Charles Schwab Wins Significant Pro-Arbitration ERISA Decision

Charles Schwab has prevailed in its appeal of an Employee Retirement Income Security Act (ERISA) lawsuit known as Dorman vs. The Charles Schwab Corporation. 

Prior to this ruling by the 9th U.S. Circuit Court of Appeals, the U.S. District Court for the Northern District of California had ruled in favor of plaintiffs in the case, who argued that Charles Schwab defendants violated ERISA and breached their fiduciary duties by including certain proprietary investment funds in the plan. Significantly, the 9th Circuit has overturned and remanded the District Court’s decision on the grounds that it is no longer “good law” to conclude that ERISA plaintiffs as a general mater cannot be forced into arbitration.  

Technically, the 9th Circuit panel has ruled that Amaro v. Continental Can Co., an earlier 9th Circuit decision from 1984 which held that ERISA claims are not arbitrable, is no longer good law in light of intervening Supreme Court case law, particularly American Express Co. v. Italian Colors Restaurant, which was decided back in 2013.

“Over 35 years ago, in Amaro v. Continental Can Co., we wrote that ERISA mandated minimum standards for assuring the equitable character of ERISA plans that could not be satisfied by arbitral proceedings,” the decision states. “We reasoned that arbitrators, many of whom are not lawyers, lack the competence of courts to interpret and apply statutes as Congress intended. In Comer v. Micor, Inc., we acknowledged in dicta that our past expressed skepticism about the arbitrability of ERISA claims seemed to have been put to rest by the Supreme Court’s opinions.”

Since Amaro, the decision explains, the Supreme Court has ruled that arbitrators are competent to interpret and apply federal statutes, holding that “there is nothing unfair about arbitration—even arbitration on an individual basis—as long as individuals can vindicate their statutory rights in the arbitral forum.”

Generally, a three-judge panel may not overrule a prior decision of the 9th Circuit. If, however, an intervening Supreme Court decision undermines an existing precedent of the circuit, and both cases are closely on point, a three-judge panel may then overrule prior Circuit authority. The issue decided by the higher court need not be identical. The appropriate test is whether the higher court “undercut the theory or reasoning underlying the prior circuit precedent in such a way that the cases are clearly irreconcilable.”

“Where the reasoning or theory of our prior circuit authority is clearly irreconcilable with the reasoning or theory of intervening higher authority, a three-judge panel should consider itself bound by the later and controlling authority, and should reject the prior circuit opinion as having been effectively overruled,” the decision states. “The holding in American Express Co. that federal statutory claims are generally arbitrable and arbitrators can competently interpret and apply federal statutes constitutes intervening Supreme Court authority that is irreconcilable with Amaro. Amaro, therefore, is no longer binding precedent.”

The now-defunct District Court decision had found that, even if the claims asserted in the complaint did fall within the scope of one or more of the arbitration agreements in question, the agreements would be unenforceable on multiple grounds. According to the District Court, the lead plaintiff’s claims were brought on behalf of the plan—not on his own behalf—and without the plan’s consent he cannot waive rights that belong to the plan, such as the right to file this action in court.

“The District Court acknowledged that the plan did consent to arbitration by virtue of its plan document’s arbitration provision,” the appellate decision explains, “but it erroneously held that consent invalid because the plan fiduciaries added the arbitration provision to the plan document after they were sued.”

In fact, as case documents show, the defendants submitted evidence that the arbitration provision took effect while the lead plaintiff was still a plan participant.

Read the full appellate decision here.