Shafer v. Morgan Stanley

Background

The plaintiffs are former Morgan Stanley financial advisors who worked for the company at various times between 1994 and 2020. They alleged that Morgan Stanley, Morgan Stanley Smith Barney LLC, the Morgan Stanley Compensation Management Development and Succession Committee, and unnamed committee members violated the Employee Retirement Income Security Act of 1974 (ERISA) by withholding deferred compensation after the plaintiffs left their positions.

The deferred compensation came through the Compensation Incentive Plan and Equity Incentive Plan. Under the compensation program, part of advisors’ incentive compensation was deferred, with 75% generally paid as cash approximately six years after the award and 25% generally awarded as restricted stock units scheduled to convert approximately four years after the award. The plans generally required advisors to remain employed through the applicable grant and vesting dates, subject to exceptions including disability, full-career retirement, involuntary termination, and governmental service. The plaintiffs called this the “Cancellation Rule.”

The amended complaint asserted claims under ERISA sections 502(a)(1), 502(a)(2), and 502(a)(3), seeking declaratory and equitable relief, reformation of the plans, benefits under the reformed plans, and relief for alleged breach of fiduciary duty. The plaintiffs sought to proceed on behalf of themselves and other similarly situated financial advisors.

Arbitration Agreements

Morgan Stanley offered evidence that some plaintiffs signed bonus or employment agreements containing arbitration provisions. It offered evidence that other plaintiffs continued working after receiving notice of the 2015 expansion of Morgan Stanley’s Convenient Access to Resolutions for Employees program, known as CARE, without opting out. The CARE materials provided for binding arbitration of covered claims on an individual, nonclass, noncollective, and nonrepresentative basis.

The court found that the plaintiffs did not dispute the evidence showing their agreement to the arbitration provisions. It concluded that the plaintiffs and Morgan Stanley had entered into agreements to arbitrate. The agreements also delegated most disputes about whether a claim was arbitrable to an arbitrator, while reserving questions about the validity or enforceability of class, collective, or representative-action waivers for the court.

The plaintiffs argued that the Compensation Incentive Plan document required disputes to be heard in New York courts and therefore superseded the arbitration agreements. The court rejected that argument. It reasoned that the relevant arbitration agreements generally were later than the plan document, some contained merger provisions, and the documents did not have identical subject matter. The court also held that the plan document’s New York-law and New York-court provisions were invalid to the extent they purported to govern ERISA claims, because ERISA supplies the governing federal law and federal courts have jurisdiction over ERISA claims. The court further stated that any remaining dispute about whether the plan provision or arbitration provisions controlled was a question delegated to the arbitrator.

Scope of the Agreements

The arbitration provisions covered broad categories of disputes arising from or relating to employment, compensation, and termination. The court held that the plaintiffs’ claims fell within that language. Although the plaintiffs argued that their claims did not involve facts particular to their individual employment, the court concluded that vesting depended on the timing and circumstances of each advisor’s separation from Morgan Stanley, including whether the advisor quit, was fired, or retired.

The court also concluded that the deferred compensation programs were ERISA pension plans. It found that the programs were not bonus plans because the deferred compensation was based on revenue generated by the advisors and was part of commission-like incentive compensation, while Morgan Stanley separately paid year-end bonuses. Because the programs were not bonus plans, the court considered whether they resulted in income being deferred until the end of employment or beyond. It held that they did: compensation was calculated from monthly revenue but paid four to six years later, and certain payments occurred after employment ended. The court therefore concluded that the programs were ERISA plans under ERISA section 3(2)(A)(ii).

Representative-Claim Arguments

The plaintiffs argued that their ERISA section 502(a)(2) fiduciary-duty claim was brought on behalf of the plans and therefore could not be compelled into individual arbitration. The court rejected that characterization. Section 502(a)(2) permits recovery for losses to an ERISA plan caused by a fiduciary’s breach. The court found that the plaintiffs did not allege mismanagement of plan assets or another impairment of plan assets. Instead, they sought restoration of deferred compensation allegedly forfeited under the Cancellation Rule.

The court concluded that the section 502(a)(2) claim was a disguised claim for individual benefits under section 502(a)(1)(B), not a genuine claim for losses to the plans. Because the plaintiffs had not alleged the type of plan losses required for a section 502(a)(2) claim, the court held that they were not proceeding in the representative capacity associated with that provision and could not use its procedural protections to avoid arbitration.

As to the section 502(a)(3) claims, the court held that ERISA does not require those claims to be brought on behalf of a plan and that the plaintiffs had not shown that section 502(a)(3) claims are categorically nonarbitrable. The court also rejected the argument that the arbitration agreements impermissibly waived statutory remedies. It found no remedy limitation other than the class waiver, and it treated class treatment as a procedural matter rather than a substantive right. The Bonus Agreement and CARE arbitration materials also authorized arbitrators to award the full remedies available in court.

Disposition

The court granted defendants’ motion to compel arbitration. Because all claims had been referred to arbitration and Morgan Stanley requested a stay, the court stayed the proceedings pending arbitration. The opinion did not resolve the ultimate question whether the Cancellation Rule violated ERISA or whether the plaintiffs were entitled to deferred compensation.