Judge Extends Employment Arbitration Requirement to Claims Against Advisor

A federal court has extended the reach of an employment arbitration agreement to require a participant to first arbitrate, rather than sue a plan’s investment advisor.

Significantly, the decision in the United States District Court for the Southern District of New York drew a distinction between the arbitration clause in an employer handbook and the 401(k)’s summary plan description. The latter, which advised participants that they may file suit in federal court, didn’t undermine a finding that in this case the participant’s claims were related to employment, and thus subject to arbitration.

The Allegations

The plaintiffs here alleged that the fiduciaries of the DST Systems, Inc. 401(k) Profit Sharing Plan pursued an imprudent investment strategy that resulted in losses exceeding $100 million, and that those same plan fiduciaries deprived participants of timely and meaningful information regarding their investments, including investment objectives, strategies, portfolio holdings, and the risk levels associated with each investment. Plaintiff Cooper claims that conflicts of interest between Ruane—the plan’s investment manager—and DST “hobbled” management of the plan, and allowed Ruane to “enter into self-dealing transactions, charge unreasonable fees, and continue as investment manager despite years of dismal performance.”

The plan consisted of a participant-directed 401(k) plan in which employee contributions were matched by DST up to a certain percentage, and a profit sharing account, the latter to which eligible workers were automatically enrolled and could not withdraw from, short of ending their employment with DST.  Ruane, as the investment manager selected by DST’s Advisory Committee, managed all profit-sharing plan assets.

The Arbitration Agreement

As a DST employee, Cooper received a copy of the “Associate Handbook,” and that contained a section on arbitration, though it carved out an exception for “ERISA-related benefits provided under a Company sponsored benefit plan.” On August 11, 2008, Cooper signed the Acknowledgement and Agreement Form, indicating that he understood and agreed that if he did not “opt out in writing within 30 days after [he] receive[d] the [Arbitration Agreement], then [he] and [DST] shall be considered to have agreed” to the arbitration program – and he did not subsequently opt out of the agreement.

In March 2016, Cooper filed this lawsuit, and according to the court record, several months later, he voluntarily dismissed his claims against all defendants in this action except Ruane (he chose to mediate his claims with the DST Defendants in a private forum) – but he did not amend his original complaint.

Issues Raised

Judge Pauley noted that the central issue raised in Ruane’s motion is whether Cooper’s breach of fiduciary duty claims relating to the mismanagement of assets in the plan fall within the ambit of DST’s broadly worded Arbitration Agreement. Ruane contends that Cooper should be compelled to arbitrate those claims because “Cooper is a participant in the DST Plan only by virtue of his employment by DST, and his claims are entirely about the management and operation of the DST Plan,” while Cooper countered that because he was bringing suit on behalf of the plan, and not himself, his ERISA claims arise under the operative Investment Management Agreement between DST and Ruane, which doesn’t have an arbitration clause. However, Judge Pauley held that Cooper’s claims “clearly relate” to his employment, and were thus within the scope of the arbitration agreement.

Equitable Estoppel

Having decided that, the court turned its attention to whether Ruane, who wasn’t a signatory to the Arbitration Agreement, could compel Cooper to arbitrate his claims under the doctrine of equitable estoppel.

Judge Pauley noted that DST and Ruane have enjoyed a longstanding relationship that predates Cooper’s employment – a relationship in which he noted that both occupied co-extensive positions as Plan fiduciaries – the very relationship that plaintiff Cooper claims was riddled with conflicts of interest between DST and Ruane and “forms the basis of his allegations that the Advisory Committee allowed Ruane to charge unreasonable expenses and fees, exercised inadequate oversight over Ruane’s self-dealing transactions, and “support[ed] and propp[ed] up [Ruane] at a time critical to [Ruane], to the benefit of [Ruane] and the detriment of the Plan and its participants.”

Pauley noted that as a plan participant Cooper received “… a stream of information about Ruane’s role as the sole investment manager—through Plan documents, account statements, and investment fee notices—over a sixteen-year period.” He went on to note that “Cooper knew that Ruane was actively involved in investing and managing the PSA assets—at one point directly paying Ruane for those services—and was aware that Ruane counseled the Advisory Committee on non-PSA investments offered,” and that not only was there a “substantial overlap between Cooper’s claims against DST and Ruane,” but that the complaint itself “indiscriminately lumps DST and Ruane together as “Defendants.”

Moreover, Judge Pauley concluded that the “issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed,” and that Cooper’s breach of fiduciary duty claims stem from the ERISA statute and, “while not tethered to any specific agreement, relate to the subject matter of the Arbitration Agreement.” Judge Pauley also dismissed Cooper’s argument that the arbitration agreement violated the National Labor Relations Act (“NLRA”) and the Norris-LaGuardia Act by prohibiting collective action by employees,” in that employees had to agree to it as a condition of employment – though, as Pauley noted, “Cooper understood that he could opt-out of the arbitration program and voluntarily chose not to.”

In light of those determinations, Judge Pauley granted Ruane’s motion to compel arbitration.

The case is Cooper v. Ruane Cunniff & Goldfarb Inc., S.D.N.Y., No. 1:16-cv-01900, 8/15/17.

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