The Beginning of the End for 401(k) Class Actions?

Ninth Circuit enforces retirement plan’s individual arbitration provision

By Mark E. Schmidtke, Madeline Chimento Rea and Stephanie C. Ng © Ogletree Deakins August 27, 2019
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In Dorman v. Charles Schwab Corp., (Aug. 20, 2019), the Ninth Circuit Court of Appeals held that a 401(k) plan participant was required to individually arbitrate his claims regarding the plan's fees and investment options, pursuant to the plan's arbitration provision.

Factual Background

The plaintiff, a former employee of Charles Schwab & Co. Inc., was a participant in Schwab's defined contribution 401(k) plan, which was amended during his employment to include an arbitration provision with a class and collective action waiver. The employee was also enrolled in the Schwab Investor Financial Consultant Compensation Plan, which contained a class action waiver and a provision mandating arbitration of any claims arising out of his employment, except for claims for benefits.

After his employment at Schwab and his participation in both the 401(k) plan and the compensation plan had ended, the employee filed a class action on behalf of all participants in and beneficiaries of both plans. The complaint asserted claims under § 502(a)(2) and (3) of the Employee Retirement Income Security Act (ERISA). The employee alleged that the defendants—Schwab and various Schwab entities and employees—had breached their fiduciary duties and engaged in prohibited transactions in violation of ERISA by including Schwab-affiliated investment funds in the 401(k) plan. According to the employee, the funds performed poorly but were kept as investment options in the 401(k) plan to generate fees for Schwab and its affiliates.

The employee also alleged that certain defendants breached their duty to monitor the 401(k) plan's fiduciaries, and he asserted claims for co-fiduciary breach and knowing participation in a breach.

Ninth Circuit's Ruling

The defendants moved to compel individual arbitration, citing the arbitration agreements in both the 401(k) and compensation plans. The district court denied the motion and the defendants appealed. In a published decision, the Ninth Circuit first addressed whether ERISA claims could be subject to mandatory arbitration. The Ninth Circuit had previously held in Amaro v. Continental Can Co. that ERISA claims were not arbitrable. The Ninth Circuit held that Amaro had been overruled by intervening jurisprudence from the Supreme Court of the United States holding that "federal statutory claims are generally arbitrable and arbitrators can competently interpret and apply federal statutes."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Unpublished Memorandum

In a concurrently filed unpublished memorandum, the court addressed the defendants' specific arguments and held that the district court had erred by denying the defendants' motion to compel arbitration. The Ninth Circuit noted that the employee—by participating in the 401(k) plan for nearly a year after the arbitration provision was added—and the 401(k) plan had agreed to arbitrate all ERISA claims. The court held that the claims fell within the scope of the 401(k) plan's arbitration provision and rejected the district court's reasoning that the arbitration provision was unenforceable because it violated the National Labor Relations Act (NLRA) and ERISA.

The Supreme Court recently held that an arbitration agreement containing a class action waiver does not violate the NLRA. Further, ERISA does not prohibit arbitration and this was not an attempt to insulate fiduciaries from liability. Therefore, the Ninth Circuit concluded, "because 'arbitration is a matter of contract,' the [arbitration provision's] waiver of class-wide and collective arbitration must be enforced according to its terms, and the arbitration must be conducted on an individualized basis."

Key Takeaways

This Ninth Circuit decision will likely be the subject of a petition for rehearing and possibly a petition for certiorari at the Supreme Court. Nevertheless, it is an important decision and it is the second Ninth Circuit arbitration decision impacting ERISA plans in the past 13 months. This may lead employers to consider adding arbitration provisions with class waivers to their employee benefit plans. Aside from individual benefit claims, most suits against ERISA plans in the past several years have been filed as class actions. Many of those suits ended in multi-million-dollar settlements. At least in the Ninth Circuit, it appears that employers can combat this trend by requiring plan participants to engage in individual arbitration of their ERISA claims, even if the arbitration provision is added to a 401(k) plan after a participant joined the plan.

The potential downside to such provisions is that requiring individual arbitration could result in multiple arbitrations regarding the same issues. However, it could also discourage such claims in the first place where the prospect of arbitrating multiple individual claims requires litigants to face significant costs to prosecute claims that may not involve much money to each individual participant. It remains to be seen where other circuit courts or the Supreme Court land on the arbitration issue, but the Ninth Circuit decision seems to forecast a significant change in how ERISA disputes are resolved.

Mark E. Schmidtke, Madeline Chimento Rea and Stephanie C. Ng are attorneys concentrating on ERISA and benefit matters with Ogletree Deakins. © 2019 Ogletree, Deakins, all rights reserved, reposed with permission.


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