Irreconcilable Differences: In Dorman v. Charles Schwab Corp., Ninth Circuit Overrules 35-Year-Old Authority; Concludes ERISA Claims Subject to Mandatory Arbitration.

The Ninth Circuit recently issued two decisions in Dorman v. Charles Schwab Corp.: the first overrules the decision in Amaro v. Continental Can. Co., 724 F.2d 747 (9th Cir. 1984) (Dorman, – F.3d –, No. 18-15281, 2019 WL 3926990 (9th Cir. Aug. 20, 2019) (slip op.) (“Dorman I”)); and the second concludes that an individual’s ERISA claim may be subject to the plan’s arbitration provision (Dorman, — F. App’x –, No. 18-15281, 2019 WL 3939644 (9th Cir. Aug. 20, 2019) (slip op.) (“Dorman II”)).

Dorman, a former Schwab employee, filed a putative class action under ERISA §502(a)(2) and (3), alleging that defendants violated ERISA and breached their fiduciary duties by including poorly performing Schwab-affiliated investment funds in the defined contribution 401(k) retirement plan to generate fees for Schwab. Dorman I, 2019 WL 3926990 at *1-*2.

In December 2014, the plan was amended to require that “[a]ny claim, dispute or breach arising out of or in any way related to the plan shall be settled by binding arbitration.” Id., 2019 WL 3926990 at *2.

Defendants moved to compel individual arbitration, which the district court denied. The Ninth Circuit found the district court decision to be in error because (1) as a threshold matter, ERISA claims may be subject to mandatory arbitration, Dorman I, 2019 WL 3926990 at *1; and (2) plaintiff was bound by the Plan’s valid arbitration provision, Dorman II, 2019 WL 3939644 at *1.

  1. Dorman I – ERISA claims are arbitrable

The district court denied defendants’ motion to compel individual arbitration on the following grounds: Dorman’s claims fell outside the scope of the plan’s arbitration provision, arbitration was unenforceable because the plan’s amendment to include the arbitration provision occurred after Dorman filed suit, and prior Ninth Circuit authority provided that class-action waivers required as a condition of employment are unenforceable by operation of the National Labor Relations Act. Dorman I, 2019 WL 3926990 at *2-*3.

In reviewing the district court’s denial of defendants’ motion to compel individual arbitration, the Ninth Circuit addressed the “threshold” issue of arbitrability of ERISA claims and observed that its existing precedent, Amaro v. Continental Can. Co., stood for the proposition that arbitrators lacked the competence to review “the equitable character of [ERISA] plans.”  Dorman I, 2019 WL 3926990 at *3 (citing Amaro, 724 F.2d at 752, 750).  Because of intervening Supreme Court precedent upholding and expanding the enforceability and permissible breadth of arbitration agreements, the Ninth Circuit determined that it was necessary to consider whether Amaro remained good law.  The court concluded that it did not because Amaro was “irreconcilable” with the Supreme Court’s arbitration jurisprudence. Dorman I, 2019 WL 3926990 at *3.

The Ninth Circuit cited the Supreme Court’s decision in Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013), as controlling authority which specifically recognized the competence of arbitrators to “interpret and apply federal statutes.”  Dorman I, 2019 WL 3926990 at *3.

The Ninth Circuit also noted that its own jurisprudence questioned the continued validity of AmaroDorman I, 2019 WL 3926990 at *3 (“‘there is considerable force’ to the argument that Amaro has been overruled”) (quoting Munro v. Univ. of S. Cal., 896 F.3d 1088, 1094, n.1 (9th Cir. 2003)).

The Ninth Circuit concluded that the clear reasoning of the Supreme Court decision in Am. Express Co., which held that federal statutory claims are generally arbitrable and also that arbitrators are competent to interpret and apply federal statutes, was “clearly irreconcilable” with Amaro, and accordingly, the holding of Amaro was no longer binding precedent. Dorman I, 2019 WL 3926990 at *3.

  1. Dorman II – Plan contained valid, enforceable arbitration provision

In the companion Memorandum decision issued in Dorman II, the Ninth Circuit found that the plan contained a valid, enforceable arbitration provision because (1) plaintiff was a participant of the plan at the time the arbitration provision was in effect, and (2) that notwithstanding plaintiff’s objection to the arbitration provision, arbitration was enforceable because the agreement to arbitrate belonged to the plan (and not plaintiff). Dorman II, 2019 WL 3939644 at *1.

The Ninth Circuit’s analysis of the validity of the arbitration provision included the following considerations: First, the arbitration provision, which requires individual arbitration for claims that “arise out of” and “relate to” the ERISA plan, did not seek to seek to “relieve a fiduciary from responsibility or liability.”  Dorman II, 2019 WL 3939644 at *1. Second, the Ninth Circuit noted that a court “must order arbitration” unless the arbitration agreement was unenforceable on grounds such as fraud, duress, or unconscionability, which factors were not present in Dorman.  Id., 2019 WL 3939644 at *1-*2 (citing Epic Sys. Corp. v. Lewis, — U.S. –, 138 S. Ct. 1612, 1621 (2018)). Third, relying on Supreme Court precedent, the Ninth Circuit concluded that because arbitration is a matter of contract, class-wide or collective arbitration cannot be compelled under the Federal Arbitration Act. Dorman II, 2019 WL 3939644 at *2 (internal citations omitted).

Accordingly, the Ninth Circuit instructed the district court to order arbitration of plaintiff’s individual claims.  Dorman II, 2019 WL 3939644 at *2.

With the Ninth Circuit’s explicit overruling of Amaro and recognition that a participant’s ERISA claims may be subject to mandatory arbitration provisions, ERISA plan fiduciaries appear to have another tool to consider in evaluating a claim brought in litigation.

Second Circuit Upholds District Court’s Choice of Equitable Remedies Under ERISA and Its Decision to Award Prejudgment Interest at the Federal Prime Rate

The Second Circuit Court of Appeals recently issued an opinion in Frommert v. Conkright, affirming a district court decision regarding appropriate equitable remedies under ERISA and the amount of prejudgment interest to be applied. The Second Circuit’s views on each of these issues should be of interest to plan fiduciaries as well as practitioners.

This litigation has a long history, dating back to 1999, and has generated many court opinions along the way, from the district court level all the way up to the U.S. Supreme Court. Indeed, this is the Second Circuit’s fourth decision in this case. (Readers are likely familiar with this case from the 2010 Supreme Court decision, which addressed the standard of review and held that an honest mistake does not strip a plan administrator of the deference otherwise granted to it to construe plan terms.)

By means of background, the litigation was initiated by Xerox employees who had left the company in the 1980s, received distributions of the retirement benefits they had earned up to that point, and who were subsequently rehired by Xerox. In addition to the issues concerning interpretation of the Plan and related documents, the primary focus of the case was how to account for the employees’ past distributions when calculating their current benefits so as to avoid a “double payment” windfall. Continue Reading

Successful Pleading Challenges to Parity Act Claims Regarding Wilderness Treatment

Wilderness therapy, also referred to as outdoor behavioral healthcare, is a treatment modality that uses expeditions into the wilderness as a means of addressing behavioral and mental health issues. Claims that health plans pay for wilderness therapy have been denied for various reasons, including the lack of accreditation of the program or licensing of the providers, or that the treatment is not medically necessary.

In the majority of recent wilderness therapy coverage suits, plaintiffs allege wilderness program exclusions violate the Mental Health Parity and Addiction Equity Act (“Parity Act”). Several recent district court decisions provide guidance on whether the criteria used to deny coverage of “wilderness programs” may be considered a potential Parity Act violation. Continue Reading

Sixth Circuit Finds No Fiduciary Duty To Give Notice Of Conversion/Portability Rights On Termination Of Employment

In Vest v. Resolute FP US, Inc., 905 F.3d 985 (6th Cir. 2018), the Sixth Circuit Court of Appeals upheld dismissal of a claim by the beneficiary of a deceased employee that the employer breached its fiduciary duty under ERISA §502(a)(3), 29 U.S.C. §1132(a)(3) by failing to notify the decedent of his right to port or convert his group life insurance coverage to an individual life insurance policy after he ceased active employment. Continue Reading

Could We See Retirement Reform in a Lame Duck Congress?

As we approach the end of the year and mid-term elections, expectations for meaningful policy from a lame duck Congress are at a record low. Surprisingly, however, the earlier passage of the Tax Cuts and Jobs Act (commonly referred to as “Tax Reform”) resulted in an unsettled desire among those in the U.S. House of Representatives and U.S. Senate to accomplish something rare – bipartisan legislation improving retirement and savings for millions of Americans.

The two pieces of legislation that have bipartisan support are the Retirement Enhancement and Savings Act (RESA) and the Family Savings Act of 2018 (FSA). Continue Reading

Second Circuit Speaks On When Ministerial Acts Can Breach a Fiduciary Duty

The Second Circuit recently held that alleged misrepresentations by a “ministerial” plan representative about plan benefits will not support a claim for breach of fiduciary duty if the SPD clearly provides “complete and accurate” information, but might support a claim for breach of fiduciary duty if the SPD does not.  In re DeRogatis, 16-977-cv, 16-3549-cv (2d Cir. Sept. 14, 2018) (slip op.).

Petitioner’s Claim

Emily DeRogatis brought two lawsuits concerning benefits under her deceased husband’s pension and health plans. She claimed that two plan employees provided inaccurate information about her husband’s eligibility for, and the amount of, survivor benefits payable under the pension plan, and the impact of early retirement on health benefits under the welfare plan. Continue Reading

ERISA Does Not Preempt Third Party Providers’ Unfair And Deceptive Business Practice Claims Against Health Insurer, Rules Ninth Circuit

In Hansen v. Group Health Cooperative, 2018 U.S. App. LEXIS 25033, (9th Cir. Sep. 4, 2018), two psychotherapists (“Providers”) sued Group Health Cooperative (“GHC”) in Washington state court, alleging GHC engaged in unfair and deceptive practices, in violation of Washington’s Consumer Protection Act.

The Providers claimed that GHC engaged in unfair and deceptive business practices by utilizing so-called Milliman Care Guidelines as its primary and exclusive criteria for authorizing mental health treatment. The problem with GHC’s use of these guidelines, according to the Providers, was that they:  (1) were intrinsically biased against mental healthcare, (2) were utilized to avoid paying for mental healthcare required by Washington’s Mental Health Parity Act, and (3) enabled GHC to unfairly compete by employing its own psychotherapists and discouraging patients from seeking treatment from rival practitioners. Continue Reading

New Case Gives Guidance on Video Surveillance in Disability Cases

Video surveillance can be an extremely effective tool in making disability benefits determinations.  Historically, courts have cautioned that the weight given to surveillance in these cases depends both on the amount and nature of the activity observed. A recent ERISA case out of the Western District of Tennessee provides insurers with guidance on the use of video surveillance in disability benefits decisions. The case is Eaton v. Reliance Standard Life Ins. Co., No. 2:16-cv-02764-TLP-cgc, 2018 U.S. Dist. LEXIS 127488, at *1 (W.D. Tenn. July 31, 2018). Continue Reading

Ninth Circuit Holds That Employees’ ERISA Breach of Fiduciary Duty Claim Against Their Employer is Not Subject to the Mandatory Arbitration Clause in Their Employment Contracts

In Munro v. University of Southern California, No. 17-55550, 2018 U.S. App. LEXIS 20522 (9th Cir. July 24, 2018), the U.S. Court of Appeals for the Ninth Circuit held that employees alleging an ERISA breach of fiduciary duty claim against their employer based on the employer’s administration of defined-contribution plans may not be compelled to arbitrate their collective claims under the terms of the arbitration clause in their employment contracts because their claims were brought on behalf of the plans and not on their own behalf.

The lawsuit was brought by nine current and former USC employees. The employees alleged that USC breached its fiduciary duty under ERISA in administering two defined-contribution plans – the USC Retirement Savings Program and the USC Tax-Deferred Annuity Plan (the “Plans”). The employees sought financial and equitable remedies to benefit the Plans and all affected participants and beneficiaries, including “a determination as to the method of calculating losses, removal of breaching fiduciaries, a full accounting of Plan losses, reformation of the Plans, and an order regarding appropriate future investments.” Continue Reading

Court Awards Pre-Judgment Interest To Kentucky Plaintiff at Massachusetts State Rate but Declines Boston Attorney Rates for Kentucky Lawyer

In Gross v. Sun Life Assur. Co. of Can., No. 09-11678-RWZ, 2018 U.S. Dist. LEXIS 107918 (D. Mass. June 28, 2018), a District Court decided the appropriate prejudgment interest rate for a Kentucky resident was the Massachusetts prejudgment rate (12 percent) rather than the federal rate at the time (.37 percent). The District Court awarded attorney’s fees in the amount of $625 per hour for Plaintiff’s Boston lawyer but refused to increase the rate for Plaintiff’s Kentucky lawyer in accordance with the Boston market rate. The Court also refused to compensate the Kentucky lawyer for work performed during the phases of litigation “infected” by misconduct.   Continue Reading

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