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The Ninth Circuit has reversed a lower court decision, based on “intervening Supreme Court case law.”
The case (Dorman v. Charles Schwab Corp., 9th Cir., No. 18-15281, 8/20/19) involved Michael Dorman, a participant in the Schwab 401(k) plan, who wanted to bring 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 available.”
Shortly after joining the firm in February 2009, Dorman completed a Uniform Application for Securities Industry Registration or Transfer (Form U-4), under which he agreed “to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs indicated in Section 4 (SRO REGISTRATION) as may be amended from time to time and that any arbitration award rendered against me may be entered as a judgment in any court of competent jurisdiction.” However, what’s key to this case is that the plan document also included language that said: “Any claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration….”
That particular provision was added to the plan in December 2014, with effect Jan. 1, 2015, “nine months before Dorman ended his employment at Schwab and nearly a year before he terminated his participation in the Plan” (timing that seems at odds with that noted by the district court[i]).
Well, that and, as the Ninth Circuit noted in its reversal: “…we must revisit our holding in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), in which we held that ERISA claims were not arbitrable. In light of intervening Supreme Court case law, including American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), we conclude that our holding in Amaro is no longer good law.”
What’s Changed
Here the Ninth Circuit acknowledged that more than 35 years ago, in Amaro v. Continental Can Co., “we wrote that ERISA mandated ‘minimum standards [for] assuring the equitable character of [ERISA] plans’ that could not be satisfied by arbitral proceedings,” reasoning that “…[a]rbitrators, many of whom are not lawyers, lack the competence of courts to interpret and apply statutes as Congress intended.”
However, now Judge Benita Y. Pearson (sitting by designation from the U.S. District Court for the Northern District of Ohio), joined by Judges Ronald M. Gould and Sandra S. Ikuta, wrote that, “Since Amaro, the Supreme Court has ruled that arbitrators are competent to interpret and apply federal statutes.”
More recently, Judge Pearson cited Munro v. Univ. of S. Cal., 896 F.3d 1088 (9th Cir. 2018), where this same court noted that “there is considerable force” to the argument that Amaro has been overruled. Noting that generally, “a three-judge panel may not overrule a prior decision of the court,” she wrote that, “if, however, an intervening Supreme Court decision undermines an existing precedent of the Ninth Circuit, and both cases are closely on point[,]” the three-judge panel may then overrule prior circuit authority, even if the issue decided by the higher court is not “identical.”
She concluded that the “holding in American Express Co. that federal statutory claims are generally arbitrable and arbitrators can competently interpret and apply federal statutes constitutes intervening Supreme Court authority that is irreconcilable with Amaro. Amaro, therefore, is no longer binding precedent.”
What This Means
Not to put too fine a point on it, but one shouldn’t be surprised to see a burst of activity amending plan documents to incorporate an arbitration clause…
NOTE: At the present time the IRS does not allow arbitration clauses in pre-approved Prototype and Volume Submitter plans.
Footnote
[i]However, the court noted that the plan document provided by the defendants was dated Jan. 1, 2016 and executed on June 13, 2016, “over a year after Dorman terminated his participation in the Plan….” Judge Claudia Wilken of the U.S. District Court for the Northern District of California wrote that, “…the Plan Document issued a year after Dorman ceased participation in the Plan cannot apply to his claims,” going on to state that to hold otherwise “…would be inequitable because it would allow a plan defendant to amend the plan documents unilaterally at any time, even after a participant has brought suit against the defendant, and put the participant at a disadvantage.”
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