Law360 (July 10, 2025, 5:41 PM EDT) — The Second Circuit refused to upend part of a lower court’s ruling that former Morgan Stanley financial advisers’ deferred compensation fell within the reach of federal benefits law, saying the financial firm couldn’t clear the high bar necessary to undo the decision.
In an order issued Wednesday, a unanimous three-judge panel denied Morgan Stanley’s petition for a writ of mandamus to nullify part of U.S. District Judge Paul G. Gardephe’s November 2023 decision finding, in part, that the deferred compensation plans were subject to the Employee Retirement Income Security Act.
Morgan Stanley argued Judge Gardephe didn’t need to find the plans were subject to ERISA when he granted the company’s motion to compel individual arbitration of the proposed class action. In doing so, the company said, the district court undermined the company’s right to arbitrate because its defenses rely on the contention that the plans fell outside ERISA and its anti-forfeiture rules.
But the appeals panel said that while “it may well be that the better course” would’ve been for the court to assume the plans were governed by ERISA rather than rule definitively, the requirements for mandamus are arduous. Additionally, the panel noted that Judge Gardephe’s ruling didn’t take away alternative remedies.
“Though arbitrators may consider the district court’s opinion, Morgan Stanley is free to argue to those arbitrators that the district court’s conclusion that the plans were governed by ERISA was dictum and was legally incorrect,” the panel said. “Indeed, Morgan Stanley admits that it has already done so — successfully — in some of the intervening arbitrations.”
The panel added that the district court’s decision to wade into whether ERISA applied wasn’t based on an erroneous view of the law. The Second Circuit has said the federal benefits law could render arbitration agreements invalid if they cover certain types of claims, according to Wednesday’s order, and it’s “sometimes necessary to consider the applicability of ERISA before ordering arbitration.”
The panel also dismissed Morgan Stanley’s appeal of the district court’s decision to send the case to individual arbitration, rejecting the company’s assertion that Judge Gardephe’s commentary on the merits of the case amounted to an “effective denial” of its motion.
A group of former advisers for Morgan Stanley filed their lawsuit in December 2020, alleging they were denied deferred compensation they earned from commissions while employed at the investment banking company. The suit challenges a vesting schedule for the deferred compensation plan that workers claim unlawfully forced them to forfeit certain benefits they were owed.
In November 2023, Judge Gardephe said that the ERISA claims over the deferred compensation were inherently individual as opposed to being on behalf of the plan and that they could be compelled into arbitration. The following year, the judge rejected Morgan Stanley’s bid to reconsider the part of his ruling where he concluded that ERISA governed the deferred compensation plans.
A spokesperson for Morgan Stanley said in a statement provided to Law360 that the adviser’s “awards are not a pension, as multiple arbitration panels have now recognized.”
“We remain confident that as individual arbitrators see all the evidence, they will reach exactly the same result,” the statement said.
Douglas Needham of Motley Rice LLC, who is representing the former advisers, said in a statement that the Second Circuit’s decision “is a step in the right direction” for his clients.
“We look forward to arbitrating these claims on behalf of our clients,” Needham said.
U.S. Circuit Judges Gerard E. Lynch, Richard J. Sullivan and Steven J. Menashi sat on the panel for the Second Circuit.
The plan participants are represented by Mathew P. Jasinski, Douglas P. Needham, William H. Narwold, M. Zane Johnson and Riley Breakell of Motley Rice LLC, by John S. Edwards Jr. and Courtney D. Scobie of Ajamie LLP and by Robert A. Izard of Izard Kindall & Raabe LLP.
Morgan Stanley is represented by Meaghan VerGow, Anton Metlitsky, Brian D. Boyle and Alexander Reed of O’Melveny & Myers LLP.
The case is Shafer et al. v. Morgan Stanley, case number 24-3271, in the U.S. Court of Appeals for the Second Circuit.
–Additional reporting by Kellie Mejdrich. Editing by Abbie Sarfo.