Ten years from now there may well be no more Employee Retirement Income Security Act (ERISA) class actions. The law, like the rest of life, is not immune from disruptive innovations. In our own lifetime, we have seen disruptive innovations from chemical photography to digital photography, from personal computers to smart phones, and from snail mail to Instagram. Just as Brown v. Board of Education, 349 U.S. 483, 495 (1954) created a legal sea change by finding racial discrimination in public education unconstitutional, a series of recent U.S. Supreme Court decisions has established another legal sea change: class action lawsuits are no longer necessary. These new cases taken together indicate that ERISA plan sponsors can kill off all future ERISA class actions if they adopt mandatory arbitration provisions with class action waivers.

The first Circuit Court of Appeals to consider whether an ERISA plan's own mandatory arbitration clause could bar class action claims was the Ninth Circuit. The Ninth Circuit actually went one step further―it ruled the plan sponsor could amend the ERISA plan to preclude all class action claims after the employee had commenced employment. In Dorman v. Charles Schwab Corp., No. 18-15281 (9th Cir. 2019), Charles Schwab amended its 401(k) plan in December 2014, to be effective on Jan. 1, 2015. Nine months later Dorman ended his employment at Schwab. He subsequently terminated his plan participation. The mandatory arbitration amendment to the Schwab 401(k) plan states "any claim, dispute or breach arising out of or in any way related to the Plan shall be settled by binding arbitration …." This mandatory arbitration provision included an express waiver of class or collective action claims that require individual arbitration. Absent this express waiver, the participant could have represented the interests of other plan participants. All Schwab plan participants were informed arbitrations were to be conducted "on an individual basis only, and not on a class, collective or representative basis." In essence, the terms of Schwab's 401(k) plan stated to continue plan participation participants had to agree to waive the right to be a part of any class or collective action.

Dorman had filed a class action alleging, among other things, that the Schwab funds available in the 401(k) plan performed poorly and generated excess fees for Schwab. Charles Schwab then moved to compel individual arbitration under the terms of the 401(k) plan's mandatory arbitration agreement. The district court denied Schwab's motion to compel arbitration.

Just last year in Munro v. University of Southern California, 816 F.3d 1088 (9th Cir. 2018), 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 USC 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." Id. at 1092. The Ninth Circuit found that this language did "not extend to claims that other entities have against the University."

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, 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."

The rule in the Ninth Circuit for almost 35 years had been that ERISA claims were not suitable to arbitration following its decision in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984). In Dorman, the Ninth Circuit reversed Amaro.

The holding in American Express Co. that federal statutory claims are generally arbitrable and arbitrators can competently interpret and apply federal statutes, 570 US at 233, constitutes intervening Supreme Court authority that is irreconcilable with Amaro. Amaro, therefore, is no longer binding precedent.

In a separate, later, unpublished decision, the Ninth Circuit found that the plaintiff had agreed to be bound by the arbitration provision that was introduced after he began employment because he had continued his participation in the plan. The Ninth Circuit further noted that the ERISA statute nowhere precludes limiting a plaintiff's relief to his own individual losses. Citing the Supreme Court's decision in LaRue, the Ninth Circuit has now ruled that 401(k) plan claims are "inherently individualized." The Ninth Circuit's unpublished decision reversed and remanded with instructions to the district court to order arbitration of Dorman's claims.

The U.S. Supreme Court (on May 21, 2018) ruled in Epic Systems Corp. v. Lewis, et al., 138 S. Ct. 1612, that a class action waiver contained in an employee's arbitration agreement is enforceable under the Federal Arbitration Act (FAA). The Supreme Court found obtaining class action waivers from employees did not constitute a violation of the National Labor Relations Act (NLRA).

Federal courts like to send cases to arbitration. For example, the Supreme Court has stated Section 2 of the FAA reflects a "liberal federal policy favoring arbitration agreements." Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). Lower courts are to apply a presumption of arbitrability when deciding challenges to arbitration. Id. at 24–25. Arbitration clauses in all agreements in state or federal court "involving commerce" are subject to the FAA.  9 U.S.C. § 2, Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 273–274 (1995). The FAA preempts conflicting state law. Volt Info. Sciences v. Bd. of Tr. of Leland Stanford Jr., U., 489 U.S. 468, 477 (1989). Finally, the Supreme Court has ruled federal statutory claims are arbitrable as a matter of public policy unless Congress explicitly states that they are not.

The "central purpose" of the FAA is to "ensure 'that private agreements to arbitrate are enforced according to their terms.'" Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 53–54 (1995) (quoting Volt Info Sciences, n.5 at 479); see also, e.g. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 625 (1985) (FAA is "at bottom a policy guaranteeing the enforcement of private contractual arrangements"). Because arbitration "is a matter of consent, not coercion,"  (Volt, n.5 at 479) the Act leaves it to the parties to establish the nature and scope of their arbitration, through a "written provision" in a contract or separate "agreement in writing," limiting the scope of the parties' arbitration agreement. 9 U.S.C. §2. The Supreme Court has stated that parties to an arbitration agreement may "specify by contract the rules under which that arbitration will be conducted." Volt, n.5 at 479. "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." Id. at 476.

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Recent Supreme Court Cases Have Uniformly Enforced Mandatory Arbitration Clauses

Over the last nine years, the Supreme Court has decided ten cases enforcing arbitration agreements: (1) Am. Exp. v. Italian Colors Rest., 570 U.S. 228 (2013); (2) AT&T Mobility v. Concepcion, 563 U.S. 333 (2011); (3) CompuCredit Corp. v. Greenwood, 565 U.S. 95 (2012); (4) Epic Systems Corp. v. Lewis, 584 U.S. ___, 138 S.Ct. 1612 (2018); (5) DirecTV v. Imburgia, 577 U.S.     ,136 S.Ct. 463 (2013); (6) Stolt-Nielsen v. AnimalFeeds Int'l, 559 U.S. 662 (2010); (7) Rent-A-Center, West v. Jackson, 561 U.S. 63 (2010); (8) Kindred Nursing Centers Ltd. v. Clark, 581 U.S.     , 137 S.Ct. 1421 (2017); (9) Henry Schein v. Archer & White Sales, 586 U.S.     , 139 S.Ct. 524 (2019); and (10) Lamps Plus v. Varela, 587 U.S.     , 139 S.Ct. 1407 (2019). Taken together, these 10 Supreme Court rulings are support for amending ERISA plans to include mandatory arbitration clauses with class action waivers in all ERISA-regulated plans. So long as the arbitration clauses and class waivers are properly drafted and the elements of contract formation are properly observed, employers will be able to eliminate their exposure to the runaway costs of class action litigation. Five examples:

In American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), 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.

In its second decision in the 2013 term regarding class action waivers, a unanimous Supreme Court reiterated that parties who agree to an arbitration clause that is silent on whether class arbitration of claims is allowed, and who later agree to ask the arbitrator to decide whether or not class action claims are permitted, will be stuck with the arbitrator's decision on that issue.  569 U.S. 564 (2013).

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. 563 U.S. 333 (2011).  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 U.S. Court of Appeals for 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 at 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 and contravene the FAA's overriding policy favoring arbitration.

In Stolt-Nielsen, the Supreme Court ruled that, absent a mutual agreement to participate in class-wide arbitration, a party could not be compelled to arbitrate class-wide claims. 559 U.S. 662 (2010). The parties in Stolt-Nielsen had stipulated that although their disputes were subject to binding arbitration, they had never reached an agreement on class arbitration.  Relying on FAA §10(a)(4), the Supreme Court vacated the arbitrator's decision approving class proceedings because, in the absence of such an agreement, the arbitrators had "simply … imposed [their] own view of sound policy."

Who decides whether an arbitration agreement is unconscionable when the agreement expressly delegates that decision to the arbitrator? In Rent-A-Center, the Supreme Court ruled that the arbitrator does. 561 U.S. 62 (2010). 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 ERISA plan participants will be hard pressed to avoid arbitration.

Can statutory claims be subject to arbitration? Again, the short answer is "yes." Dorman Slip Op. at 9. The Supreme Court has ruled that federal statutory claims may be arbitrated unless there is an express command to the contrary in the statute. The ERISA statute does not expressly preclude the arbitration of statutory (also known as fiduciary breach) claims.

The Supreme Court has repeatedly ruled that "federal statutory claims may be the subject of arbitration agreements that are enforceable pursuant to the FAA because the agreement only determines the choice of forum." EEOC v. Waffle House, 534 U.S. 279, 295, n. 10 (2002); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985)). In Dorman, the Ninth Circuit enforced this rule as to fiduciary breach claims arising under an ERISA-regulated 401(k) plan.

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Why Try to Eliminate Class Action Lawsuits?

In class action litigation, similarly situated legal claims are combined under a single lawsuit. The theory justifying the use of class actions is that they can be an efficient mechanism for resolving large numbers of relatively low-dollar-value claims. The reality, however, is quite different. In the real world, the class action process is notoriously inefficient. Class actions are often used as a means to enrich plaintiffs' lawyers at the expense of claimants. Plaintiffs' lawyers recognize that class action lawsuits have little economic value to individual plaintiffs. Accordingly, individual plaintiffs, even when named as class representatives, have little incentive to monitor the lawyers' handling of the case. Class action lawsuits usually take years to reach a settlement. When a settlement is eventually reached, plaintiffs' lawyers have an incentive to structure the settlement to recover as much in attorneys fees as they can. This adverse economic incentive sometimes makes it difficult for class members to obtain any real substantive relief. More important, given the large expense of defending class actions, and in the absence of significant procedural protections against self-dealing settlements, plaintiffs' lawyers have an incentive to maintain a class action lawsuit until a settlement is reached, even those that have little merit. As such, the deterrent effect of class actions against bad behavior is relatively modest because innocent defendants are treated by the judicial system much like the guilty. The advantages of arbitration are compelling—individual arbitration is usually faster, less costly, more informal, and can be designed to suit the needs of the litigants.

James P. Baker is a partner at Baker McKenzie and heads the firm's ERISA litigation practice group. His practice focuses on litigating employee benefit plan disputes and the counseling of employers on the design and operation of ERISA regulated plans.