Fiduciary breach claims brought by employees on behalf of plans fell outside arbitration agreements in individual employment contracts

Plan participants were not required by arbitration agreements signed as part of their individual employment contracts to submit claims for breach of fiduciary duty to arbitration, according to the U.S. Court of Appeals in San Francisco (CA-9). In affirming a decision of the trial court, the Appeals Court explained that the scope of the arbitration agreements was limited to claims brought by the employees on their own behalf and did not extend to claims brought on behalf of the plans in which they participated.

Employment contract required arbitration of all claims against university

Employees of the University of Southern California (USC) were required, upon beginning employment, to sign arbitration agreements, pursuant to which an employee agreed to submit claims against the university for violations of federal (e.g., ERISA), state, or governmental law to arbitration. The arbitration agreements were contained in individual employment contracts, but were not signed by anyone with authority to bind the plans and were not part of the governing plan documents.

Current and former employees who participated in two individual account retirement plans maintained by USC brought suit against the Oversight Committee responsible for administering the plans and investing plan assets, alleging violations of ERISA’s fiduciary standards. The employees sought financial and equitable remedies under ERISA Sec. 502(a)(2) to benefit the plans and all affected participants and beneficiaries, including a determination of the method of calculating losses, the removal of breaching fiduciaries, full accounting of plan losses, reformation of the plans, and an order regarding appropriate future investment.

The Committee, relying on the arbitration agreements, filed a Motion to Compel Arbitration. At trial, the participants argued that their claims were brought on behalf of the plans and the individual arbitration agreements did not apply to the plans. The Committee countered that the agreements did bind the participants, and since the participants were bringing their claims on behalf of the plans, the participants were required to arbitrate. The trial court denied the motion, explaining that ERISA Sec. 502(a)(2) claims are plan claims and cannot be waived or released by individual agreements, including arbitration agreements.

Arbitration agreements did not encompass fiduciary breach claims

In affirming, the denial of the motion to compel arbitration, the Ninth Circuit focused on whether the arbitration agreement encompassed the employees’ fiduciary breach claims. The terms of the agreements, the court explained, required the parties to arbitrate all claims that the “Employee may have against the University” and all claims the “University may have against Employee.” Thus, the court stressed, by its express terms, the agreement did not extend to the claims of other entities (e.g., plans) against the University.

The court further explained that, in an ERISA Sec. 502(a)(2) breach of fiduciary duty action, recovery is sought only for injury done to the plan. The court analogized to a case in which it held that a qui tam claim was not subject to an individual arbitration agreement because the underlying claim belonged to the federal government (United States, ex. rel. Welch v. My Left Foot Children’s Therapy, LLC (CA-9 (2017) 871 F. 3d 791)). Similar to a qui tam action, the court reasoned, individuals may not settle an ERISA Sec. 502(a)(2)claim because that claim does not exist for the individual’s benefit.

ERISA 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries

USC countered that, under the United States Supreme Court’s ruling in LaRue v. DeWolff, Boberg & Assocs., Inc. (552 U.S. 248 (2008)), individuals may seek individual recovery in the context of defined contribution plans because the plans comprise individual accounts. In LaRue, the Supreme Court held that an individual may bring an ERISA claim for breach of fiduciary duty even if the claim pertains only to her account and is limited to relief for losses to the account. However, the Ninth Circuit noted that the Supreme Court also stressed that it had not reconsidered its longstanding recognition that the benefits of winning a claim for breach of fiduciary duty redound to the benefit of the plan and not the individual plan participants and beneficiaries. Thus, while, under LaRue, ERISA Sec. 502(a)(2)authorizes recovery for fiduciary breach that impairs the value of plan assets in a participant’s individual account, the provision, the Ninth Circuit stressed, does not provide a remedy for individual injuries that are distinct from plan injuries.

In addition, further distinguishing LaRue, the Ninth Circuit explained that the fiduciary misconduct alleged in the instant case was not limited to mismanagement of individual accounts, but extended to the plans in their entireties. Thus, unlike the LaRue principals, the employees’ claims were intended to benefit the plans across the board, and not just their individual accounts. Accordingly, the participants’ claims fell outside the arbitration clause under the employment contracts and were not subject to arbitration.

Source: Munro v. University of Southern California (CA-9).
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