PLANSPONSOR - October/November 2019 - 55

INSIDE ANGLE
The Right
To Arbitrate
The class action landscape has changed with Dorman
O
ver the last decade, the class action landscape has dominated
headlines in the retirement plan marketplace. In
welcome news to the plan sponsor community, the 9th
Circuit's decision in Dorman v. Charles Schwab Corp. may provide
sponsors with another avenue to resolve disputes for their retirement
plan. How the courts resolve some of the lingering questions
from the Dorman decision remains to be seen, but the case does
provide hope to sponsors concerned about class-action liability.
Over the decades since the Federal Arbitration Act (FAA)
took effect in 1926, the Supreme Court has repeatedly ruled in
favor of arbitration in a variety of circumstances. For such cases
under the Employee Retirement Income Security Act (ERISA),
its leanings have been similar. However, because ERISA allows
plan participants to sue on behalf of their entire plan-which
plaintiffs sometimes bring as putative class actions and sometimes
do not-any discussion of arbitration in the ERISA context
must consider whether it is the entire plan's claim being sent to
arbitration or just the individual participant's. Thus, arbitration
agreements often include the term " class action waiver, " which
provides that the individual is waiving his right to proceed on a
class or representative basis.
Against this backdrop, the 9th Circuit in Dorman was
presented with an arbitration provision, including a class
action waiver, embedded within an ERISA plan document. The
court decided to enforce the provision, but to do so it had to
issue two separate rulings. First, it explicitly overruled its prior
precedent, which held that ERISA claims are not arbitrable.
Second, it addressed the case at hand, holding that, because
the arbitration provision was included within the plan document,
the plan itself had consented to arbitration. At the same
time, the court recognized that such claims are inherently individualized
when brought in the context of a defined contribution
(DC) plan and that the arbitration could be limited to the
participant's individual claims.
Implications for Plan Sponsors
The most significant takeaway from the Dorman decision is that
the court upheld the inclusion of arbitration and of class action
waivers in the plan document itself rather than in a separate, individually
signed contract. Whether other courts follow Dorman or
express concern that the ruling conflicts with ERISA's provisions
empowering participants to bring suit on behalf of their entire
plan will be something to watch. Plaintiffs have petitioned for
a rehearing en banc on this issue. As of press time, whether the
court decides to grant plaintiff's request remains to be seen.
In light of this case, plan sponsors may wish to consider
revisiting their plan document to add mandatory arbitration provisions.
A threshold question for sponsors to answer is whether they
would prefer to resolve plan-related disputes in federal court or
through arbitration. In particular, plan sponsors may consider the
following aspects of federal court litigation vs. arbitration.
ERISA litigation in federal court: is arguably more adherent
to legal precedent, which may increase predictability; has formal
appeal structure; generates precedent that may be helpful in
future cases; and is typically more expensive than arbitration.
Additionally, the class action process provides structure that generates
sufficient recovery for plaintiff firms to bring more marginal
claims and provides final resolution for all class members.
Arbitration of ERISA claims: is less predictable, though
sponsors could draft their plan document to require arbitrators to
have specific background in, or familiarity with, ERISA; allows a
very limited right to appeal; does not generate precedent; and is
typically less expensive than federal court.
Plan-wide arbitration may risk the adjudication of a significant
dollar amount of total claims with practically no likelihood
of appeal. For this reason, most plan sponsors that include an
arbitration provision in their plan document also couple it with a
class action waiver. Provisions requiring arbitration of individual
claims may make the plan a far less appealing target to plaintiffs'
lawyers. On the other hand, it's possible that the plan could face
the nuisance of repeated arbitrations of individual claims due to
the lack of binding precedent.
The Dorman decision should be welcome news to sponsors
seeking to utilize arbitration as a means to avoid litigating
disputes in federal courts. Employers have generally seen the
use of mandatory arbitration as a means to reduce the costs and
burdens of resolving matters of controversy. However, as the above
discussion illustrates, the use of mandatory arbitration in the
context of ERISA plan controversy should be carefully considered,
and different sponsors may prefer different dispute mechanisms.
Stephen Saxon is a partner with Groom Law Group,
Chartered, and George Sepsakos is a principal with Groom.
Offices for Groom are in Washington, D.C.
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