Amicus Briefs Argue Against 9th Circuit USC Decision About Arbitration Agreements

The Charles Schwab Corporation and the U.S. Chamber of Commerce have filed amicus briefs in the 9th U.S. Circuit Court of Appeals asking it to reconsider its decision that claims against the University of Southern California relating to breaches of fiduciary duty in the management of its 403(b) plans fell outside the scope of the arbitration agreements that the participants signed.

In the case of Munro vs. University of Southern California, the appellate court upheld a district court’s denial of defendants’ motion to compel arbitration of collective claims for breach of fiduciary duty in the administration of two Employee Retirement Income Security Act (ERISA) plans. These agreements stated that these employees could only arbitrate claims brought on their own behalf. The panel concluded that the dispute fell outside the scope of the arbitration agreements because the claims were brought on behalf of the ERISA plans, not the individuals.

For its part, Schwab says the appellate court’s decision, which effectively invalidates agreements to arbitrate ERISA Section 502(a)(2) claims, conflicts with U.S. Supreme Court and Circuit precedent interpreting the Federal Arbitration Act (FAA) and ERISA. The 9th Circuit held, in effect, that employers and employees can never agree to arbitrate ERISA Section 502(a)(2) claims without the plan’s consent. According to Schwab, that holding contradicts Supreme Court precedent concerning arbitrability—including Epic Systems Corp. v. Lewis. Schwab also noted that just three months ago, the Supreme Court overturned the 9th Circuit’s decision in Morris v. Ernst & Young LLP.

According to Schwab, the appellate court compounded its error by holding that an ERISA Section 502(a)(2) claim brought by a participant in a defined contribution plan belongs to the plan, not the participant—a conclusion that squarely contradicts the Supreme Court’s decision in LaRue v. DeWolff, Boberg & Associates, Inc.

Schwab says rehearing the case is further warranted because the court’s decision implicates a question of exceptional importance. “The Panel’s decision imperils arbitration agreements that Schwab and many other companies rely on to limit the costs of offering its employees the opportunity to participate in a retirement plan. Under the Panel’s ruling, sponsors of employee retirement plans would be forced to defend against class action Section 502(a) claims—and potentially other types of claims—in court despite having agreed to arbitration with their employees,” the brief says.

In addition to arguing that the 9th Circuit decision goes against U.S. Supreme Court precedent, the Chamber adds in its brief that the question presented is also one of “exceptional importance” and thus warrants en banc review on that basis as well. “The panel’s holding will disrupt the settled expectations of numerous contracting parties and undermine the benefits of employment-related arbitration. The Supreme Court has recognized that ‘[a]rbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts.’”

The Chamber also argues that the arbitral forum is just as fair to employees as litigation in court, and arbitration’s benefits are superior to the outcomes of the overwhelming majority of class actions. It cited a 2015 study by the Consumer Financial Protection Bureau in which it examined over a hundred class action settlements and found that the “weighted average claims rate”—i.e., the average rate at which class members in those settlements filed claims to receive a settlement payment, weighted by the size of each class—was just 4%. In addition, the brief says that, given its informality and its efficiency, arbitration is also less contentious than litigation, enabling employees to resolve disputes with less risk of permanently damaging their relationships with their employers and coworkers.

Finally, the Chamber says every other court of appeals to address the question has held that ERISA claims are subject to arbitration, so the 9th Circuit’s holding, if allowed to stand, would disrupt the reasonable expectations of employers and employees that properly drafted arbitration clauses will cover employee claims that relate to ERISA benefit plans. Citing another Supreme Court ruling, Schwab said under the appellate court’s approach, Section 502(a)(2) claims will not be subject to arbitration unless the applicable arbitration agreement specifically mentions claims on behalf of the plan—a “magic words” test that is particularly inappropriate under the FAA.