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Irreconcilable Differences: In Dorman v. Charles Schwab Corp., Ninth Circuit Overrules 35-Year-Old Authority; Concludes ERISA Claims Subject to Mandatory Arbitration.
by: Labor, Employment, Benefits + Immigration of Robinson & Cole LLP  -  ERISA Claim Defense Blog
Tuesday, September 10, 2019

The Ninth Circuit recently issued two decisions in Dorman v. Charles Schwab Corp.: the first overrules the decision in Amaro v. Continental Can. Co., 724 F.2d 747 (9th Cir. 1984) (Dorman, – F.3d –, No. 18-15281, 2019 WL 3926990 (9th Cir. Aug. 20, 2019) (slip op.) (“Dorman I”)); and the second concludes that an individual’s ERISA claim may be subject to the plan’s arbitration provision (Dorman, — F. App’x –, No. 18-15281, 2019 WL 3939644 (9th Cir. Aug. 20, 2019) (slip op.) (“Dorman II”)).

Dorman, a former Schwab employee, filed a putative class action under ERISA §502(a)(2) and (3), alleging that defendants violated ERISA and breached their fiduciary duties by including poorly performing Schwab-affiliated investment funds in the defined contribution 401(k) retirement plan to generate fees for Schwab. Dorman I, 2019 WL 3926990 at *1-*2.

In December 2014, the plan was amended to require that “[a]ny claim, dispute or breach arising out of or in any way related to the plan shall be settled by binding arbitration.” Id., 2019 WL 3926990 at *2.

Defendants moved to compel individual arbitration, which the district court denied. The Ninth Circuit found the district court decision to be in error because (1) as a threshold matter, ERISA claims may be subject to mandatory arbitration, Dorman I, 2019 WL 3926990 at *1; and (2) plaintiff was bound by the Plan’s valid arbitration provision, Dorman II, 2019 WL 3939644 at *1.

  1. Dorman I – ERISA claims are arbitrable

The district court denied defendants’ motion to compel individual arbitration on the following grounds: Dorman’s claims fell outside the scope of the plan’s arbitration provision, arbitration was unenforceable because the plan’s amendment to include the arbitration provision occurred after Dorman filed suit, and prior Ninth Circuit authority provided that class-action waivers required as a condition of employment are unenforceable by operation of the National Labor Relations Act. Dorman I, 2019 WL 3926990 at *2-*3.

In reviewing the district court’s denial of defendants’ motion to compel individual arbitration, the Ninth Circuit addressed the “threshold” issue of arbitrability of ERISA claims and observed that its existing precedent, Amaro v. Continental Can. Co., stood for the proposition that arbitrators lacked the competence to review “the equitable character of [ERISA] plans.”  Dorman I, 2019 WL 3926990 at *3 (citing Amaro, 724 F.2d at 752, 750).  Because of intervening Supreme Court precedent upholding and expanding the enforceability and permissible breadth of arbitration agreements, the Ninth Circuit determined that it was necessary to consider whether Amaro remained good law.  The court concluded that it did not because Amaro was “irreconcilable” with the Supreme Court’s arbitration jurisprudence. Dorman I, 2019 WL 3926990 at *3.

The Ninth Circuit cited the Supreme Court’s decision in Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 233 (2013), as controlling authority which specifically recognized the competence of arbitrators to “interpret and apply federal statutes.”  Dorman I, 2019 WL 3926990 at *3.

The Ninth Circuit also noted that its own jurisprudence questioned the continued validity of Amaro.  Dorman I, 2019 WL 3926990 at *3 (“‘there is considerable force’ to the argument that Amaro has been overruled”) (quoting Munro v. Univ. of S. Cal., 896 F.3d 1088, 1094, n.1 (9th Cir. 2003)).

The Ninth Circuit concluded that the clear reasoning of the Supreme Court decision in Am. Express Co., which held that federal statutory claims are generally arbitrable and also that arbitrators are competent to interpret and apply federal statutes, was “clearly irreconcilable” with Amaro, and accordingly, the holding of Amaro was no longer binding precedent. Dorman I, 2019 WL 3926990 at *3.

  1. Dorman II – Plan contained valid, enforceable arbitration provision

In the companion Memorandum decision issued in Dorman II, the Ninth Circuit found that the plan contained a valid, enforceable arbitration provision because (1) plaintiff was a participant of the plan at the time the arbitration provision was in effect, and (2) that notwithstanding plaintiff’s objection to the arbitration provision, arbitration was enforceable because the agreement to arbitrate belonged to the plan (and not plaintiff). Dorman II, 2019 WL 3939644 at *1.

The Ninth Circuit’s analysis of the validity of the arbitration provision included the following considerations: First, the arbitration provision, which requires individual arbitration for claims that “arise out of” and “relate to” the ERISA plan, did not seek to seek to “relieve a fiduciary from responsibility or liability.”  Dorman II, 2019 WL 3939644 at *1. Second, the Ninth Circuit noted that a court “must order arbitration” unless the arbitration agreement was unenforceable on grounds such as fraud, duress, or unconscionability, which factors were not present in Dorman.  Id., 2019 WL 3939644 at *1-*2 (citing Epic Sys. Corp. v. Lewis, — U.S. –, 138 S. Ct. 1612, 1621 (2018)). Third, relying on Supreme Court precedent, the Ninth Circuit concluded that because arbitration is a matter of contract, class-wide or collective arbitration cannot be compelled under the Federal Arbitration Act. Dorman II, 2019 WL 3939644 at *2 (internal citations omitted).

Accordingly, the Ninth Circuit instructed the district court to order arbitration of plaintiff’s individual claims.  Dorman II, 2019 WL 3939644 at *2.

With the Ninth Circuit’s explicit overruling of Amaro and recognition that a participant’s ERISA claims may be subject to mandatory arbitration provisions, ERISA plan fiduciaries appear to have another tool to consider in evaluating a claim brought in litigation.

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