By Carol Buckmann
Will we see the end of ERISA class actions? Many comments on a recent Ninth Circuit Court of Appeals decision (Dorman v. Charles Schwab Corp., No. 18-15281 (August 20, 2019)) upholding plan provisions preventing participant class actions have posed that question. If you look carefully at the existing authority though, that prediction seems premature. The choice between litigation and mandatory arbitration is not simple. There are downsides to choosing arbitration.
What Is New?
The drafters of ERISA didn’t reference arbitration at all. Some plan sponsors had nevertheless relied on prior court cases and the absence of an ERISA provision barring arbitration to include mandatory arbitration provisions and class action waivers in their employment agreements and plan documents. The U.S. Supreme Court strengthened their case when it addressed arbitration issues in two recent cases. In these cases, Epic Systems and Lamps Plus v. Varela, the Supreme Court determined that mandatory arbitration provisions in employment agreements did not violate federal labor law, that the arbitration clause would be interpreted in accordance with contract law principles and that provisions permitting class arbitration must be unambiguous to be enforceable. We have a majority of the current Supreme Court favorably disposed towards arbitration of employment matters.
The 9th Circuit Speaks.
Following the Epic Systems decision, the 9th Circuit Court of Appeals added a new issue in a case involving USC. The USC decision stated that ERISA claims were not covered by the language in the USC employment agreements. It also held that ERISA fiduciary breach claims could not be waived in employment agreements because these claims were asserted on behalf of the plan, not individual employees, and the plan had to agree to arbitration.
In addition, a district court in California had refused to compel mandatory arbitration in the Dorman case. This suit raised a fiduciary breach claim based on the inclusion of allegedly underperforming Schwab funds as investment options and, unlike the USC case, was based on specific plan language.
On appeal, the 9th circuit overturned the district court decision in Dorman and a prior decision that ERISA claims were not arbitrable to uphold the enforceability of the Schwab plan provisions. It stressed that the provisions had been added to the plan while the plaintiff was employed (correcting the district court’s understanding of the facts) and indicated the plan’s agreement to arbitrate claims. The court seemed to view Dorman’s continuing to participate in the plans after the provisions were added as a form of contractual agreement. It did not find that the timing of the provision, which was added after the lawsuit began, made the provision unenforceable.
There is no discussion of whether the plan’s summary plan description disclosed the arbitration provision, although any sponsor relying on such a provision would be well advised to describe it in the SPD. The decision does not overrule the USC decision. It does, however, mention that Dorman had an employment agreement covering all “federal, state and local claims” that indicated that benefits claims would be adjudicated in accordance with the plan documents.
Where Does That Leave Plan Sponsors?
Plan sponsors need to be aware that arbitration decisions cannot be appealed absent unusual factors such as fraud and that the arbitrator may not issue a well-reasoned decision or any decision at all. If claims must be arbitrated individually, there is the possibility of inconsistent decisions on the same issue. How can these be enforced, given that fiduciaries are supposed to interpret plan provisions in a uniform manner? In addition, many litigators will tell you that arbitration still can have extensive discovery and is not always cheaper or faster than litigation.
Tips to Avoid Litigation.
Plan sponsors who want to use plan provisions to avoid litigation would be well advised to amend their plans and SPDs quickly and to communicate the changes clearly.
There will be issues as to whether the provision can be applied to participants who terminated employment before the provision was added. This issue was not specifically addressed in the Dorman decision given the revised facts. Since the Supreme Court has viewed these provisions through the lens of contract law, it would be difficult to demonstrate that provisions added after termination of employment were part of any contractual agreement. There is also a question whether the situation might be different if Schwab had put the arbitration/waiver provision in a tax qualified defined benefit plan, where participants don’t typically contribute and are brought into the plan automatically without the right to waive participation.
Since the 9th Circuit is only one federal circuit and other courts may come out differently, a belt and suspenders approach of inserting clearly drafted mandatory arbitration and ERISA class action waivers in employment agreements as well as plan documents and SPDs should put plan sponsors in the most defensible position to avoid class action litigation.
Don’t Ignore Releases. Even if plan provisions cannot be applied to former participants, other recent case law has indicated that releases obtained from terminated employees can waive ERISA claims. See https://https://cohenbuckmann.com/insights/2019/5/30/can-employees-release-erisa-fiduciary-breach-claims In order to be enforceable, the terminating employee must receive consideration in addition to what the employee would otherwise receive (such as severance pay or COBRA premium payments). In addition, employees must be able to understand the effect of the release, which must be “knowing and voluntary”. Releases may not be enforceable against an employer’s entire workforce.