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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 22nd, 2019, a federal district judge certified a class of at least 28,000 participants and beneficiaries of the Cornell University Retirement Plan, consisting of the Employees of the Endowed Colleges at Ithaca Plan and the Cornell University Tax Deferred Annuity Plan, in Cunningham et al. v. Cornell University et al., No. 1:16-cv-06525 (S.D.N.Y., Jan. 22, 2019).

Consistent with a number of suits for underfunded and poorly performing university pension plans, the plaintiffs’ complaint asserts the fiduciaries did not manage the plans prudently, underperformed, and accrued excessive administrative fees in violation of ERISA Sections 404 and 406, 29 U.S.C. §§ 1104, 1106.

Each plan holds more than a billion dollars in assets, a fact which the plaintiffs claim affords the plans and their fiduciaries “tremendous bargaining power in the market for retirement plan services.”  While participants are allowed to designate which of the available investment options to invest their individual accounts, the Plans’ fiduciaries choose the investment option offerings, which as of December 2014 averaged 300 separate investment options between the two plans.

The defendant fiduciaries, including Cornell University, the Retirement Plan Oversight Committee, the plan recordkeepers – TIAA-CREF (Teachers Insurance and Annuity Association of America) and the College Retirement Equities Fund) and Fidelity, and CAPTRUST Financial Advisors, had previously filed a motion to dismiss which was denied in part.

In denying the defendants’ motion to dismiss, the federal court held that the plaintiffs’ amended complaint plausibly alleged:

  • All defendants, other than CAPTRUST, failed to monitor and control the plans’ recordkeeping fees and failed to solicit bids from competing recordkeeping providers on a flat per-participant fee basis, and failed to determine, in a timely manner, whether the plans would benefit from moving to a single recordkeeper; and
  • All defendants unreasonably continued to offer as a fund option the CREF Stock Account and TIAA Real Estate Account, despite high fees and poor performance, selected and retained funds with high fees and poor performance relative to other available options, and selected and retained high-cost mutual funds instead of identical lower-cost funds.

In ruling on the motion to dismiss, the court also held that the plaintiffs had plausibly alleged that Cornell University and Mary G. Opperman, the head of the Oversight Committee, failed to monitor the performance of their appointees to the Committee and failed to remove appointees whose performance was inadequate as related to selecting and retaining funds.

In certifying the class, the court defined the class as “All participants and beneficiaries of the Plans from August 17, 2010, through the date of judgment, excluding the Defendants and any participant who is a fiduciary to the Plans.”

The court held that the plaintiffs had demonstrated individualized losses for each count which survived the motion to dismiss, noting that the Second Circuit has previously held that plaintiffs who assert claims in a derivative capacity on behalf of a retirement plan establish sufficient injury-in-fact by alleging injuries to the plan itself, regardless of whether the plan is a defined benefit or defined contribution plan.  Nor was standing predicated on a plaintiffs actual purchase of a financial instrument – as long as the defendant’s conduct in question implicates the same set of concerns, a plaintiff can bring claims on behalf of the absent class members who had purchased said instruments. (“Personalized injury-in-fact requires named plaintiffs to demonstrate individualized losses in the form of some amount of financial damage; it does not require harm to be shown from investment in each fund that makes up an overall plan.”).

In adjudging commonality, the court noted that the common contention of the classes’ action was that “the investment lineup made available to all participants violated ERISA… [and that] the centralized administration of [the plans] is common to all class members.”  This commonality holds regardless of the number of individual funds available in each plan, as the allegations go to the defendants’ prudential oversight and failure to take actions that would result in lower costs.

Also of note, the court refused to credit defendants’ argument that individualized statute of limitation calculations negated the “many other common issues in this case.”

Regarding typicality, the court held that “[e]ach plaintiff’s claim and each class member’s claim is based on the same legal theory and underlying events, namely, that CAPTRUST and the Cornell Defendants breached their duty of prudence by imprudently selecting, administering, and reviewing the Retirement and TDA Plans’ investments, recordkeeping fees, and the Committee’s delegates.”

A full copy of the court’s opinion and order is available here.