Back in August, a three-judge panel of the 9th United States Circuit Court of Appeals issued a major decision that was taken to have shifted the standing of mandatory arbitration provisions used in the operation of retirement plans governed by the Employee Retirement Income Security Act (ERISA).
In short, the panel concluded that a previous, precedent-setting 9th Circuit decision which had held that ERISA claims are generally not subject to arbitration provisions is “no longer good law” in light of interim Supreme Court rulings. The underlying case, Dorman vs. Charles Schwab, was initially filed in 2017. Subsequently, in January 2018, a district court judge denied a motion by Charles Schwab that sought to mandate the lawsuit proceed via individual arbitration, rather than as an ERISA class action in federal court. This denial kicked off the appeals process which led to the three-judge panel’s pro-arbitration ruling earlier this year.
Now, the full 9th Circuit has backed the panel’s ruling. Technically speaking, the full court has been advised of the plaintiff’s/appellee’s petition for a rehearing “en banc,” and no judge of the court has requested a vote on said petition. Thus, the appellee’s petition for rehearing en banc has been denied.
Analysts tell PLANADVISER the 9th Circuit’s decision, now certified by the full appeals court, is significant because it is the first case in the nation to explicitly permit the implementation of an arbitration provision in a plan document. However, the full ramifications of this decision are still uncertain.
A Move Toward Mass Arbitration?
Moving forward, the decision has the potential to impact other cases proceeding in the 9th Circuit, which includes the district courts in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. Without the Supreme Court weighing in or other circuit courts taking up this matter in other cases, the decision likely won’t have a big impact outside of these states.
Joan Neri, counsel in Drinker, Biddle & Reath’s ERISA practice in Florham Park, New Jersey, also notes the case’s impact in the ERISA landscape could be muted by the fact that it does not directly address how a fiduciary breach claim seeking plan-wide relief aligns with the individual recovery sought in arbitration.
“This is something that advisers and sponsors should continue to watch in the litigation sphere before making any amendments to a plan,” she recommends.
While generally speaking plan sponsors prefer arbitration to going to court, there are some downsides to forcing ERISA claims into the arbitration route, warns Tad Devlin, a partner with Kaufman Dolowich & Voluck in San Francisco.
“For non-experienced practitioners, the ERISA statute can be a labyrinth, so this would weigh some plan sponsors in favor of going before a federal judge who has heard these types of claims,” he says. “Another disadvantage to arbitration is that it is confined to a limited review, and the arbitration award likely would be final and binding and can be very difficult to challenge or overturn. It can be almost impossible to challenge at the judicial level on a petition to vacate the award. To do so, the sponsor would essentially have to show the award decision was fraudulent or corrupt. On the other hand, in a judicial setting, you have at your disposal the district court, the court of appeals and the highest court in the land.”