In an ongoing battle over its deferred compensation plan, Morgan Stanley has asked a panel of the U.S. Court of Appeals for the Second Circuit to condemn the lower court's finding that its plan falls under the Employee Retirement Income Security Act (ERISA). Even though the financial services firm won its bid to compel arbitration, it continues to argue that the court improperly considered whether its plan is subject to ERISA. Therefore, the firm is requesting that the appellate court delete or modify the language in the lower court's decision regarding ERISA and/or declare that ERISA is inapplicable to the plan.
The panel of appellate judges appeared skeptical of Morgan Stanley's appeal, with one judge reminding the firm that a party generally cannot appeal a favorable ruling simply because it disagrees with the court's reasoning. Although Morgan Stanley argued that the lower court's finding that ERISA governs its plan adversely affects its position in the arbitration proceeding, the judges seemed to disagree. One judge noted that striking the sentence(s) characterizing the plan as governed by ERISA still would not prevent arbitrators from relying on the court's ruling.
Whether Morgan Stanley's deferred compensation plan qualifies as a benefit plan under ERISA is central to this lengthy dispute. The plaintiffs, who include a former financial adviser, argue that forfeiture provisions in the plan violate ERISA rules regarding vesting. The lower court determined that the plan is a benefit plan within the scope of ERISA because it is related to adviser performance and can be deferred beyond an employee's termination.
On appeal, Morgan Stanley argues that the lower court's characterization of its plan as subject to ERISA will adversely affect the outcome of the suit, even though the firm won its bid to compel arbitration. In response, the plaintiffs argue that the appeal contravenes the federal prohibition on appeals from orders compelling arbitration. They also describe the lower court's ruling on the applicability of ERISA to the plan as a finding necessary to enforce the arbitration agreement. Otherwise, the plaintiffs claim that allowing such an appeal to move forward would permit them to challenge individual arbitration mandates.
The Second Circuit's decision in this case is likely to have broader consequences. According to Morgan Stanley, over 80 plan participants have initiated arbitration based on the lower court's ruling on ERISA. Many of these arbitration proceedings are challenging the firm's compensation structure for advisers.
Outcomes in FINRA arbitration proceedings have varied widely. For example, a panel in Florida denied a $1.2 million claim, while another in Texas awarded over $440,000 to two former advisers, and a third panel awarded more than $3 million to ten advisers citing ERISA violations.
In its decision, the Second Circuit will determine whether Morgan Stanley can appeal its successful order compelling arbitration based on the lower court's findings on ERISA applicability. It also must decide whether the lower court's ruling that the plan falls within the scope of ERISA is correct. The Second Circuit's decision may significantly influence how deferred compensation plans across the financial industry are structured and defended in ERISA litigation.
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