A federal appeals court in San Francisco ruled that Charles Schwab Corp. can compel arbitration in a complaint that the company's 401(k) plan managers violated their fiduciary duties under ERISA.
Not only did the 9th U.S. Circuit Court of Appeals reverse a decision by a federal District Court that supported the plaintiff, but it also ruled that a 1984 precedent decision issued by the appeals court "is no longer good law."
The 9th Circuit covers judicial districts in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington and Guam.
The initial complaint, in the case of Michael F. Dorman et al. vs. The Charles Schwab Corp. et al., was filed in 2017 by a former employee and former plan participant. He alleged that Schwab plan managers breached their fiduciary duties by emphasizing Schwab investment products that charged higher fees and performed worse than comparable products from other providers. Mr. Dorman alleged Schwab failed to adequately investigate other products.
Attorneys for Schwab argued that Mr. Dorman's complaint was covered by an arbitration agreement. U.S. District Judge Claudia Wilken in San Francisco ruled against Schwab in January 2018. Schwab appealed.
A three-judge appeals court panel reversed the decision Tuesday, sending the case back to the lower court.
The panel's ruling described how the judges had changed their views about ERISA and arbitration since their 1984 decision in Amaro vs. Continental Can Co.
In that case, the appeals court rejected the company's arbitration argument because "arbitrators, many of whom are not lawyers, lack the competence of courts to interpret and apply statutes as Congress intended."
However, the judges noted in their Tuesday decision that since the Amaro decision, the U.S. Supreme Court "has ruled that arbitrators are competent to interpret and apply federal statutes."
A 2013 Supreme Court ruling cited by the appeals court, American Express Co. vs. Italian Colors Restaurant, wasn't an ERISA case. It was a dispute between a merchant who accepted American Express cards and the card company. The Supreme Court, in a 5-3 decision, supported American Express' claim for arbitration, and that served as the foundation for the 9th Circuit's ruling in the Schwab ERISA case.
The American Express decision "constitutes intervening Supreme Court authority that is irreconcilable with Amaro," the appeals court wrote. "Amaro, therefore, is no longer binding precedent."
The Schwab Retirement Savings and Investment Plan had $3.8 billion in assets as of Dec. 31, 2017, according to the latest Form 5500.
