courthouse of 9th Circuit in San Francisco

The Ninth Circuit Court of Appeals has reversed a lower court ruling that denied Charles Schwab Corp.'s motion to compel arbitration in a class-action lawsuit against fiduciaries to the company's 401(k) plan.

In January of 2018, a ruling in the U.S. District Court for the Northern District of California said the arbitration provisions in Schwab's plan documents did not bind the plaintiff, a former broker with the firm, to arbitration.

One of the arbitration provisions was written into plan documents after the plaintiff left Schwab, but before he brought the lawsuit.

"The Plan Document issued a year after Dorman (the plaintiff) ceased participation in the Plan cannot apply to his claims," wrote District Court Judge Claudia Wilken in 2018. "To hold otherwise would be inequitable because it would allow a plan defendant to amend the plan documents unilaterally at any time, even after a participant has brought suit against the defendant, and put the participant at a disadvantage."

Judge Wilken also said the arbitration agreements were not binding because the lawsuit was brought on behalf of the retirement plan, and the arbitration agreements only applied to claims from individuals.

In reversing the lower court's decision, the Ninth Circuit reversed its position on the enforceability of arbitration agreements in ERISA claims, which was based on a 1984 circuit ruling in Amaro v. Continental Can Co.

"We conclude that our holding in Amaro is no longer good law," the Ninth Circuit said in its ruling, citing the Supreme Court's 2013 decision in American Express Co. v. Italian Colors Restaurant.

According to the Ninth Circuit's decision, the lower court erred in ruling that one of the arbitration agreements, and class-action waivers, was written into plan documents after the plaintiff left Schwab.

Attorneys for the brokerage attempted to file papers showing evidence the arbitration provision took effect during the plaintiff's employment, but the lower court denied their request to reconsider its decision.

When the Ninth Circuit ruled in Amaro back in 1984, it reasoned that "arbitrators, many of whom are not lawyers, lack the competence of courts to interpret and apply statutes as Congress intended."

But several rulings by the Supreme Court since have upheld the competency of arbitrators, the Ninth Circuit's decision said.

That the Ninth Circuit overturned its own precedent on arbitration agreements and ERISA claims is substantial, not just for Schwab, but for the larger plan sponsor community, said Kevin Walsh, a partner with The Groom Law Group.

"It's a big deal because it could provide a way for sponsors to reduce litigation costs in arbitration rather than in class-action litigation," said Walsh.

The plaintiffs could petition the Supreme Court to review the Ninth Circuit's decision. But the High Court has issued several rulings on the enforceability of arbitration agreements under the Federal Arbitration Act over the past decade. And the Court may decide that those rulings provide enough clarity, said Walsh.

"I think this may be the end of the road for challenges to arbitration agreements in the ERISA context," he said. "The Supreme Court has spoken with a uniform voice upholding the enforceability of arbitration agreements."

The ruling is likely to motivate more arbitration agreements in plan documents, added Walsh.

"Even though the Supreme Court has been signaling arbitration is a fair remedy, there was still some skepticism over whether the Ninth Circuit would go along with that," he said. "I think we will see more arbitration agreements added to plan documents."

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