(a)(3) or individual claims for benefits brought under ERISA Section 502(a)(1)(B). Those types of claims would almost certainly be more amenable to arbitration, and arbitration might actually prove to be a more favorable forum for participants and beneficiaries.

Second, the court notes that the plans never consented to arbitration, but that leaves open at least a couple of provocative drafting and tactical questions. What if the plan's administrative procedures were to end in arbitration? What if the employer, in the plan document, required all the stakeholders, including the plan itself, to agree to binding arbitration with a class action waiver? How would that work? And what about the other parties capable of bringing claims under ERISA's remedial provisions, such as the plan's fiduciaries – or for that matter, the U.S. Department of Labor (DOL), which has the right to bring parallel claims on its own initiative? Could there be situations where an employer could compel its employees to arbitrate their claims, and perhaps even require the same of its plan's fiduciaries, but find itself the target of a legal action brought by the DOL over the same issues, without any opportunity to combine or consolidate the disputes and avoid the risk of inconsistent results?

Third, an employer should consider whether it really wants any or all of its ERISA claims to be arbitrated. Most arbitrators are unfamiliar with ERISA. Federal district courts at least tend to be familiar with ERISA's basic workings and, in connection with benefit claims, ERISA's limited evidence rules and deferential standard of review (when claims are properly handled at the initial level). Arbitration may limit appellate review, a frequent necessity for employers in this arena, particularly on technical issues.

The Munro case will likely result in a split among the circuits, but it really prompts questions about whether and how plans might be written to require arbitration, and more importantly when and under what circumstances it might make sense to do so.

The bottom line:

The Ninth Circuit has refused to compel arbitration for a Section 502(a)(2) ERISA breach of fiduciary duty claim, but that is likely not the last word.

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