Blogging Employee Benefits

February 2, 2006

Participant Not Subject to Investment Manager’s Arbitration Clause

Filed under: Litigation — Fuguerre @ 10:38 pm

A participant is not compelled to arbitrate an ERISA fiduciary breach claim under an arbitration agreement between the plan and its investment manager, according to a 9th Circuit Court of Appeals decision affirming a district court ruling. [Comer v. Micor and Salomon Smith Barney, CA9, No. 03-16560, 2/1/06]

Comer participated in two ERISA plans sponsored by Micor. Plan trustees had retained Smith Barney to provide investment advice. Investment management agreements between the plans and Smith Barney contained arbitration clauses, under which “all claims or controversies” between the plan trustees and Smith Barney “concerning or arising from” any of the plan accounts were to be submitted to binding arbitration.

When the plans suffered heavy investment losses during the dot-com market crash in early 2000, Comer filed suit under ERISA for breach of fiduciary duty. Smith Barney unsuccessfully petitioned the district court to stay proceedings, arguing that the matter had to be submitted to arbitration in accordance with the investment management agreements. The appellate court now affirms the district court denial of Smith Barney’s petition. The court first rejected Smith Barney’s “attempt to shoehorn Comer’s status as a passive participant” into an equitable estoppel argument, finding no evidence that Comer had knowingly exploited the agreements that contained the arbitration clauses. The court then rejected Smith Barney’s alternative argument that Comer was bound by the arbitration clauses as a third party beneficiary of the investment management agreements, finding no evidence that the agreement signatories had intended to give plan beneficiaries the right to sue under the agreements. Under the general rule that a nonsignatory is not bound by an arbitration clause, the court declined to require Comer to arbitrate the ERISA claim.

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