For years, companies around the United States have used arbitration clauses to stop consumer class actions before they start. A recent pair of rulings from the U.S. Court of Appeals for the Ninth Circuit suggests that sponsors of retirement plans might consider a similar approach to fend off class actions under the Employee Retirement Income Security Act (ERISA).
In the past two decades, the fiduciaries of 401(k) and other retirement plans have regularly been sued in class actions under a variety of legal theories, ranging from “stock drop” cases filed after a dip in the share price of company stock to claims that investment options on a plan’s menu are imprudent or too expensive. Those cases have been litigated in federal court, not arbitration.
That may change in the wake of two Ninth Circuit opinions in Dorman v. Charles Schwab Corp., issued on August 20, 2019. In a reported opinion, the court overruled an earlier Ninth Circuit opinion that had found ERISA claims immune from arbitration. In an accompanying unpublished order, the same panel enforced the arbitration clause in the plan document, finding that claims challenging the use of Schwab’s proprietary funds were subject to arbitration and — importantly — had to be arbitrated on an individual rather than a class basis, with recovery limited to the claims of the individual plaintiff.
In the wake of these rulings, plan sponsors may want to consider adopting arbitration clauses combined with class action waivers. (Arbitration clauses without an enforceable class action waiver can lead to classwide arbitrations — an acutely undesirable outcome for defendants.) But arbitration clauses that forbid class actions are not a panacea, as companies such as Uber could testify. In recent years, the plaintiffs’ bar has brought large numbers of individual arbitrations against Uber and other companies that have arbitration clauses in their contracts, creating challenges for defendants that in some ways can be more onerous than class actions. Like any other significant question involving plan design, this one should be answered after a careful weighing of the pros and cons of different approaches and the unique circumstances of each participant population.
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