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.”
As part of their employment contract, each of the employee plaintiffs had signed an arbitration agreement, by which they agreed to “arbitrate all claims that either the Employee or the USC has against the other party to the agreement,” including claims for violations of federal law. Based on the terms of the employees’ arbitration agreements, USC moved to compel arbitration. The district court denied USC’s motion, holding that the arbitration agreements “do not bind the Plans because the Plans did not themselves consent to arbitration of the claims.”
On appeal, the Ninth Circuit upheld the district court’s denial of USC’s motion to compel arbitration. Specifically, the Ninth Circuit held that the dispute “falls outside the scope of the [arbitration] agreements” because “the parties consented only to arbitrate claims brought on their own behalf” and because the employees’ claims “are brought on behalf of the Plans.” In so holding, the Ninth Circuit analogized the employees’ ERISA breach of fiduciary duty claim to qui tam claims brought on behalf of the United States under the False Claims Act (FCA), which the Ninth Circuit had previously held were not covered under a standard employment arbitration agreement. The court noted that “neither the qui tam relator nor the ERISA §502(a)(2) plaintiff may alone settle a claim because that claim does not exist for the individual relator or plaintiff’s individual benefit” – i.e., “[a] party filing a qui tam suit under the FCA seeks recovery only for injury done to the government” and “a plaintiff bringing a suit for breach of fiduciary duty similarly seeks recovery only for injury done to the plan.”
Finally, the Ninth Circuit limited its holding by rejecting the employees’ argument that “claims for breach of fiduciary duty seeking a remedy under ERISA §409(a) are inarbitrable as a matter of law.” The court noted that “there is considerable force” to USC’s argument that the decision in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), where the court held that the “’minimum standards [for] assuring the equitable character of [ERISA] plans’ could not be satisfied in an arbitral proceeding,” is “clearly irreconcilable” with intervening Supreme Court case law. However, the Ninth Circuit decided to “leave the issue of Amaro’s viability for another day.”
While the holding in Munro appears to leave open a possibility that more broadly worded arbitration agreements may force arbitration of ERISA breach of fiduciary duty claims, that notion was rejected by the United States District Court for the Northern District of California in Dorman v. Charles Schwab & Co., No. 17-cv-00285-CW, 2018 U.S. Dist. LEXIS 9107 (N.D. Cal. Jan. 18, 2018). The court in Dorman held that an arbitration clause mandating that “[a]ny claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration” could not be enforced because an employee bringing a claim pursuant to ERISA §502(a)(2) and §502(a)(3) “on behalf of the plan” cannot “waive rights that belong to the Plan, such as the right to file this action in court.” The court noted that “[a] plan document drafted by fiduciaries – the very people whose actions have been called into question by the lawsuit – should not prevent plan participants and beneficiaries from vindicating their rights in court.” Defendants in Dorman have appealed the district court’s ruling to the Ninth Circuit and it remains to be seen how the Ninth Circuit will rule in light of its recent decision in Munro.