It’s a Matter of When, Not If: Validity of Class Action Waivers in ERISA Plans To Be Tested

In addition to reporting on active ERISA litigation, the authors of this blog take a great interest in potential future litigation. One such area is the validity of class action waivers (as part of arbitration clauses) in ERISA plans.

On Friday, the Securities Law Prof Blog*** by University of Cincinnati College of Law professor Barbara Black reported on Schwab’s decision to withdraw the class action waiver clause from their brokerage account agreements in light of the fact that the issue is now on appeal before the FINRA appellate body. Click here to read the blog post. For a full copy of Schwab’s statement, click here. For history’s sake, here is Schwab’s statement in part:

Effective immediately, Schwab is modifying its account agreements to eliminate the existing class action lawsuit waiver for disputes related to events occurring on or after May 15, 2013 and for the foreseeable future.

While the company believes that dispute resolution is best handled via FINRA arbitration, we have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decisions. Given that the process will likely take considerable time to resolve, and may leave clients with a degree of uncertainty about their dispute resolution options in the meantime, we have elected to remove that uncertainty until the legal and regulatory process is completed.

So why does this matter for ERISA plans? The opportunity to test on a nationwide preclusive fashion whether class action waivers are valid will be too tempting for those that have a vested interested in seeing it happen.

The issue skyrocketed to prominence after the Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion essentially ruled in favor of class action waivers in consumer contracts despite state law prohibiting them. For the best information on the case, head over to the SCOTUSblog and read their excellent summary and commentary. Probably 4 out of every 5 contracts you sign as an American consumer have such a clause now (based upon my own non-scientific survey of reading every page of every contract I sign).

In the well researched article entitled Requiem for ERISA Class Actions? by ERISA litigator James P. Baker, a case is laid out for validity of arbitration clauses in ERISA plans. Here are some relevant excerpts:

The ERISA statute does not expressly preclude the arbitration of statutory (also known as fiduciary breach) claims. It indicates that while both state and federal courts have concurrent jurisdiction over claims for benefits, federal courts have “exclusive jurisdiction” over statutory claims. Nowhere, however, does ERISA state that statutory violations cannot be arbitrated.

The trend among federal courts is to permit arbitration of fiduciary breach claims. For example, a district court in Massachusetts held that “no external legal restraints foreclose the arbitration of ERISA claims.”

Taking the next step, in the October 2012 ERISA Litigation Newsletter published by Proskauer Rose, LLP, after a detailed discussion of relevant case law, they argue that although it may be an advantage for plan sponsors to include class action waivers, it is by no means a slam dunk:

Given the current state of the law, there appears to be enough of a possibility to prevail on enforcing class waivers in arbitration agreements that plan sponsors and fiduciaries should include them in their arbitration agreements and plan documents if perceived to be an advantage. Even if enforced, however, their impact remains unclear in light of the fact that, as mentioned, a single participant may commence a lawsuit in a representative capacity under ERISA, without resorting to the class action devices available under the Federal Rules of Civil Procedure.

Although this issue is years away from being resolved, we have no doubt that plan sponsors and service providers will soon enough be faced with making a decision regarding the inclusion of arbitration clauses and class action waivers. As ERISA fiduciary consultants, we have no dog in the fight. However, we believe that after nearly 40 years of jurisprudence in the federal courts, ERISA offers a scheme of rules and regulations that strongly attempts to balance the interests of both plan sponsor/fiduciaries and plan participants, despite not being perfect all the time. The creation of dueling venues of public resolution (courts) and private resolution (arbitration) has great potential for unintended consequences for all involved parties.

[*** The Securities Law Prof Blog is a sister blog to a favorite of mine, and many other readers, the Workplace Prof Blog.]

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