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In Epic Systems Corp. v. Lewis,[1] the U.S. Supreme Court ruled that a class action waiver contained in an employee’s arbitration agreement is both enforceable under the Federal Arbitration Act and does not constitute a violation of the National Labor Relations Act.

Three Justice Scalia Supreme Court Decisions Set the Stage for Epic Systems

The “central purpose” of the FAA is to “ensure ‘“that private agreements to arbitrate are enforced according to their terms.’”[2][3] Because arbitration “is a matter of consent, not coercion,”[4] the act leaves it to the parties to establish the nature and scope of their arbitration, though a “written provision” in a contract or separate “agreement in writing,” limiting the scope of the parties’ arbitration agreement.[5] The Supreme Court has stated that parties to an arbitration agreement may “specify by contract the rules under which that arbitration will be conducted.”[6] “There is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate.”[7]

Three decisions (all written by Justice Antonin Scalia) strongly suggest the Supreme Court would allow a mandatory arbitration clause with a class action waiver in the Employee Retirement Income Security Act context:

1. Rent-A-Center, West Inc. v. Jackson[8]

Who decides whether an arbitration agreement is unconscionable when the agreement expressly delegates that decision to the arbitrator? Prior to this decision, it was settled that courts, not arbitrators, decided challenges to the substantive arbitrability of the dispute, absent an express agreement to the contrary.[9] In Rent-A-Center, the Supreme Court ruled that the arbitrator does. A district court can only intervene if a party challenges the validity of the agreement to delegate that decision to the arbitrator. When an arbitration clause has a proper delegation provision, giving the arbitrator the power to determine all questions as to arbitrability, then employees or potentially ERISA plan participants will be hard-pressed to avoid arbitration.

2. AT&T Mobility v. Concepcion[10]

The plaintiffs in Concepcion, claimed that AT&T cheated them when they agreed to select AT&T as their mobile phone carrier in exchange for a free phone. Notwithstanding AT&T’s promise of a “free” telephone, the Concepcions subsequently discovered that they were required to pay $30 in sales tax based on the retail value of the phone. AT&T’s customer service agreement contained a consumer-friendly mandatory arbitration agreement and a class action waiver. Both the federal district court and the Ninth Circuit agreed with the plaintiffs, relying on the so-called “Discover Bank Ruling” — a common-law rule propounded by California’s Supreme Court that found arbitration agreements prohibiting class arbitration are unconscionable. The U.S. Supreme Court reversed. It held that California’s Discover Bank rule was aimed as regulating arbitration agreements and was therefore superseded by the FAA. Justice Scalia, writing for the majority, noted that while the FAA’s savings clause preserves generally applicable contract defenses to arbitrability, it supersedes state law rules that contravene the FAA’s overriding policy favoring arbitration.

3. American Express Co. v. Italian Colors Restaurant[11]

In Italian Colors, the Supreme Court ruled that an express waiver of class action claims in a written arbitration agreement is enforceable under the FAA, even when the plaintiff can show that the cost of individually arbitrating a federal statutory claim would likely exceed any potential recovery. “The fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”[12] In Italian Colors, the court also took note of its prior ruling in Gilmer v. Interstate/Johnson Lane Corp.,[13] where the court stated it had “no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue, the Age Discrimination Employment Act, expressly permitted collective actions.”[14] In Gilmer, the court explained that limiting the plaintiff to arbitration did not infringe on the ADEA’s goal of combating age discrimination. The plaintiff could still pursue his discrimination claim and arbitration. The EEOC, the federal agency charged with enforcing the ADEA, retained independent authority to investigate age discrimination claims and still bring collective actions.[15]

The Epic Systems Decision

The employee plaintiffs in Epic Systems had alleged Federal Labor Standards Act and related state law claims through class or collective actions in federal court. Justice Neil Gorsuch recently filled Justice Scalia’s seat. His decision in Epic Systems employed the same analytics used by Justice Scalia in the three decisions described above. Both justices frame their opinions by asking simple questions exploring the pros and cons of the plaintiff’s response, followed by the rationale for the court’s decision. Justice Gorsuch in Epic Systems began by asking:

Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employers?

As a matter of policy these questions are surely debatable. But as a matter of law the answer is clear. In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms — including terms providing for individualized proceedings. Nor can we agree with the employees’ suggestion that the National Labor Relations Act (NLRA) offers a conflicting command.

In upholding the three arbitration clauses in dispute, the Supreme Court majority rejected three different arguments. First, the employees argued the FAA’s savings clause allows courts to refuse to enforce arbitration agreements “‘upon such grounds as exist at law or in equity for the revocation of any contract.’ 9 U.S.C. § 2.” Justice Gorsuch found this argument to be fundamentally flawed. He explained the savings clause recognizes only defenses that applied to “any” contract. This means that arbitration agreements can be invalidated by “generally applicable contract defenses, such as fraud, duress or unconscionability.”

Under our precedent, this means the savings clause does not save defenses that target arbitration either by name or by more subtle methods, such as by “interfering with fundamental attributes of arbitration.” Because the employees objected to the nature of the individualized arbitration proceedings, the Supreme Court concluded that this was merely an objection to fundamental attribute of arbitration. As such, it was not subject to challenge under the FAA’s savings clause.

The employees’ second argument was that the NLRA’s Section 7 rendered their arbitration agreements unenforceable. Justice Gorsuch began by observing, “This argument faces a stout uphill climb.” The Supreme Court ruled that, while the NLRA has a comprehensive regulatory scheme, it contains no reference to arbitration or class or collective action procedures. The court found the “catchall” language contained in Section 7 protects only the same kinds of collective bargaining activities that are otherwise protected under the NLRA. Nothing in the NLRA gave the employees the unhindered right to pursue class action claims in court.

Justice Gorsuch thought about why the employees had not argued the FLSA itself gave them the right to pursue class actions in federal court. He determined that employees did not make that argument because the Supreme Court had ruled decades ago that the FLSA does not displace the FAA or prohibit individualized arbitration proceedings citing Gilmer v. Interstate/Johnson Lane Corp.[16]

Finally, the court rejected the employees’ third argument that it must defer to the National Labor Relations Board’s most recent interpretation that the NLRA made class action waivers invalid under the FAA. The Supreme Court explained the NLRB was not seeking deference as to its interpretation of the NLRA. Instead, it found the NLRB was seeking to impose its own interpretation of the NLRA that limited the application of the FAA, a separate federal statute that the NLRB does not administer.

Epic Systems’ Impact on ERISA Class Actions

ERISA plan participants can choose to pursue three different remedies: (1) a claim for additional plan benefits arising under 29 U.S.C. § 1132(a)(1)(B); (2) a claim for breach of fiduciary duty to make the plan whole for any losses, 29 U.S.C. § 1132(a)(2); and (3) a claim for breach of fiduciary duty seeking to enforce the terms of the plan or other appropriate equitable relief arising out of 29 U.S.C. § 1132(a)(3).

An employee who wants to sue over a denied plan benefit is obviously suing on his or her own individual behalf. As the Supreme Court made clear in Epic Systems, individual claims (such as those for additional plan benefits) can be subject to an agreement to arbitrate, as well as a class action waiver. Fiduciary breach claims arising under ERISA are much more problematic. Suing to make the plan whole for any losses is a form of derivative action. The plaintiff is not suing to obtain her own personal monetary relief, but instead she is seeking relief for the entire plan.[17][18]

Ninth Circuit Rejects USC’s Mandatory Arbitration Clause for ERISA Breach of Fiduciary Duty Claims

In Munro v. University of Southern California,[19] the Ninth Circuit ruled that participants bringing fiduciary duty claims are not seeking individual damages for themselves but rather were seeking relief for the entire ERISA plan. Each of the employees had signed an employment arbitration agreement that stated they agreed to arbitrate “all claims that … Employee may have against the University or any of its related entities … and all claims that the University might have against Employee.” The Ninth Circuit found that this language did “not extend to claims that other entities have against the university.”

Turning to the particular arbitration agreements entered into between the Employees and USC, we must decide “whether the agreement encompasses the dispute at issue.” Cox v. Ocean View Hotel Corp., 533 F.3d 1114, 1119 (2008) (citation omitted). Because the parties consented only to arbitrate claims brought on their own behalf, and because the Employees’ present claims are brought on behalf of the Plans, we conclude that the present dispute falls outside the scope of the agreements.

Chief Judge Sidney Thomas, writing for the court, found there were many similarities between qui tam lawsuits under the False Claims Act and ERISA breach of fiduciary duty lawsuits. He explained that both qui tam relators and ERISA fiduciary breach plaintiffs are not seeking relief for themselves.

A party filing a qui tam suit under the FCA seeks recovery only for injury done to the government. Vt. Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 u.s. 765, 771-72 (2000), and a plaintiff bringing a suit for breach of fiduciary duty similarly seeks recovery only for injury done to the plan. LaRue v. DeWolff, Boberg & Assoc., Inc., 552 U.S. 248, 256 (2008); accord id. at 261 (Thomas, J., concurring).

The court also observed it was constrained by its prior precedents. In Bowles v. Reade,[20] the court ruled that a plaintiff seeking relief for breach of fiduciary duty under ERISA could not settle a claim on behalf of a plan, but rather could only settle if the plan consents to the settlement. The Ninth Circuit, in affirming the district court, concluded:

In sum, the claims asserted on behalf of the Plans in this case fall outside the scope of the arbitration clauses in individual Employees’ general employment contracts.

The Ninth Circuit’s decision in Munro thus rested on the specific arbitration language before it. It explained:

Although the Supreme Court has never expressly held that ERISA claims are arbitrable, there is considerable force to USC’s position. See, e.g., Comer v. Micro, Inc., 436 F.3d 1098, 1100-01 (9th Cir. 2006) (discussing the issue in dicta). However, given our decision that the claims asserted in this case fall outside the arbitration clauses in the employee agreements, it is unnecessary to decide that question here.

Other district courts in California have also rejected class action waivers in cases where plaintiffs have alleged a breach of fiduciary duty under ERISA. The courts reasoned that fiduciary breach claims cannot be compelled into arbitration for two reasons: (1) 29 U.S.C. § 1132(a)(2) provides a participant with a statutory right to bring a breach of fiduciary duty lawsuit on behalf of the ERISA plan; and (2) the ERISA plan, itself, did not sign an arbitration agreement or an agreement to waive class or representative actions.[21][22]

Epic Systems’ Unanswered Questions

The Ninth Circuit’s decision in Munro is not the end of this story. The Munro court’s ruling was actually quite narrow. It found the arbitration language between the employees and USC was inadequate because the language applied to employee/employer disputes. The language did not apply to ERISA fiduciary breach claims seeking to make the plan whole for losses.

The question remains whether the ERISA retirement plan, itself, could be amended to exclude class action breach of fiduciary duty claims. Prior rulings by the U.S. Supreme Court suggest that these types of plan amendments may be permissible. For example, in Lockheed Corporation v. Spink,[23] a unanimous Supreme Court reversed the Ninth Circuit’s ruling that amending a retirement plan to benefit the employer was a breach of fiduciary duty. It ruled Lockheed Corporation did not violate ERISA when it amended its defined benefit pension plan to offer early retirement benefits only to employees who agreed to execute a complete release of any employment-related claims against Lockheed. The Lockheed court explained, “Plan sponsors who alter the terms of a plan do not fall into the category of fiduciaries.” So, changing the plan’s design through a plan amendment is not a fiduciary act. On a second question, the court split seven to two in ruling that members of Lockheed’s retirement committee who administered the pension plan, could not be sued because ERISA does not forbid a quid pro quo under which employees gain a benefit if they meet a particular condition set by the plan sponsor.

Perhaps this same paradigm will work when ERISA plan sponsors adopt amendments mandating arbitration and class action waivers. The Supreme Court may find that a change of forum, from federal court to arbitration, is lawful under ERISA. Like other statutes the Supreme Court has recently reviewed in the class action waiver context (Sherman Act, FLSA, ADEA, NLRA, etc.), ERISA is silent about class actions. In Hughes Aircraft Co. v. Jacobson,[24] the Supreme Court reaffirmed the rule that ERISA plan amendments do not constitute fiduciary conduct. In Hughes, the plan sponsor had used surplus employee contributions in its defined benefit pension plan to fund an early retirement incentive plan.

Although there is no direct legal authority yet, given the consistent tenor of the Supreme Court’s pro-arbitration rulings, could an ERISA plan be amended to contain a clause mandating arbitration with a class action waiver for fiduciary breach claims? I think the short answer is, “Yes.”

 


 

James P. Baker is head of the ERISA litigation practice group at Baker McKenzie.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Epic Systems Corp. v. Lewis , et al., __ U.S. __ Nos. 16-285, 16-300, 16-307 (May 21, 2018).
[2] See also, e.g. Mastrobuono v. Shearson Lehman Hutton Inc. , 514 U.S. 52, 53-54 (1995) (quoting Volt Info Sciences, Inc., 489 U.S. at 479).
[3] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc. , 473 U.S. 614, 625 (1985) (FAA is “at bottom a policy guaranteeing the enforcement of private contractual arrangements”).
[4] Volt, 489 U.S. at 479.
[5] 9 U.S.C. § 2.
[6] Volt, 489 U.S. at 479.
[7] Id. at 476.
[8] Rent-A-Center, West Inc. v. Jackson , 561 U.S. 63, 68 (2010).
[9] Howsam v. Dean Witter Reynolds Inc. , 537 U.S. 79, 83 (2002).
[10] AT&T Mobility v. Concepcion , 131 S.Ct. 1740 (2011).
[11] American Express Co. v. Italian Colors Restaurant , 133 S.Ct. 2304 (2013).
[12] 133 S.Ct. at 2311.
[13] Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20 (1991).
[14] 133 S.Ct. at 2311.
[15] Gilmer, 500 U.S. at 28.
[16] Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991).
[17] Massachusetts Mut. Life Ins. Co. v. Russell , 473 U.S. 134, 140 (1985).
[18] Pfahler v. National Latex Products Co. , 517 F.3d 816, 825 (6th Cir. 2007).
[19] Munro v. University of Southern California , __ F.3d __, No. 17-55550 (9th Cir. July 24, 2018).
[20] Bowles v. Reade , 198 F.3d 752, 760 (9th Cir. 1999).
[21] See, e.g., Cryer v. Franklin Templeton Res. Inc. , (2017) WL4410103 (N.D. Cal. Oct. 4, 2017).
[22] Dorman v. Charles Schwab & Co. Inc. , Case No. 17-cv-00285-CW (Jan. 18, 2018) (“Just as a participant suing on behalf of a plan under Section 502(a)(2) cannot waive a plan’s right to pursue claims, a participant cannot waive a plan’s right to file its claims in court.”).
[23] Lockheed Corporation v. Spink , 517 U.S. 882 (1996).
[24] Hughes Aircraft Co. v. Jacobson , 525 U.S. 432 (1999).
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