Second Circuit Reverses Order Compelling Arbitration of ERISA Fiduciary Breach Claims by Plan Participant Against Employer’s Third-Party Investment Advisor

Yesterday, the Second Circuit Court of Appeals issued its second decision this week involving the arbitration of ERISA claims. In Cooper v. Ruane Cunniff & Goldfarb Inc., No. 17-2805, __F.3d__2021 WL 821390 (2d Cir. Mar. 4, 2021), the Second Circuit considered whether language in an employment arbitration agreement required the employee to arbitrate his ERISA fiduciary breach claims, which he brought on behalf of a putative class, against the employer’s third-party investment advisor. The U.S. District Court for the Southern District of New York said yes. On de novo review, the Second Circuit concluded that the district court erred and reversed the order compelling arbitration.

The following facts are relevant to understanding the court’s decision. Plaintiff-Appellant Cooper worked for DST Systems, Inc. (“DST”) and participated in its profit-sharing plan (“the Plan”) which included a participant-directed 401(k) component and a profit-sharing account (“PSA”) component. All employees are enrolled in the PSA and are not allowed to decline participation. They cannot remove their PSA assets until the end of their employment. DST engaged Defendant-Appellee Ruane Cunniff & Goldfarb Inc. (“Ruane”) in 1973 to manage investment of the PSA funds. Cooper alleges that under Ruane’s management, total assets experienced a dramatic decline caused by Ruane’s “catastrophic over-allocation of Plan assets” to certain shares. Cooper further alleged that Ruane breached its fiduciary duty to Plan participants, and to the Plan generally, and sought equitable relief for the PSA participants under ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2).

Ruane sought to compel arbitration based on an arbitration agreement with DST, which was part of a DST Handbook that Cooper received and signed that he acknowledged. The Handbook, in relevant part, states:

For employment-related legal disputes that are not resolved through our Open Door Policy or Equal Employment Opportunity (EEO) Policy, the Company has implemented an arbitration program under the DST Output Arbitration Program and Agreement that is set forth in the Addendum to this Handbook.

The Arbitration Program and Agreement mandates arbitration of “all legal claims arising out of or relating to employment, application for employment, or termination of employment, except for claims specifically excluded under the terms” of the Agreement. Claims “specifically excluded,” are “[1] workers’ compensation benefits, [2] unemployment compensation benefits, [3] ERISA-related benefits provided under a Company sponsored benefit plan, [and,] [4] claims filed with the National Labor Relations Board.” Cooper did not opt out of the above Agreement though he was given 30 days to do so.

The Second Circuit concluded that the Agreement between Cooper and DST does not encompass the claims for breach of fiduciary duty brought by Cooper on behalf of the Plan against Ruane under ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2).

First, the court evaluated the meaning of the Agreement’s phrase “relating to employment.” The question is whether such claims for fiduciary breach are covered by the phrase “all legal claims arising out of or relating to employment” used in his Arbitration Agreement with DST. The Second Circuit found the Ninth Circuit’s decision in United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017) (“Welch”) to be persuasive. In Welch, “the Ninth Circuit interpreted an employee arbitration clause that expressed coverage for “any claims”—similar to that found here—as not covering an employee’s suit under the False Claims Act.” Here, none of the facts relevant to the merits of Cooper’s claims against Ruane relates to his employment. They do not involve his own work performance, his evaluations, his treatment by supervisors, his compensation, or any condition of his experience at DST. Instead, they hinge on Ruane’s investment decisions. The court found it notable that “others who were never DST employees could have brought claims identical to those stated by Cooper—for example, the mismanagement claims could have been pursued by other Plan beneficiaries (such as spouses, heirs, or designees of participants); by other Plan fiduciaries, including DST itself; and by the Secretary of Labor.” The court agreed with the Welch approach that in the “context of an employment arbitration agreement, a claim will ‘relate to’ employment only if the merits of that claim involve facts particular to an individual plaintiff’s own employment.” In this case the merits of the claims do not involve such facts.

Second, the court found that enforcement of the arbitration provision would create tension with Second Circuit case law governing the prerequisites applicable to plaintiffs pursuing ERISA fiduciary actions. In Coan v. Kaufman, 457 F.3d 250 (2d Cir. 2006), the court “construed ERISA § 502(a)(2) to require parties suing on behalf of a plan to demonstrate their suitability to serve as representatives of the interests of other plan stakeholders.” Given the nature of § 502(a)(2), the plaintiff must ensure that recovery insures to the benefit of the plan as a whole. Here, the arbitration agreement prohibits joinder of multiple parties and class or collective actions. Cooper would have to choose either bringing the claim in arbitration in some representative capacity, which is untenable under the Agreement’s terms, or risk having any award not enforced by courts due to the absence of the required procedural safeguards required of § 502(a)(2) claims. In other words, “Ruane’s reading of the Arbitration Agreement appears to make it impossible to bring an ERISA fiduciary action that satisfies both the Agreement and the Coan representative adequacy requirement, potentially rendering at least this part of the Agreement unenforceable.” The court declined to find this reason alone as justification for the non-enforcement of the arbitration provision because the court already determined that the Agreement, by its terms, does not encompass Cooper’s claims. “To the extent the Agreement’s text may permit other interpretations, we also decline to adopt an unnecessary reading that casts its enforceability into doubt, in derogation of ERISA’s protective purposes.”

Plaintiff is represented by Monique Olivier, Olivier Schreiber & Chao LLP, San Francisco, CA (James E. Miller, Laurie Rubinow, Shepherd, Finkelman, Miller & Shah, LLP, Chester, CT, on the brief), for Plaintiff-Appellant.