ERISA Arbitration Looks Safer; Ninth Circuit Reverses District Court, Sends Fiduciary Dispute To Arbitration

The US Court of Appeals for the Ninth Circuit's recent reversal of the district court's decision in Dorman v. Charles Schwab & Co. has finally opened the door to arbitration of ERISA fiduciary breach claims in that circuit. Last year, district courts in California handed down two decisions rejecting motions to compel the arbitration of claims alleging violations of the fiduciary standards of the Employee Retirement Income Security Act of 1974 (ERISA). Munro v. University of Southern California, 2017 U.S. Dist. LEXIS 166135 (C.D. Cal. 2017), affirmed, 896 F.3d 1088 (9th Cir. 2018), cert. denied, 139 S. Ct. 1239 (Feb. 19, 2019); Dorman v. Charles Schwab & Co., 2018 U.S. Dist. LEXIS 9107 (N.D. Cal., 2018), reversed and remanded, 2019 U.S. App. LEXIS 24735 (9th Cir. Aug. 20, 2019) and 2019 U.S. App. LEXIS 24791 (9th Cir. Aug. 20, 2019) (memorandum opinion).

In some quarters, these district court decisions, handed down a few months apart, signaled an ominous resuscitation of judicial resistance to the arbitration of ERISA claims, particularly those arising from alleged violations of the statute rather than of the terms of the plan. In the early days of ERISA, many courts held that mandatory arbitration, whether imposed by plan provisions or by participants' employment agreements, was incompatible with ERISA's civil enforcement provisions. In the words of the Second Circuit, "[a]ccess to a federal judicial forum" was "essential to assuring the minimum standards guaranteed pension participants by ERISA." Bird v. Shearson Lehman/American Express, 871 F.2d 292, 297 (2d Cir.), cert. granted, vacated and remanded, 493 U.S. 884 (1989). See also Barrowclough v. Kidder, Peabody & Co., 752 F.2d 923, 940 (3d Cir. 1985); Amaro v. Continental Can Co., 724 F.2d 747, 750-53 (9th Cir. 1984); McLendon v. Continental Group, Inc., 602 F. Supp. 1492, 1503-4 (D. N.J. 1985); Lewis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 431 F. Supp. 271, 275-77 (E.D. Pa. 1977).

That line of cases reflected the US Supreme Court precedents that existed when ERISA was enacted, most notably Wilko v. Swan, 346 U.S. 427 (1953), which viewed arbitration as an inferior and disadvantageous forum for the vindication of plaintiffs' statutory rights. In time, though, the Court changed its perspective and began to give full effect to the Federal Arbitration Act of 1925, which provides that written agreements to arbitrate disputes "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. §2. Wilko was overruled by Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989). In the wake of that decision, the US Court of Appeals for the Second Circuit's anti-arbitration case, which happened to reach the Court in the same term, was vacated and remanded. On remand, the circuit court held that requiring plaintiffs to arbitrate rather than litigate does not contravene ERISA. Bird v. Shearson Lehman/American Express, 926 F.2d 116 (2d Cir.), cert. denied, 501 U.S. 1251 (1991). That has since become the consensus of all circuits except the Ninth, which held to the position that where "there is only a statute to interpret," "[t]hat is a task for the judiciary, not an arbitrator." Amaro v. Continental Can Co., supra, at 751. See also Graphic Communications Union, District Council No. 2 v. GCIU-Employer Retirement Benefit Plan, 917 F.2d 1184, 1188 (9th Cir. 1990) ("The enforceability of an arbitration provision in this circuit turns on whether it is the statute or the plan that gives rise to the underlying claim.") Even there, judges expressed doubt that Amaro remained good law. See Munro v. University of Southern California, supra, 896 F.3d at 1094, fn. 3; Comer v. Micor, Inc., 436 F.3d 1098, 1100-1 (9th Cir. 2006).

The district court decisions in Munro and Dorman were apparent throwbacks to the Wilko era. They involved arbitration clauses with similar wording, and the claims that the defendants sought to have arbitrated included similar assertions that plan fiduciaries had acted imprudently in the selection of investment options available to participants. The district court decisions also shared the view that arbitration of ERISA claims is a device by which fiduciaries seek to evade liability for their misconduct. As the opinion in Munro (quoted, too, by Dorman) expressed it:

If the Court were to hold participants' arbitration agreements controlled their §502(a)(2) claims, fiduciaries could mitigate their ERISA obligations to their plans and erect barriers to ERISA enforcement on behalf of plans by requiring employees to sign arbitration agreements - including provisions requiring confidentiality, expedited arbitration procedures, limited discovery...