Compliance August 29, 2018

Charles Schwab, Chamber of Commerce Ask Court to Reconsider Arbitration in USC Case

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.

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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.

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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.
Compliance August 29, 2018

6th Circuit Asks District Court to Consider Plan Reformation in Chrysler Lawsuit

A plan participant relied on language in the SPD regarding eligibility for benefits, and the appellate court found the SPD inaccurately portrayed provisions of the plan document.

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The U.S. 6th Circuit Court of Appeals has ruled once again on pension plan litigation filed by a former employee of Chrysler Group.

As with previous decisions in the case, the opinion filed by the 6th Circuit is something of a mixed bag. In short, this second appellate decision reverses the district court’s latest grant of summary judgment to the plan on the lead plaintiff’s request for reformation. On the other hand, the decision affirms summary judgment on the plaintiff’s request for equitable estoppel, and remands the matter again to district court for further proceedings consistent with the latest appellate opinion.

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Background information in plan documents shows the plaintiff believes he is entitled to an early retirement supplement, called “30-and-Out benefits.” According to the original and amended complaints, this belief is based on the summary plan document (SPD) provided by Chrysler to plan participants, which stated the plaintiff did not need to be “actively employed at retirement” to remain eligible for these benefits. But the SPD omitted an exclusionary clause contained in the plan document itself, which said that an employee who was terminated was ineligible for the early retirement supplement.

After the plaintiff was terminated, he applied for his retirement benefits and was denied the 30-and-Out benefits. After unsuccessfully appealing this denial administratively, the plaintiff brought suit under the Employee Retirement Income Security Act (ERISA). The initial lawsuit sought to hold the plan to its representations in the SPD, notwithstanding the exclusionary provision in the plan document, via the equitable remedies available under ERISA Section 502(a)(3).

Latest action in the case

The case has reached the 6th Circuit for a second time on appeal from the U.S. District Court for the Eastern District of Michigan. In the first appellate decision, the circuit court sided with Chrysler on some matters, but it determined in favor of the plaintiff/appellee that the pension plan’s summary plan description (SPD) in fact failed to provide all the information required by ERISA about eligibility for supplemental benefits. At that juncture, the appellate court concluded a participant who relied on the SPD and expected those benefits may be due relief.

In that first appellate decision, the circuit court noted that under ERISA, the SPD must be “written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan.” In addition, the court stipulated that an SPD must include “the plan’s requirements respecting eligibility for participation and benefits; a description of the provisions providing for non-forfeitable pension benefits; and circumstances which may result in disqualification, ineligibility, or denial or loss of benefits.”

As part of its first appellate decision, the 6th Circuit remanded the matter of whether “a conflict exists between the SPD and the pension plan because the SPD misleads or fails to state additional requirements contained in the plan document.” In essence, the appellate court agreed that, because of the clear material conflict between the pension plan terms and the SPD, the plaintiff could seek equitable relief under ERISA Section 502(a)(3). Thus, his motion to amend his complaint to add a request for equitable relief under ERISA Section 502(a)(3) was not futile.

Finding himself again in district court, the plaintiff filed an amended complaint. In the first count, he sought equitable relief in the form of reformation, equitable estoppel, and surcharge under ERISA Section 502(a)(3) for a violation of ERISA Section 102(b). Further, in count two, the plaintiff renewed his claim for relief under ERISA Section 502(a)(1)(B). The parties subsequently filed cross-motions for summary judgment. In turn, the magistrate judge recommended that the district court deny the plaintiff’s motion for summary judgment and grant Chrysler’s motion for summary judgment, and the district court adopted the magistrate judge’s report and recommendation in full.

This turn of events resulted in yet another appeal to the 6th Circuit, resulting in the current decision. In particular, the plaintiff appealed the grant of summary judgment with respect to his request for equitable relief in the forms of reformation and equitable estoppel. Ultimately, this second appellate decision reverses the district court’s grant of summary judgment to the plan on the lead plaintiff’s request for reformation. On the other hand, the decision affirms summary judgment on the plaintiff’s request for equitable estoppel, and remands for further proceedings consistent with the latest opinion.

The full text of the decision is available here.

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