Arbitration Clause Doesn’t Bar Excessive Fee Suit

A plan participant wasn’t forced to arbitrate an excessive fee claim against his former employer.

In the most recent case (Dorman v. Charles Schwab & Co., N.D. Cal., No. 4:17-cv-00285-CW, order declining to compel arbitration 1/18/18) involving allegedly excessive fees associated with the use of proprietary funds, Michael Dorman, a former Charles Schwab employee, alleged that Schwab-affiliated funds “charged higher fees and performed more poorly than other investment options on the market,” and further 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.”

According to the suit, the Schwab plan offers several investment options managed by Charles Schwab, including the Schwab S&P 500 Index Fund, 7 Schwab mutual funds, 10 Schwab target date funds, a Schwab money market fund and a deposit account in the Schwab Bank.

Arbitration ‘Cause

Dorman was employed at Charles Schwab & Co., Inc. for six years, until he left the company on Oct. 8, 2015. According to the facts of the case, on Feb. 23, 2009, shortly after starting his employment, he completed a Uniform Application for Securities Industry Registration or Transfer (Form U-4), which contains a provision stating:

I agree 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.

On Dec. 19, 2014, Dorman electronically signed an “Acknowledgment of the Schwab Investor Financial Consultant Compensation Plan” Compensation Plan, which included a section entitled “11.0 Arbitration of Disputes,” which in turn stated that “Any controversy, dispute, or claim arising out of or relating to the FC’s employment or the termination of employment shall be resolved by binding arbitration….”

However, it also stated that the agreement “…does not apply to … claims for benefits under any ERISA-governed benefit plan(s), which shall be resolved pursuant to the claims procedures under such benefit plans.”

Here 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….”

Arguments

Defendants contend that the plan document, Form U-4, and the Compensation Plan Acknowledgment are valid agreements that require arbitration under the FAA. They also argue that the plan document bound the plaintiff as well.

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.”

“Defendants provide no authority supporting their contention that a plan document executed after the participant has ceased participation in the plan can bind the participant to arbitration,” she wrote, going on to note that the cases cited all involved situations where the plan document was in effect while the plaintiff participated in the plan.

Similarly, she noted that while Schwab argued that the Forum U-4 covers “any dispute, claim or controversy” between Dorman and Schwab, “Defendants read this provision out of context.” She noted that it applied only to those “required to be arbitrated under the rules, constitutions, or by-laws of the SROS indicated in Section 4,” and that it “mentions nothing whatsoever about the Plan.” Judge Wilken further explained that the Compensation Plan Agreement arbitration was limited to claims arising out of his employment or termination thereof, “it is not clear that Defendants are correct” – in no small part because she also noted that “the arbitration provision contains an exception for ‘claims for benefits under any ERISA-governed employee benefit plan(s),’” which are to be resolved according to the “claims procedures under such benefit plans.”

Finally, she noted that if the arbitration provisions did apply, they could not be enforced here since the claim was brought on behalf of the plan, and “He cannot waive rights that belong to the Plan, such as the right to file this action in court.”

Judge Wilken also noted that “a plan document drafted by fiduciaries – the very people whose actions have been called into question by the lawsuit – should not prevent plan participants and beneficiaries from vindicating their rights in court.”

“In sum,” she wrote, “the arbitration provisions cited by Defendants (Plan Document, Form U-4, and Compensation Plan Acknowledgment) are not enforceable against Dorman’s claims … accordingly, Defendants’ motion to compel arbitration must be denied.”

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