Many times, employees must sign written employment contracts before beginning a new position. These contracts generally set forth the terms of the relationship between the employer and employee. They also establish both the rights and responsibilities of the two parties. Employers often include an arbitration clause in their employment contract. This means that any disputes that arise between the employer and employee must be settled through arbitration, rather than through the courts.
But what happens when an employee sues his employer not on his own behalf, but on behalf of another entity for claims that the employee cannot bring in his individual capacity? For instance, in the context of ERISA, employees who participate in an employer-sponsored ERISA plan can bring a claim for breach of fiduciary duty on behalf of the ERISA plan against the employer. If the employee signed an arbitration agreement, does that preclude the employee from litigating this particular claim in court?
The Ninth Circuit Court of Appeals recently addressed this issue in the matter of Munro v. University of Southern California, No. 17-55550 (9th Cir. July 24, 2018). In Munro, nine current and former employees of the University of Southern California (“USC”) brought suit against their employer for breach of fiduciary responsibility in the administration of two ERISA plans offered by the employer (collectively, the “Plans”). The relief sought by the plaintiffs included the following: a determination as to the method of calculating losses; removal of breaching fiduciaries; a full accounting of Plan losses; reformation of the Plans and an order regarding appropriate future investments
Since the plaintiffs/employees all signed arbitration agreements as part of their employment contracts, USC filed a motion to compel arbitration, arguing that the arbitration agreements bar the plaintiffs from litigating the claims at issue. The district court denied USC’s motion and ruled that the arbitration agreements, which the employees entered into in their individual capacities, do not bind the Plans because the Plans did not themselves consent to arbitration of the claims. The Ninth Circuit upheld the district court’s ruling, finding that the claims for breach of fiduciary duty fall outside the scope of the arbitration agreements. In reaching its decision, the court turned to the language of the arbitration agreements, which state that the parties agreed to arbitrate “all claims…that Employee may have against the University or any of its related entities…and all claims that the University may have against Employee.” The court noted that this language does not extend to claims that other entities have against the University.
The Munro court concluded that the ERISA claims for breach of fiduciary duty were not claims that the “Employee may have against the University or any of its related entities.” Rather, the employees brought the claims on behalf of the Plans, and, since the Plans never consented to arbitration of the claims, the arbitration provision did not apply in this instance. In reaching its conclusion, the court looked to the case of United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017), which dealt with a similar issue, specifically, whether a standard employment arbitration agreement covered qui tam claims brought by the employee on behalf of the United States under the False Claims Act (“FCA”). The court in Welch found that because the underlying fraud claims asserted in a FCA case belong to the government and not to the employee, the claims were not claims that the employee had against the employer and therefore were not within the scope of the arbitration agreement. Welch, 871 F.3d at 800 & n.3. In Munro, the Ninth Circuit found similarities between the type of claim brought in Welch and the ERISA claims at issue in Munro. Specifically, the court noted that the ERISA plaintiffs did not seek relief for themselves, but rather sought recovery for injury done to the Plans. This was evident in the relief sought by the plaintiffs, which included removal of breaching fiduciaries, a full accounting of Plan losses, and reformation of the Plans. Furthermore, since the Plans were not parties to the arbitration agreements between the employer and employees, and therefore never consented to arbitration, the court could not compel arbitration in this instance.
The issue of whether a party can be compelled to arbitrate an ERISA claim where the party did not sign an arbitration agreement arose in a prior Ninth Circuit decision, Comer v. Micor, Inc., 436 F.3d 1098 (9th Cir. 2006). The plaintiff in Comer participated in an ERISA plan offered by his employer. The plan trustees retained a company, Salomon Smith Barney, Inc. (“Smith Barney”) to provide investment advice. The plan and Smith Barney entered into an investment management agreement that contained an arbitration clause. After Comer sued Smith Barney for breach of fiduciary duty under ERISA, Smith Barney moved to compel arbitration. The court found that pursuant to ordinary contract and agency principles, Comer could not be bound to the terms of a contract he did not sign and could not enforce. Therefore, the arbitration agreement did not apply to Comer’s ERISA claim. The same argument could be made in Munro, where the Plans were not signatories to the individual employment contracts and, therefore, were not bound by the arbitration agreements.
In summary, even though an employee has signed an employment contract containing an arbitration provision, this does not necessarily preclude the employee from bringing a lawsuit against his employer for ERISA violations when the employee is suing on behalf of the ERISA plan and not simply in an individual capacity. In such cases, the claims belong to the ERISA plan itself and, if the plan did not consent to arbitration, then this opens the door for the employee to bring his ERISA breach of fiduciary duty claim in federal court.
