The uncertainty in the USC case raises the question as to why more sponsors of DC plans don't write arbitration agreements into plan documents. But claims against sponsors would not necessarily go away if arbitration agreements were enforceable. (Photo: Shutterstock)

Future class-action lawsuits against sponsors of defined contribution plans brought under the Employee Retirement Income Security Act could very well be stymied by the Supreme Court if the fiduciaries of the University of California's 403(b) plan get their way.

Last November, USC officially petitioned the High Court to review a decision from the U.S. Court of Appeals for the Ninth Circuit.

In Munro v. USC, filed in August of 2016 in U.S. District Court for the Central District of California, plan participants levied allegations common in claims against 403(b) plans being litigated across the country.

The plan, which included a DC and deferred annuity platform that combined held more than $4.4 billion in assets, had too many investment options (more than 340), too many recordkeepers (4), offered mostly proprietary funds, offered retail class shares and actively managed funds, paid too much in asset-based recordkeeping costs, included expensive annuities with onerous surrender chargers, and failed to put plan services out for competitive bidding. The result was millions lost in unnecessary costs, the plaintiffs alleged.

But USC's defense was novel to other 403(b) cases. Instead of defending the plan's administration, USC filed a motion to compel arbitration of the claims on an individual basis, based on the arbitration agreements each plaintiff signed upon accepting employment at USC.

Ninth Circuit says no dice

According to those agreements, “any claim that otherwise would have been decidable in a court of law—whether under local, state, or federal law—will instead be decided by arbitration.”

In March of 2017, Chief District Judge Virginia Phillips denied USC's motion to compel arbitration, on the grounds that the agreements were signed on behalf of the employees, and not the 403(b) plan.

The claims in the USC case are being brought on behalf of the plan—not individuals—reasoned Judge Phillips in her decision, which the Ninth Circuit unanimously upheld on appeal.

“Holding that participants' arbitration agreements cannot affect their claims (brought under ERISA) makes practical sense and is closely aligned with the goals of ERISA,” wrote Chief Judge Phillips in her decision. “Indeed allowing such arbitration agreements to control participants' claims would, in a sense, be allowing the fox to guard the henhouse.”

“Benefits lawyers have been struggling with this question for some time,” said Ian Morrison, co-chair of the ERISA & Employee Benefits Litigation Practice Group at Seyfarth Shaw. “Can you force arbitration in ERSIA claims? People have been trying to push arbitration to eliminate class-action exposure.”

Last year, the Supreme Court ruled that class-action waivers can be included in arbitration agreements. Now, USC is asking the Supreme Court to decide the nuanced question of whether its complaint is being brought on behalf of the participants that signed the arbitration agreements, or whether the complaint is being brought on behalf of the 403(b) plan.

“The fundamental question when seeking to compel arbitration is did the plaintiff agree to arbitrate claims. The USC claim really turns on the issue of whose claim this is,” explained Morrison.

The question raised in Munro v. USC is somewhat novel. Courts have found that ERISA claims are arbitrable, as Chief Judge Phillips noted in her decision. But the question of who is bringing claims—an individual or a plan—has not been fully resolved by courts, says Morrison.

“Courts have said the private right of action in ERISA is somewhat on behalf of a plan, not individual employees,” he said.

“Qui tam,” or whistleblower litigation brought on behalf of government employees, is typically not subject to arbitration agreements because the claims belong to the government, not individuals, said Morrison. In oral arguments, the panel of appellate judges in the Ninth Circuit raised the relationship of the qui tam standard to the USC case.

But in the ERISA realm, the question of who is suing—a person or a plan—remains murky.

“This is the first decision in the ERISA arbitration context,” noted Morrison. “If the Supreme Court takes the case, and asks if this is an individual's claim, that would be a big step forward.”

Why not just write arb agreements into plan documents?

Attorneys for USC's plan participants have filed a brief in opposition with the Supreme Court. To date, the Court has not asked the U.S. Solicitor General to review the case, an action that Morrison said would be a solid indication of the court's interest in taking it up.

Each term the High Court receives up to 8,000 petitions for review, and typically only agrees to hear about 80 claims. If the Court is to hear the USC case this term, it will have to say so soon, said Morrison.

Guessing whether the Court will hear the case, and predicting how it may rule, is futile, he added.

“The Court has issued too many rulings on arbitration issues. That could mean they are exhausted with the issue, or it could mean they'd be interested in taking it up,” he said.

The Supreme Court has tended to rule in favor of the Federal Arbitration Act, which bodes well for the fiduciaries of USC's plan. But the Court also recently issued a ruling in support of limiting arbitration, explained Morrison.

The uncertainty in the USC case raises the question as to why more sponsors of defined contribution plans don't write arbitration agreements into plan documents.

More are, said Morrison. Charles Schwab had an arbitration agreement in its 401(k) plan, which a District Court in the Ninth Circuit did not enforce in claim brought by Schwab plan participants. Schwab has appealed.

The plaintiffs' bar, which holds to the argument that ERISA's express private right of action supersedes class-action waivers in arbitration agreements, has implied that it would arbitrate claims en mass on an individual basis if forced to.

In other words, claims against sponsors would not necessarily go away if arbitration agreements were enforceable.

“They are saying, 'fine, bring it on, we'll just file thousands of arbitration claims,” said Morrison. “You do see that in other areas of employment law, like wage and hour and discrimination claims. But not on the ERISA side. That would potentially change the dynamic of ERISA claims.”

The perception exists—fair or not, says Morrison—that arbitrators bring a more even hand to disputes and are more likely to rule down the middle.

But arbitration agreements don't amount to a get-out-of-jail-for-free card for employers, says Morrison.

For one, employers waive the right to appeal if they lose in arbitration. Sponsors have been able to land favorable rulings appealing decisions in federal court.

And the Department of Labor is still able to bring claims against sponsors. Labor would not be bound by arbitration agreements, said Morrison.

“There are balancing factors to writing arbitration agreements in plan documents,” he added. “They are not a slam dunk for sponsors.”

If the Supreme Court passes on the hearing the USC case in this term, there remains the possibility it will reconsider the claim in the next term, said Morrison.

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