The Ninth Circuit Court of Appeals ruled yesterday that, contrary to prior Circuit precedent, the presence of an arbitration provision in an employee benefits plan could compel arbitration.  See, Dorman v. Charles Schwab Corp., Case No. 18-15281 (9th Cir., Aug. 20, 2019).  The plaintiff had filed a class action suit in district court alleging that the defendants, plan fiduciaries, administrators, and employers, had improperly selected proprietary funds for inclusion within the offerings of multiple 401(k) plans, despite their poor performance, and to the detriment of the plans and individual participants.

Relying principally on the holding of American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), the court ruled that Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), was no longer good law and ERISA claims could be subject to contractually-mandated arbitration.

The relevant arbitration provision, contained within the plan document itself, was wide-reaching, stating that “[a]ny claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration….”  The provision also included a waiver of class or other collective action, “even if absent the waiver [the plaintiff] could have represented the interests of other Plan participants. The arbitration provision within the second plan at issue was materially identical.

The plaintiff sought to recover under both ERISA Section 502(a)(2) and (3), “seeking plan-wide relief on behalf of a class comprising all participants in, and beneficiaries of, the Plan at any time within six years of the filing of the Complaint.” The complaint’s claims were focused on violation of ERISA’s prohibited transaction rules through demonstrated preference of inclusion of investment funds affiliated with Schwab, despite mounting evidence of poor performance across benchmarks.

The district court had previously denied the motion to compel arbitration, holding the provisions were inapplicable since enacted after the plaintiff’s participation in the plan ended and that “the claims were ‘claims for benefits’ that were expressly carved out of the arbitration agreement in the Compensation Plan.” Further, the district court ruled that even if the agreements were applicable, they were unenforceable as the plaintiff’s claims were “brought on behalf of the Plan,” not for individual relief, and an individual “cannot waive rights that belong to the Plan, such as the right to file this action in court.”

While the Dorman opinion cites Munro v. University of Southern California, No. 17-55550 (9th Cir., Jul. 24, 2018), multiple times throughout as complimentary, the outcome in Munro was, notably, the opposite of that within Dorman – the Ninth Circuit held that the Plaintiffs, who had been required to sign arbitration agreements as part of their employment contracts, were asserting claims squarely on behalf of their plans and, accordingly, arbitration clauses executed on behalf of the individuals themselves, pursuant to employment contracts, would not compel arbitration of claims clearly brought on behalf of the plans.

Under the Munro court’s holding, employees

seek[ing] financial and equitable remedies to benefit the Plans and all affected participants… 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” are clearly “bringing their claims to benefit their respective Plans across the board, not just to benefit their own accounts as in LaRue.

Munro slip op. at 12-13. The Dorman court was arguably facing a distinguishable analysis on two separate fronts – while the obvious difference is the fact the plans at issue in Dorman contained the relevant arbitration agreement (rather than individual employment agreements, as in Munro), the scope and direction of the separate plaintiffs’ claims would also seem to be critically different.  The Dorman plaintiff was seeking relief which could, conceptually at least, be segregated into an individual claim – ultimately, the recovery of losses sustained on his individual retirement account(s) owing to alleged fiduciary breach, versus the clear plan-wide relief sought in Munro.

But take for instance a hybrid-hypothetical, somewhere between both Dorman and Munro – a class of plaintiffs seeking to litigate claims clearly brought on behalf of their plan (removal of breaching fiduciaries and reformation) yet faced with an arbitration provision contained within the relevant plan itself and barring class-wide or collective arbitration.  Consistent with the Munro holding, an ERISA plaintiff seeking judicial remedy which exists for the benefit of a plan may not alone settle a claim.  Id. at 11.  If arbitration was compelled, would a plan-appointed representative step-in or is that not the position already occupied by a plaintiff bringing a derivative action? Would a split of the individual claims and the ‘clear’ plan relief-related claims be compelled, resulting in the possibility of two distinct resolutions on fact?

The Dorman court also addressed, in a separate memorandum, the effectiveness of an arbitration provision in barring class-wide arbitration of 502(a)(2) claims brought by a plaintiff.  However those claims are, as articulated in the memorandum, and under LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008), “inherently individualized when brought in the context of a defined contribution plan….”  Dorman, et al. v. The Charles Schwab Corporation, et al., No. 17-cv-00285, ECF No. 53, at 5-6 (Aug. 20, 2019).

On January 22, 2019, the United States Secretary of Labor filed an amicus curiae brief in support of the plaintiff-appellants/ cross-appellees Ivan and Melissa Mitchell in the matter of Mitchell, et al. v. Blue Cross Blue Shield of North Dakota, et al.

Blue Cross Blue Shield of North Dakota filed a cross-appeal in the matter arguing that the Mitchells, despite being fully insured for medical claims by Blue Cross, had ‘no legal or constitutional standing’ to sue for payment of their benefits.

Ms. Mitchell was transported by air ambulance during a winter storm between two medical facilities owing to the fact that the receiving hospital did not have the capability to treat her emergency medical condition.

Blue Cross, despite having provided the Mitchells with coverage documents indicating it would pay 80% of “allowed” air ambulance charges, paid only about 20% of those charges.

The Secretary argued:

1.  “A denial of a participant’s or beneficiary’s right to have a benefits claim determined in accordance with plan terms is an injury sufficient to establish constitutional standing. The Mitchells suffered an injury in fact when Blue Cross denied benefits they contend were promised by the Plan by failing to fully reimburse their medical service provider”; and

2.  In accordance with Supreme Court precedent, an ERISA participant “may include a former employee with a colorable claim for benefits.” (quoting LaRue v. DeWolff, Boberg & Assocs., Inc., 552 U.S. 248 (2008)).  The Mitchells advanced a “colorable argument that Blue Cross interpreted the Plan terms to deprive them of rights promised under the Plan” and, accordingly, established statutory standing to bring an ERISA action under Section 502(a)(1)(B).

The Secretary of Labor emphasized the fact that the four United States Circuits to consider the issue have each held that a denial of a benefits claim which is alleged to constitute a violation of the plan terms constitutes injury for Article III purposes.  Uniformly, “whether a provider decided to seek payment for services from a plan participant or whether the participant actually paid is irrelevant to the injury that the participant suffers from the deprivation of benefits owed under the plan.”  This also comports with Congressional intent underlying ERISA, common law precedent,[1] and Spokeo v. Robins, 136 S. Ct. 1540 (2016).  A ruling contrary to that of the district court’s on the issue of standing would “create an unnecessary circuit split and deny a participant the only recourse for judicial review of a plan’s denial of a benefit.”

The amicus brief also argues that, consistent with all circuit court decisions, a “provider’s actions are not determinative to an injury in fact analysis: “Whether the Mitchells assigned the proceeds of this litigation to (but not their underlying claim) to another party is irrelevant to their injury in fact… That injury is not eliminated if the provider decides not to balance bill the patient for the amount the plan did not pay.”

A copy of the Secretary of Labor’s brief is available here.

[1] “A breach of a promise in a plan is analogous to a breach of contract, and courts have always considered breaches of contractual promises to constitute Article III injuries.”