The U.S. Court of Appeals for the Ninth Circuit recently upheld a lower court ruling that a group of ERISA plan participants’ claims under ERISA Section 502(a)(2) for breach of fiduciary duty were not required to be arbitrated despite the fact that they had entered into employment agreements requiring them to arbitrate all of their claims.
In reaching this holding, the court emphasized that the participants had raised claims not on their own behalf, but on behalf of an ERISA plan, which was not a party to the employment agreement with the arbitration clause. Munro v. Univ. of Southern Cal., No. 2:16-cv-06191, 2018 WL 3542996 (9th Cir. July 24, 2018).
The ERISA claims and rulings
Allen Munro and eight other current and former employees of the University of Southern California were participants in the USC Retirement Plan Oversight Committee. They sued the University, the Retirement Plan, and a committee member for breaching their fiduciary duties by failing to reduce the retirement plan’s fees and expenses and by failing to use sound judgment when determining what investments to include in the plan. The participants seek monetary and equitable remedies that benefited the plans and its participants and beneficiaries, including a determination about how to calculate losses, removal of certain fiduciaries, an accounting of plan losses, reformation of the plans, and an order concerning future investments.
The University moved to compel arbitration, contending that the participants agreed in their employment agreements to arbitrate “all claims … that [they] may have against the University,” including “claims for violation of any federal, state or other governmental law, statute, regulation, or ordinance.” The U.S. District Court for the Central District of California denied the University’s motion to compel arbitration, concluding that the dispute was outside of the arbitration clause “[b]ecause the parties [to the agreements] consented only to arbitrate claims brought on their own behalf” and the participants’ “claims are brought on behalf of the Plans.”
The Ninth Circuit affirmed the district court and held that the participants’ claims were not subject to the arbitration clause. It interpreted the arbitration clause and assessed whether the participants were bringing a claim on behalf of themselves or on behalf of an ERISA plan. It noted that the arbitration clause required the parties to arbitrate “all claims … that Employee may have against the University,” but did not “extend to claims that other entities have against the University.”
The court also analogized the dispute to a case in which it refused to compel arbitration of claims under the False Claims Act because those claims belonged to the government, not to the relator. There, it reasoned that the “government, rather than the relator, stands to benefit most from” that litigation. In Munro, it ruled that the participants seek recovery for the plan, not themselves. Likewise, the court found that, like a relator raising FCA claims, the participants raising ERISA Section 502(a)(2) claims “may not alone settle a claim because that claim does not exist for” the participants’ “primary benefit” but instead for the plan’s benefit.
Finally, although the employees asked the Ninth Circuit to depart from several other federal appellate courts by holding that breach of fiduciary duty claims on behalf of a plan under ERISA Section 409(a) may not as a matter of law be arbitrable, the court concluded that deciding that issue was unnecessary because it had ruled that the claims were not covered by the arbitration clause.
The significance of the ruling
Permitting ERISA participants and beneficiaries to pursue their claims in court rather than in arbitration has significant consequences. First, arbitrations are typically private, but the parties’ arguments, evidence, and filings–and the court’s rulings–in Munro will be available to the public. Second, an arbitrator’s rulings generally lack precedential force, but a court’s rulings will be available for other courts to consider using as precedent in subsequent cases. Third, arbitration clauses (including the clause in Munro) often bar parties from raising claims in arbitration on behalf of a class of people, thereby removing the efficiencies of a class action that generally encourage claimants to raise claims at all. By holding that the ERISA claims in Munro were not subject to the arbitration clause, the court permitted the nine participants to realize the efficiencies of pursuing their claims together.
Joshua Fowkes is a partner at Arent Fox.