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Schwab Arbitration Win Not Final Yet


An appellate court decision that an excessive fee claim was subject to arbitration under terms of the plan document might be getting another review. 

It was just a few weeks ago that Schwab prevailed on appeal in the Ninth Circuit, which had cited “intervening Supreme Court case law.” 

Now the plaintiff, Michael Dorman, a participant in the Schwab 401(k) plan, who brought suit against his former employer alleging that Schwab-affiliated funds “charged higher fees and performed more poorly than other investment options on the market,” and that the Schwab entities “violated their fiduciary duties to the Plan in offering these Schwab-affiliated funds without ‘meaningful investigation’ into whether they were prudent investments and whether there were better options, has asked for a review (Dorman v. Charles Schwab Corp., 9th Cir., No. 18-15281, order 10/1/19) of the decision by the full court – what’s called an “en banc” review.

His argument? That the court’s Aug. 20, 2019 memorandum opinion “conflicts with this Court’s binding precedent and the decisions of at least four other circuit courts of appeals on an issue that is elemental to the enforcement mechanism of the Employee Retirement Income Security Act of 1974.”

Individual Eyed?

Specifically, he drew contrast with the holding in Munro v. University of Southern California, decided last year, as well as cases in other jurisdictions (the Second, Third, Seventh, and Eighth Circuits). Moreover, he argued that “by ruling that an arbitration provision can truncate ERISA’s statutorily defined fiduciary liability and forbid plan participants from asserting the statutory right under § 1109 to seek plan-wide relief for fiduciary breach, the decision…” conflicts:

  1. with the Supreme Court’s (“and this Court’s holdings”) that arbitration agreements cannot be enforced if they limit substantive statutory remedies or forbid the assertion of statutory rights;
  2. the Fifth Circuit’s ruling in Kramer v. Smith Barney, which he argued “voids any provision that would “relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty” precludes enforcement of arbitration agreements that would reduce fiduciary liability; and
  3. “presents an issue of extraordinary importance by allowing fiduciaries to opt out of plan-wide liability thereby upending and eviscerating ERISA’s ‘comprehensive and reticulated’ enforcement regime, which the Supreme Court has repeatedly cautioned courts against tampering with.”

The bottom line? Plaintiff Dorman claimed that the Ninth Circuit’s previous decision “…both upends the ‘uniformity of the court’s decisions’ and ‘directly conflicts with an existing opinion by another court of appeals’ in an area – ERISA remedies – that requires uniformity. En banc review is therefore warranted.”

‘Two’ Timing?

By way of expounding on the argument, the plaintiff here explains that the court issued two decisions simultaneously; a published opinion and an unpublished memorandum. The former, he noted, “reversed the longstanding rule in this Circuit that ERISA claims are not generally arbitrable, overruling Amaro v. Continental Can Co.” But the petition claims that the plaintiff “…has never taken the position in this case that all ERISA claims are inappropriate for arbitration. Rather, Dorman argues that arbitration agreements cannot forbid the assertion of a statutory right or reduce the substantive liability provided by § 1109” – instead, he explains that “because the published opinion is irrelevant to the issues on appeal, Dorman does not seek rehearing as to that opinion.”

The petition notes that in that unpublished decision the court explained why it determined that Dorman’s claims were subject to individual arbitration under the provisions in the Plan Document, and that – “despite citing Munro, the panel concluded that Dorman’s claims, brought in a representative capacity on behalf of the Plan, ‘are inherently individualized when brought in the context of a defined contribution plan’ and concluded that Dorman’s claims must be arbitrated on an individual basis.”

The petition also notes that the Munro decision concluded that the claims at issue belonged to the plan, not the individual plaintiffs, and were thus not within the scope of an arbitration clause covering claims an “Employee may have.” The petition notes that in this case, “…just as in Munro, Dorman brought fiduciary breach claims in his representative capacity on behalf of the Plan, seeking only plan-wide relief. Dorman makes no allegations regarding his individual account and seeks no individual relief.”

This, of course, is not how the Ninth Circuit viewed it, according to the petition – stating that “breach of fiduciary duty claims brought in the context of defined-contribution plans are categorically inherently individualized.” The petition here notes that, “Munro made clear that allegations regarding plan-wide mismanagement brought on behalf of the plan remain plan-wide claims, and are not individualized.” However, the petition states, “The panel here made no attempt to reconcile its decision with Munro.”

“In short, the panel’s decision crashes head-on with the Supreme Court’s concern about arbitration-related waivers eliminating the enforcement of federal rights; namely, when they purport to eliminate the right to pursue a remedy guaranteed by a statute. When faced with similar attempts to use arbitration to curtail statutory rights and liabilities, this Court and other circuits have rejected such attempts.”

The court has ordered Schwab to respond to this petition by October 23.

What This Means

It’s not unusual for a party that comes up short on appeal to ask for another hearing by the entire court, rather than a subset panel of three judges customarily selected from them. It’s much less common for a court to entertain such a motion, and to order a response to that request by the opposing party. The latter might mean that this court is considering the rehearing requested.