A federal appeals court has ruled that a lower court did not have jurisdiction under the Federal Arbitration Act to confirm tens of millions of dollars in arbitration awardsto employees of Kansas City-based DST Systems Inc.
The ruling could throw the retirement plans of hundreds of employees at DST into limbo.
Citing a recent U.S. Supreme Court opinion limiting federal courts’ jurisdiction under the arbitration law, the 8th U.S. Circuit Court of Appeals held that the employees had not established an independent basis for jurisdiction.
The court sent back the cases — 177 altogether — to determine whether the lower court has the authority to confirm each individual case.
The DST employees claimed that DST, a financial and health care services company, had concentrated “an enormous and imprudent” amount of its 401(k) plan in the stock of Valeant Pharmaceuticals, now known as Bausch Health Companies Inc. When that stock’s price plummeted in 2016 from $258 per share to $15 per share, the plan sustained nearly $400 million in losses.
In 2020, Valeant paid a $45 million penalty to settle charges by the Securities and Exchange Commission that it had engaged in “improper revenue recognition and misleading disclosures in SEC filings and earnings presentations.”
The arbitration cases began as a would-be class action lawsuit filed by a DST employee in 2017, on behalf of workers who were part of the company’s profit-sharing plan. But a judge agreed with DST that the employees’ claims should instead be arbitrated on a case-by-case basis and dismissed the class-action suit.
More than 550 employees ended up submitting arbitration claims. As of April, according to the appeals court, 342 claims had been tried, with the arbitration panel ruling in favor of 214 employees. Another 61 were awaiting decisions.
Independence lawyer Ken McClain, who represented the employees, said roughly $36 million in arbitration awards had been confirmed before the 8th Circuit handed down its ruling on Monday.
McClain said he was studying the implications of the circuit court’s decision.
“This is such a controversial issue,” he said. “This ruling could even go to the Supreme Court. We don’t know what the options are really.”
While the arbitration claims were pending, other DST employees filed a parallel class-action lawsuit in federal court in New York against DST and the 401(k) plan’s investment manager, Ruane Cunniff & Goldfarb Inc. In that case, DST took a different position, insisting the claims should be litigated there, and ceased to participate in the arbitration proceedings in Missouri.
One possible option suggested by the 8th Circuit itself would be for the arbitration cases to be transferred to the New York court. It said that court may be able to resolve the “entire controversy … by settlement or otherwise, in a manner that is fair and more efficient than keeping some Plaintiffs’ claims pending in the 8th Circuit and leaving the remaining arbitration claimant to seek confirmation in state court.”
DST was founded in 1969 as a subsidiary of Kansas City Southern Industries to track movements on their railroad and to develop an automated recordkeeping system for KCSI’s mutual fund management company.
It was spun off in the 1990s and grew to become one of Kansas City’s largest private employers, with thousands of employees based here and more than 13,000 employees worldwide.
The company was acquired about five years ago by SS&C Technologies Holdings Inc. for $5.4 billion. Hundreds of employees were let go afterward. As of last year, DST’s local employment stood at below 3,000.
