Thrivent prohibits class actions

As a fraternal benefit society, Thrivent says that its relationship with its clients, who are members of the fraternal society, “differs significantly from the relationships that commercial stock and mutual life insurance companies have with their customers,” according to the complaint.

All of Thrivent’s assets are owned by its membership, which is largely comprised of investors of “modest means”—more than half of its members have household incomes of less than $75,000, and the median IRA balance is $25,000.

One way Thrivent is similar to its commercial competition is in how it structures arbitration clauses in contracts with members.

Over the past two decades, contracts issued by financial services providers have commonly included provisions that customers waive their right to a trial by jury to settle disputes and instead submit to arbitration to settle claims. Often, those arbitration clauses include a waiver prohibiting class-action claims.

For more than 15 years, Thrivent’s bylaws have required such language in its insurance contracts. Disputes among its members are resolved through mediation, and if necessary, arbitration.

Thrivent says that its arbitration process—called the Member Dispute Resolution Program—“preserves and strengthens member relations” on the rare occasions when a dispute emerges and maintains the “best interests” of the fraternal membership. The MDRP prohibits members from bringing class-action claims.

Under the DOL rule’s BIC Exemption, that will change. The rule expressly prohibits class action waivers in the BIC Exemption, which Thrivent, along with the rest of the industry, will need to be able to sell its proprietary products, annuities, and advice on IRA rollovers.

Between 2011 and 2015, Thrivent members raised more than 5,400 complaints. Almost all—96 percent—were resolved internally. Only 16 went to arbitration, which Thrivent says is proof of its ability to resolve disputes “quickly and amicably.”

By prohibiting class-action claims, Thrivent says it has avoided “adversarial litigation” that could threaten its core mission. In prohibiting class action waivers, the BIC Exemption would “undermine uniformity among its members,” and allegedly threaten Thrivent’s fraternal mission.

“The time and expense of class action litigation would convert the fairness, promptness, and efficiency that are the hallmarks of the MDRP into an expensive, lengthy and adversarial process,” Thrivent’s complaint says.

ERISA v. FAA

In July, Thrivent approached the DOL, looking for an exemption from the fiduciary rule’s prohibition on class-action waivers, “in an effort to avoid contentious litigation with DOL.” They walked away empty-handed and made the choice to sue.

Thrivent says its class-action waiver is “entirely consistent with and enforceable under the FAA (Federal Arbitration Act).”

The heart of its claim is that the BIC Exemption’s prohibition on class-action waivers is unenforceable under the FAA. In prohibiting class-action waivers, Thrivent alleges DOL exceeded its statutory authority.

“Nothing in ERISA gives DOL authority to preclude financial institutions and their clients from entering into and enforcing arbitration agreements that include class-action waivers,” Thrivent said in its suit.

That argument has merit, says Leland Beck. What’s more, the DOL may recognize as much.

Thrivent’s claim points to a “severability clause” the DOL wrote into the BIC Exemption.

In basic terms, that clause of the rule says that if a court found the prohibition on class-action waivers to be an invalid extension of DOL’s authority, then a court could sever the class-action provision while keeping the rest of the rule, and the BIC Exemption, intact.

“DOL has expressly stated in the BIC Exemption that the pre-dispute arbitration prohibition clause could be severed from the rest of the rule,” explained Beck.

 “That leaves room for DOL to adopt the rest of the BIC Exemption without that clause.  It was a smart move by DOL because their authority to bar FAA arbitration under ERISA is far from clear,” he said.

“I think DOL recognized there was a conflict between ERISA, under the rule’s BIC Exemption, and the FAA,” said Beck. “They saw this coming and understand the conflict is a big problem. Courts owe DOL no deference in interpreting the FAA.”

SCOTUS’ faith in FAA

Last December, the Supreme Court addressed the enforceability of arbitration clauses, and class-action waivers, under the Federal Arbitration Act.

“FAA says arbitration clauses are enforceable—period,” said Beck. “That has been taken to heart by business. Arbitration clauses are common in banking, investment, credit card, and other business-generated contracts.”

They are also controversial. In DIRECTV Inc., v. Imburgia, the Supreme Court upheld the enforceability of a class-action waiver under the FAA in a 6-3 decision.

In her dissent, Justice Ruth Bader Ginsberg was highly critical of the latitude the Supreme Court has given business interests in including class-action waivers under the FAA, which she said has resulted “in the deprivation of consumers’ rights” and “insulated powerful economic interests from liability” for violating consumer protection laws.

“A lot of people are very unhappy with arbitration clauses because they believe they give businesses the upper hand over consumers,” explained Beck. “The single claim arbitration clause eliminates a class-action option that many see as the only way to effectively make a claim against a large business.”

In prohibiting class-action waivers, the DOL was in lockstep with wider Obama administration policy, says Beck.

The Consumer Financial Protection Bureau, created under the Dodd-Frank Wall Street Reform Act of 2010, has proposed a rule that would eliminate banks and credit card companies from writing class-action waivers into contracts with consumers.

“The administration is trying to stop class-action waivers beyond the DOL rule,” explained Beck. “This is an administration level policy—to protect class actions and the ability to sue in federal court.”

New question for the courts

While the Supreme Court has consistently ruled in favor of the enforceability of class-action waivers under the FAA, Beck says the core issue raised in Thrivent’s claim creates a new question for courts to reconcile: how the FAA and other regulatory statutes, like ERISA, fit together.

“That is the tough part of this issue,” he said. “DOL is saying that it can adopt regulations that bar FAA arbitration. The answer is far from clear and likely to depend on the explicit language of ERISA. Courts generally defer to an agency’s interpretation of its regulatory statute. But no agency gets deference to interpret the FAA, the APA, or any other general statute.”

Beck thinks Thrivent’s claim is strong, putting the firm in a good position, “which is not easy to achieve when you sue the U.S. government.” He gives DOL’s prohibition on class-action waivers a 30 to 40 percent chance of surviving.

But a victory for Thrivent may not apply to other retirement product providers, noted Beck.

“Thrivent requested an injunction and injunctions must be narrowly tailored,” he said. “A court may well grant an injunction applicable only to Thrivent’s claim, and not the whole industry.”