United States: Ninth Circuit Reverses Itself And Finds That At Least Some ERISA Claims Can Be Compelled To Arbitration

Last Updated: August 27 2019
Article by Gregory V. Mersol

But Do You Really Want To In All Cases?

The Employee Retirement Income Security Act of 1974 ("ERISA") was the largest statute ever passed by Congress at the time it was enacted and has only grown further since then. In the 44 years that have followed its effective date, so too have grown the number of opinions, and changes in direction, among the courts.

There is little question that ERISA functions unlike many other statutes. It has one of the broadest preemption clauses of any federal statute. 29 U. S. C. § 1144(a). It has its own unique enforcement provisions in section 502 (29 U.S.C. § 1132) that are deceptively short but have spawned four decades of disputes over what may or may not be a topic of litigation and the available damages. As the Supreme Court has long recognized, the statute's enforcement provisions are a unique marriage of the common law of trusts and Section 301 of the Labor Management Relations Act, 29 U.S.C. § 185. See, e.g., Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987); Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). Particularly as to benefit claims, ERISA not only encourages but requires claims procedures that include mechanism for review. 29 U.S.C. § 1133; 29 C.F.R. § 2560.503-1.

So, given all that, can the employer or plan require arbitration of ERISA claims? Which ones? When? And might they really want to?

Only seven years after ERISA's passage, the Ninth Circuit addressed at least some of these questions in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984). The Amaro case involved an interesting fact pattern. There, a unionized employer laid off a number of employees in the years following ERISA's passage. The union grieved the terminations under the collective bargaining agreement (CBA) which, as most do, culminated in binding arbitration. The arbitrator concluded that the layoffs were precipitated by market conditions and denied the grievance under the CBA. Unhappy with this result, the employees filed suit under section 510 of ERISA (29 U.S.C. § 1140 – ERISA's anti-retaliation provision), contending that the discharges (and those following the period covered by the arbitration decision) were motivated by a desire to prevent them from accumulating years of service under the plan.

The Ninth Circuit addressed a number of arguments raised by the employer, including that of res judicata, which it rejected. Pertinent to this discussion, it held that the employees were not required to exhaust their administrative procedures (including arbitration) under the CBA before filing their statutory ERISA claims but could proceed directly to court. Its decision rested in large part on the premise that arbitrators "lack the competence of courts to interpret and apply statutes as Congress intended." Amaro was widely seen as rejecting binding arbitration in the ERISA context, at least in the Ninth Circuit, and at least as to certain kinds of ERISA claims.

Let's flash forward 30 or so years. In the decades since the Amaro decision, the Supreme Court has issued numerous opinions reiterating the importance of arbitration and largely rejecting various arguments that courts had used to invalidate arbitration agreements. These cases ultimately rejected the notion that arbitrators are incapable of interpreting complex federal statutes. This line of Supreme Court cases culminated in last year's decision in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), which eliminated one of the last remaining arguments plaintiffs and courts had used to avoid arbitration provisions. We blogged that decision here. Epic Systems and its predecessors cast considerable doubt on whether Amaro was still good law.

Two months after the Supreme Court's Epic Systems ruling, the Ninth Circuit issued another arbitration decision in the ERISA context, Munro v. University of Southern California, 896 F.3d 1088 (9th Cir. 2018). In that case, the court found, under the factual circumstances of the case, that claims under section 502(a)(2) of ERISA brought on behalf of the plan itself could not be compelled to arbitration. That decision, however, left a host of questions open, such as whether a plan could be drafted in such a way as to require arbitration, or if the plan's own fiduciaries or the Department of Labor could ever be forced to present their claims in arbitration. We blogged that decision here. Significantly, the court commented in a footnote that the proposition that the intervening Supreme Court cases overruled Amaro had "considerable force." It found no reason to reach the issue, however, as it concluded that the arbitration agreement at issue did not encompass the plaintiffs' claims.

Now, in Dorman v. Charles Schwab Corp., Case No. 18-15281 (9th Cir., Aug. 20, 2019), a 3-judge panel of the Ninth Circuit has concluded that Amaro is no longer good law. The Dorman case involved a claim under ERISA section 502 for claimed breaches of fiduciary duties based on the employer's alleged inclusion of investment funds from its affiliates in its 401k plan. The panel issued two decisions. In the first decision, designated for publication, it simply held that in light of the changes in Supreme Court authority, Amaro was overruled. Then, in a separate memorandum order designated not for publication, the court made a series of additional pronouncements. These pronouncements would also be significant but for limited precedential effect given to unpublished opinions. In that memorandum, the court concluded that, unlike Munro, the arbitration agreement did cover the disputed claims. Further, it found that while the claim purported to rely on conduct affecting the plan as a whole, it was "inherently individualized" in the context of a defined contribution plan and, pursuant to the terms of the plan, would need to be arbitrated on an individual basis.

So what does all this mean? It's not clear whether the panel decision in Dorman will stand, although it is almost certainly correct in light of recent precedent. The Supreme Court has denied certiorari in the Munro case, and it is not clear what steps the plaintiffs will now take in Dorman. Barring another change in the law, together these cases seem to stand for the proposition that many types of ERISA cases may be subject to arbitration if the plan documents are drafted properly, but much larger questions remain.

Chief among those questions is whether the employer or plan would really want claims of this type (or any particular type) resolved by an arbitrator. Even in the union context, arbitration provisions commonly exclude routine benefit claims. At the other extreme, the employer and plan can legitimately question whether they want an arbitrator to resolve complex statutory and investment issues. And it would be difficult to argue that regulatory entities like the Department of Labor would be bound by an arbitration agreement. Moreover, arbitration may prove to be an unfavorable forum in the not uncommon event that the claims involve potential cross claims, counter claims or third party practice involving consultants and vendors to the plan. And an adverse arbitral decision may have a ripple effect should a later litigant, the DOL or the IRS try to use it as proof that an employer was aware of some defect in plan administration or, worse, tries to give it issue preclusive effect. Many of these can be addressed in varying degrees in plan drafting, but some cannot, and all involve a series of practical, legal and economic considerations.

The bottom line: The Ninth Circuit, at least for now, has opened the door to mandatory arbitration of some ERISA claims, but that only begs the question of whether arbitration on balance will be a positive or negative for the employer and the plan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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