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Charles Schwab Can’t Send 401(k) Fund Lawsuit to Arbitration

Jan. 19, 2018, 6:09 PM

Charles Schwab & Co. can’t force a lawsuit over the in-house mutual funds in its 401(k) plan into arbitration, a federal judge ruled.

The financial company can’t use arbitration agreements in employment contracts or 401(k) plan documents to block a lawsuit over how the plan is managed, because the lawsuit was brought “on behalf of the plan” and not any specific employee, the judge said Jan. 18. An individual worker can’t waive the 401(k) plan’s legal right to bring a lawsuit by signing an arbitration agreement, the judge explained, following recent decisions against Franklin Templeton and the University of Southern California in similar disputes.

An employer’s ability to force class actions over retirement plan mismanagement into arbitration has become a hot topic in recent years, given the influx of litigation challenging 401(k) plan fees and companies that put their own investment products in their workers’ 401(k) plan. The U.S. Court of Appeals for the Ninth Circuit is considering this question in the ongoing case involving USC’s retirement plan.

The U.S. Supreme Court is also considering the viability of employment agreements that include class action waivers and arbitration agreements. The court heard arguments in Ernst & Young LLP v. Morris in October.

In addition to finding Charles Schwab’s arbitration agreements unenforceable under Ninth Circuit case law, the district judge also said the particular agreements in question didn’t encompass the challenges to the company’s 401(k) plan.

The case against Charles Schwab is one in a long series of recent cases challenging financial companies that put their own investment products in their workers’ 401(k) plans. Many cases have led to early losses for the financial companies, with courts granting wins to employees of BB&T Corp., Deutsche Bank, Franklin Templeton, American Century, and Edward Jones. Other companies, including Putnam Investments and Wells Fargo, have defeated these claims.

Judge Claudia Wilken of the U.S. District Court for the Northern District of California wrote the decision.

Charles Schwab is represented by Proskauer Rose LLP and Shepherd Finkelman Miller & Shah LLP. The worker is represented by Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague PC.

The case is Dorman v. Charles Schwab & Co., N.D. Cal., No. 4:17-cv-00285-CW, order declining to compel arbitration 1/18/18.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bloomberglaw.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com