The ERISA Litigation Newsletter - October 2012

This month, we follow-up on an article from our July 2011 newsletter, analyzing the U.S. Supreme Court decision in AT&T Mobility v. Concepcion, and the complex issues involved in whether and when arbitration may apply to ERISA claims and whether an employer or fiduciary may wish to require arbitration. The ruling in Concepcion, as well as the Court's earlier opinion in Stolt-Nielsen v. AnimalFeeds, could permit plan sponsorsto avoid defending class action ERISA claims infederal court by conditioning employment on arbitrationagreements, as well as avoid classwide arbitration. However, as examined by the authors, the recent case law applying the Supreme Court rulings in employment claims appears to suggest that some courts may look to find means to distinguish ERISA claims and thereby preclude the use of arbitration clauses in this manner.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.

Prospects for Avoiding ERISA Class Actions with Arbitration Agreements*

Contributed by Russell L. Hirschhorn and Jacquelyn Weisman

It is well established that plan sponsors and fiduciaries may require plan participants and beneficiaries to participate in mandatory, binding arbitration as a means to prosecute claims under the Employee Retirement Income Security Act of 1974. It remains unclear, however, whether such arbitration agreements may preclude participants and beneficiaries from pursuing ERISA claims—including fiduciary breach claims—on a classwide basis. Two recent U.S. Supreme Court rulings1 have brought renewed interest in these issues, as they suggest that employers may be able to avoid class litigation through the use of provisions that require participants to pursue ERISA claims in arbitration and then limit the arbitration to the pursuit of individual claims.

As discussed below, there is a lack of consensus among the lower courts as to application of these rulings in employment-related disputes, which in turn has left a great deal of uncertainty about whether class action waivers will be enforced in connection with ERISA claims; and, if so, whether these waivers can effectively preclude class litigation altogether.

Arbitrability of ERISA Claims

Twenty-five years ago, the U.S. Supreme Court ruled that the "duty to enforce arbitration agreements is not diminished when a party bound by an agreement raises a claim founded on statutory rights."2 The case in question was brought by trustees for various pension and profit-sharing plans alleging that a brokerage firm and the financial consultant who handled their accounts violated certain securities laws. In its ruling, the Supreme Court observed that "'we are well past the time when judicial suspicion of the desirability of arbitration and the competence of arbitral tribunals' should inhibit enforcement of the [Federal Arbitration] Act 'in controversies based on statutes.'"

The court concluded that the Federal Arbitration Act (FAA) required enforcement of arbitration clauses unless either: (a) there existed a well-founded claim that the arbitration clause resulted from the sort of fraud or excessive economic power which could invalidate any contract; or (b) the party opposing arbitration demonstrated that Congress intended to prohibit waiver of judicial remedies for the statutory rights in question.

The court rejected many of the reasons offered in prior decisions as bases for refusing to enforce arbitration clauses. For example, it rejected the presumption that arbitral tribunals were incapable of handling complex disputes and that streamlined arbitration procedures entailed a diminution of substantive rights. It also saw no reason to assume that arbitrators would not follow the law, as judicial review was sufficient to ensure that they complied with the commands of federal statutes.

Consistent with the Court's ruling in McMahon, all circuit courts that have addressed the issue have concluded that employee benefit plans may require participants and beneficiaries to arbitrate their claims under ERISA. This includes all types of ERISA claims, such as claims for benefits, claims alleging a breach of fiduciary duty, claims based upon ERISA's substantive requirements, and discrimination and/or interference with benefits claims.3 In so ruling, the courts have rejected various grounds for concluding that Congress intended to exempt ERISA claims from the FAA, including, for example, that: (a) ERISA confers exclusive jurisdiction on the federal courts; (b) arbitration will stifle judicial development of ERISA claims, since not all such claims will be subject to arbitration, and judges will continue to issue decisions interpreting ERISA; and (c) compulsory arbitration of ERISA claims will frustrate the legislative goal of developing a consistent body of law because there is no assurance that arbitrators will follow court precedents.

U.S. Supreme Court Rulings on Class Action Waivers

In the past two years, the U.S. Supreme Court has issued two rulings that have profoundly impacted the legal landscape of class arbitration claims. First, in Stolt-Nielsen v. AnimalFeeds, the Supreme Court held that, absent a mutual agreement to participate in classwide arbitration, a party could not be compelled to arbitrate classwide claims. At issue in Stolt-Nielsen was a shipping agreement that required the parties to arbitrate any dispute arising from their commercial relationship.

In 2005, AnimalFeeds served Stolt-Nielsen with a demand for class arbitration. While the parties agreed that they had to arbitrate the dispute pursuant to their contract, they also agreed that the arbitration clause was silent on the issue of class arbitration. They therefore submitted the question of class arbitration to a panel of arbitrators, who concluded, based on the rationale that public policy favors class arbitration, that class arbitration was permissible. Upon Stolt-Nielsen's motion to vacate the award, the U.S. District Court for the

Southern District of New York held that the panel had erred in basing its decision on policy grounds, and that it should have considered whether existing law provided instruction as to how to interpret a silent contract. The Supreme Court agreed. It also observed that while the panel made a few references to the parties' intent, its award did not clarify how intent informed its decision. The Court then turned to the FAA for guidance in how to treat the silent arbitration clause and concluded that, although some "silent" agreements may lend themselves to inferences regarding parties' intent, this particular agreement did not.

Second, in AT&T v. Concepcion, the Supreme Court held that the FAA preempted a California rule prohibiting certain arbitration contracts that prevented individuals from arbitrating class claims. The dispute concerned a promotion in which AT&T Mobility advertised a free or discounted phone for customers who entered into an agreement for cellular phone service...

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