Ninth Circuit: Individual Employment Provision Cannot Compel Arbitration of 409(a) Claim

HIGHLIGHTS:

• The U.S. Court of Appeals for the Ninth Circuit's recent decision in Munro v. University of Southern California concluded that an arbitration provision in individual employment contracts could not be used to compel arbitration of an Employment Retirement Income Security Act of 1974 (ERISA) Section 409(a) claim based on alleged breach of fiduciary duty because the contracts addressed only those claims brought in the employees' individual capacities.
• Because Section 409(a) claims are brought on behalf of the plan, the Ninth Circuit reasoned that the plaintiffs' claim did not fall within the scope of the arbitration provision in their employment agreements.
• The Ninth Circuit's opinion did not address the question of whether an employment agreement or plan document could be written in a way as to subject such claims to mandatory arbitration.

Holland & Knight recently published an alert regarding how the U.S. Supreme Court's decision in Epic Systems Corp. v. Lewis may affect employee stock ownership plans (ESOPs), a form of Employee Retirement Income Security Act of 1974 (ERISA) plan. (See "The Potential Impact of Supreme Court's Epic Systems Decision on ESOPs," May 23, 2018). One consideration we expressed was whether a class-action waiver/arbitration provision contained in a plan document would be binding on a plan participant where the participant did not expressly agree to the provision.

The U.S. Court of Appeals for the Ninth Circuit's recent decision in Munro v. University of Southern California, issued on July 24, 2018, concluded that an arbitration provision in individual employment contracts could not be used to compel arbitration of an ERISA Section 409(a) claim based on alleged breach of fiduciary duty because the contracts addressed only those claims brought in the employees' individual capacities. Because Section 409(a) claims are brought on behalf of the plan, the Ninth Circuit reasoned that the plaintiffs' claim did not fall within the scope of the arbitration provision in their employment agreements.

While holding that an employment agreement mandating arbitration of individual claims would not apply to a fiduciary claim based on ERISA Section 409(a), the Ninth Circuit did not reach the question of whether an employment agreement or plan document could be written in a way as to subject such claims to mandatory arbitration.

Background and Court Opinion

The case involves whether an arbitration provision contained within an employment contract, wherein the parties agreed to arbitrate "all claims ... that Employee may have against the University or any of its related entities ... and all claims that the University may have against Employee" mandates arbitration for claims of fiduciary breach brought under ERISA on behalf of an employee benefit plan.

The plaintiffs, current and former employees of the University of Southern California, and participants in two ERISA plans (the University of Southern California Defined Contribution Retirement Plan and the University of Southern California Tax Deferred Annuity Plan), brought a class action lawsuit alleging that the University mismanaged their retirement savings. The University argued that the dispute was subject to an arbitration agreement, signed as a condition of the employees' employment contracts. In the employment contract, the parties agreed to arbitrate "all claims ... that Employee may have against the University or any of its related entities ... and all claims that the University may have against Employee." In an opinion authored by Chief Judge Sidney Thomas, the Ninth Circuit concluded that the dispute fell outside the scope of the arbitration agreements because the parties consented only to arbitrate claims brought on their own behalf, and the employees' claims were brought on behalf of the ERISA plans.

The Court reasoned that "because recovery under ERISA §409(a) is recovery singularly for the plan" that such claims are not claims that an " '[e]mployee may have against the University or any of its related entities,' and the arbitration agreements cannot be stretched to apply to them."

Considerations

The Ninth Circuit's decision was based on the language of the plaintiffs' individual employee agreements. Based on the language of the agreements, the Court determined that the ERISA Section 409(a) claim was outside the scope of the arbitration provision. The Court's decision may well have been different if the arbitration provision addressed claims that an individual may bring in a representative capacity, such as ERISA claims. However, even if that had been the case, and assuming such a provision would be enforceable in a claim against the University, it is not clear that such a provision could extend to ERISA claims against persons not party to the employment agreement, such as the trustee of the plan, the plan committee or third parties engaged by the plan, such as investment advisors. Even a broadly worded arbitration provision in an individual employment agreement might not be interpreted to apply for the benefit of those entities.

An alternative or additional approach would be including an arbitration provision in a plan document. However, as our prior alert addressed, there may be an argument that such an arbitration clause is not binding because the participant has never affirmatively agreed to that provision of the plan. Ultimately, the decision in Munro, while finding ineffective one approach to mandating arbitration of ERISA fiduciary claims, leaves open the question of whether alternate forms of documentation – either in an employment agreement or a plan document – might be sufficient to compel arbitration of ERISA fiduciary cases brought by an individual plan participant.  

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.