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Thrivent Financial for Lutherans v. Acosta

United States District Court, D. Minnesota

November 3, 2017

Thrivent Financial for Lutherans, Plaintiff,
R. Alexander Acosta, [1] Secretary of Labor, and United States Department of Labor, Defendants.

          Andrew B. Kay, Catherine R. Reilly, Cozen O'Connor P.C., Christopher L. Schmitter, and Mark L. Johnson, Greene Espel PLLP, for Plaintiff.

          Galen Thorp and Emily Sue Newton, U.S. Department of Justice, for Defendants.

          Deepak Gupta, Gupta Wessler PLLC, and Vildan A. Teske, Teske, Micko, Katz, Kitzer & Rochel, PLLP for Amici Curiae.



         Currently before the Court are the Motion for a Preliminary Injunction [Doc. No. 102] filed by Plaintiff Thrivent Financial for Lutherans (“Thrivent”), the Motion for a Stay [Doc. No. 75] filed by Defendants R. Alexander Acosta, Secretary of Labor, and the Department of Labor (collectively, “DOL”), and cross motions for summary judgment [Doc. Nos. 14 & 22] filed by the parties.[2] For the reasons set forth below, Plaintiff's Motion for a Preliminary Injunction is granted, Defendants' Motion for a Stay is granted, Plaintiff's Motion for Summary Judgment is denied without prejudice, and Defendants' Motion for Summary Judgment is withdrawn.

         I. BACKGROUND

         Thrivent brought this suit pursuant to section 702 of the Administrative Procedure Act (“APA”), 5 U.S.C. § 702, challenging a requirement contained in a recent DOL rule which it claims would effectively prohibit it from requiring individual arbitration to resolve disputes with its members. Thrivent argues that the new requirement contravenes the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., which broadly “reflects an emphatic federal policy in favor of arbitral dispute resolution.” KPMG LLP v. Cocchi, 565 U.S. 18, 25 (2011) (citation omitted). In its Complaint, it asks the Court to declare the requirement in violation of the APA and the FAA, and enter a permanent injunction prohibiting its enforcement. (See Compl. at 28 [Doc. No. 1].)

         A. Plaintiff's Structure and Dispute Resolution Process

         Thrivent is a not-for-profit, member-owned and governed fraternal benefit society incorporated in Wisconsin. (Johnston Decl. ¶¶ 3, 4 [Doc. No. 18].) As a fraternal benefit society, Thrivent is required by law to ensure that its members are bound by a common bond. See I.R.C. § 508(c)(8); Nat'l Union v. Marlow, 74 F. 775, 778-79 (8th Cir. 1896); Hip Sing Ass'n Inc. v. Comm'r, T.C.M. (CCH) 1092 (T.C. 1982). Since 2013, that common bond has been Christianity. (Johnston Decl. ¶ 4; id, Ex. B.) Today, Thrivent has nearly 2.5 million members nationwide. (Id. ¶ 4.)

         Pursuant to Wisconsin state law, Thrivent is required to provide insurance benefits to its members. See Wis. Stat. § 614.01(1)(a)5. It meets this requirement with a broad range of insurance and financial products and services, including traditional life insurance offerings, annuities, disability insurance, long-term care coverage, mutual funds, retirement planning, and money management services. (See Kinney Decl. ¶ 3 [Doc. No. 17].) Several of the products Thrivent offers are proprietary in nature, such as fixed indexed[3] and fixed rate[4] annuities. (Id. ¶ 4.) These latter offerings have the benefit of being acquirable through an Individual Retirement Account (“IRA”), in contrast to traditional life insurance products. (Id.)

         Thrivent asserts that many of its members are individuals and families of modest means. The majority of its account holders have annual household incomes under $75, 000, and nearly half of its 333, 000 IRA annuity contracts have cash values of less than $25, 000. (Id. ¶ 8.) Because most of these members trade infrequently and do not need ongoing financial advice, Thrivent's financial representatives work under a “transaction-based” compensation model, meaning they receive a commission for each transaction. (Id.) Thrivent asserts that this model is more appropriate for most of its members than the competing “fee-based” model, where the consumer pays compensation periodically based upon a percentage of the assets under management, or as a flat rate, regardless of whether transactions occur. (Id.)

         Since 1999, Thrivent has required that disputes with members related to insurance products be resolved through its Member Dispute Resolution Program (“MDRP”). (See Johnston Decl. ¶ 9.) The MDRP provides for a multi-tiered dispute resolution process, escalating eventually (if necessary) to binding arbitration based on the rules of the American Arbitration Association. (See id., Ex. B at § 11(c).) Of particular relevance to this matter, the MDRP mandates that all mediation or arbitration be individual in nature-representative or class claims of any sort, whether arbitral or judicial, are expressly barred. (See id., Ex. B at § 11(e).) Thrivent contends that its commitment to individual arbitration is “important to the membership because it reflects Thrivent's Christian Common Bond, helps preserve members' fraternal relationships, and avoids protracted and adversarial litigation that could undermine Thrivent's core mission.” (See Id. ¶ 9.)

         B. The Relevant Regulatory Framework

         Retirement investment advice, such as is offered by Thrivent, is governed by several different regulatory and supervisory regimes, including federal securities laws, state insurance regulation, and industry self-regulatory bodies. (See AR344-45.)[5] Of particular relevance to the present matter is the Employee Retirement Income Security Act of 1974 (“ERISA”). See 29 U.S.C. § 1001 et seq. Among other requirements, ERISA prohibits investment advisers classified as “fiduciaries” from engaging in actions that would constitute a conflict of interest. See Id. § 1106(b); see also I.R.C. § 4975(c)(1). For example, a fiduciary is prohibited from self-dealing, and from “receiv[ing] any consideration for his own personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan.” See 29 U.S.C. § 1106(b)(3); see also I.R.C. § 4975(c)(1)(F). For purposes of ERISA, a “person is a fiduciary with respect to a plan” if, among other things, he “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so . . . .” 29 U.S.C. § 1002(21)(A)(ii) (the “investment advice” prong).

         Pursuant to statute and executive order, DOL has been granted interpretive, rulemaking, and exemption authority for the “fiduciary” definition and the prohibited transaction provisions, both in ERISA and the parallel provisions of the Code. See 29 U.S.C. § 1135; Reorganization Plan No. 4 of 1978, § 102, 43 Fed. Reg. 47, 713 (Aug. 10, 1978). In 1975, DOL issued regulations establishing a five-part test for determining whether someone qualifies as a “fiduciary” under the “investment advice” prong of 29 U.S.C. § 1002(21)(A)(ii). See 40 Fed. Reg. 50, 842 (Oct. 31, 1975). Under this test, a financial adviser became a fiduciary only if (among other things), he or she provided advice on a regular basis and the parties had a “mutual agreement” that the advice would serve as a primary basis for investment decisions. See Id. The 1975 regulations did not cover Thrivent's sale, marketing, or advice to members regarding IRAs and distributions from 401(k) and other ERISA retirement plans. (See Johnston Decl. ¶ 14.)

         On April 8, 2016, DOL issued a new rule that expanded the definition of “fiduciary, ” as well as the type of retirement advice covered by fiduciary protections. (See Final Rule, Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice, 81 Fed. Reg. 20, 946 (Apr. 8, 2016), AR001 (the “New Rule”).) Under the New Rule, a person is deemed to be rendering investment advice for purposes of 29 U.S.C. § 1002(21)(A)(ii) if that person makes certain “recommendations” to a retirement saver regarding “securities or other investment property, ” including recommendations with respect to rollovers, transfers, or distributions from a plan or IRA. See 29 C.F.R. § 2510.03-21(a)(1). Here, the parties apparently agree that Thrivent's commission structure and sale of proprietary insurance products constitute prohibited transactions under the New Rule. Cf. Chamber of Commerce v. Hugler, No. 3:16-cv-1476-M, 2017 WL 514424, at *7 (N.D. Tex. Feb. 8, 2017) (“Under the [New Rule], a person suggesting a consumer buy a particular annuity to hold in an IRA would assumedly ‘render investment advice.'”). Fiduciaries that engage in prohibited transactions are subject to an excise tax equal to fifteen percent of the amount of the prohibited transaction. See I.R.C. § 4975(a). If the prohibited transaction is not corrected within the tax year, however, it is further subject to a tax “equal to 100 percent of the amount involved.” Id. § 4975(b).

         To ameliorate some of the harshness of the New Rule, DOL promulgated a number of regulatory exemptions that would permit qualifying entities to continue to receive certain forms of compensation (such as commissions), and engage in otherwise prohibited transactions, without incurring punitive taxes. For purposes of this matter, the relevant exemption is known as the “Best Interest Contract Exemption” (“BIC Exemption”). In order to qualify for the BIC Exemption, affected financial institutions and professionals must agree to a number of conditions designed to ensure the maintenance of fundamental fiduciary standards. (See AR063.) With regard to advice to IRA investors, the BIC Exemption mandates that these specific conditions be contained in a contract between the financial institution and the retirement investor. (See AR078.) Of particular importance here, while the conditions permit these contracts to include individual arbitration agreements, the Exemption is not available for contracts that waive or qualify the investor's right “to bring or participate in a class action or other representative action in court in a dispute with the Adviser or Financial Institution.” (AR134.) As originally contemplated by DOL, financial institutions wishing to avail themselves of the BIC Exemption are to implement such contracts with their investors by January 1, 2018. (AR140.)

         Thrivent contends that because of its business model, it cannot continue to offer its current line of insurance products to its members without relief from the punitive taxation tied to the New Rule. (See Compl. ¶ 12.) However, because its MDRP-which is incorporated into every one of its insurance contracts[6]-requires individual arbitration and expressly bars class or representative claims, Thrivent asserts that it cannot currently comply with the BIC Exemption requirements. (See Id. ¶¶ 13, 77, 78.) Accordingly, it argues that DOL has left it with the choice of either changing the terms of the MDRP or altering its business model-neither of which, for various reasons, it wishes to do. (See Id. ¶¶ 77, 78.)

         C. Procedural History

         Thrivent filed the present suit on September 29, 2016, asserting that the BIC Exemption's bar on class action waivers violates the FAA and is accordingly unenforceable because it exceeds DOL's statutory authority. (See Id. ¶¶ 85-90.) By way of relief, Thrivent asked that the Court declare the class action waiver bar to be in violation of the APA and the FAA and enjoin its enforcement. (See Id. at 28.) Both parties agreed to proceed immediately with summary judgment briefing. (See Scheduling Order [Doc. No. 10].)

         Initially, DOL argued that the BIC Exemption's ban against class-action waivers did not violate the FAA, and that, pursuant to 28 U.S.C. § 1108(a), DOL had the authority to condition exemptions on adherence to certain standards, including allowing class actions. (See Defs.' Summ. J. Mem. at 21-26 [Doc. No. 24].) The ...

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