The Labor Department’s fiduciary rule may give IRA investors access to jurytrials in class action lawsuits, a right that has been denied tothe vast majority of plaintiffs in class actions brought under theEmployee Retirement Income Security Act.

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Under the rule’s private right of action provision, IRAinvestors can bring class action claims if the Best InterestContract Exemption—which includes a warranty guarantying afiduciary standard of care for advice on IRA investments--isbreached.

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As a general matter, those claims will be brought under contractlaw in state courts, and not under ERISA, a federal statute that inmost cases is deliberated in federal courts.

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Joshua Lichtenstein, an attorney in the tax and benefitsdepartment of Ropes & Gray, says the fiduciary rule’s private right of action iscausing industry stakeholders considerable worry.

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“It’s probably the aspect of the rule that industry is mostfocused on,” said Lichtenstein. “It’s one of the biggest—if not thebiggest concern—with the BIC, even more so than complying with therule’s complex disclosure requirements,” he said.

Right to jury trial widely available under state contractlaw

According to Lichtenstein and other ERISA experts, the LaborDepartment was explicit in its intention to put IRAs on par withERISA’s private right of action protection for 401(k)participants.

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In the preamble to the rule, the Department explained that thefiduciary standard in the BIC Exemption should be read as equal tothe fiduciary standard defined in ERISA.

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But a failure to comply with the BIC Exemption’s fiduciaryrequirements for advice on IRAs will result in a breach undercontract law, and not a breach of ERISA.

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In state courts, where breaches of contract claims are typicallyheard, plaintiffs have access to jury trials.

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The option of a jury trial has not been extended to planparticipants in 401(k) class action claims brought under ERISA,which have been deliberated in federal courts.

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The Constitution’s Seventh Amendment assures plaintiffs’ rightto a trial by jury in “common law” claims that are seekingfinancial restitution.

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But in the preponderance of decisions addressing 401(k)participants’ right to jury trials, courts have ruled that claimsunder ERISA, which bases plan sponsors’ fiduciary requirements ontrust law, are “equitable” in nature, and therefore not entitled tothe Seventh Amendment’s right to a trial by jury.

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Under the fiduciary rule, access to jury trials in class actioncontract claims will undoubtedly be an attractive option for IRAinvestors, and their attorneys, says Erin Sweeney, an ERISAattorney with Miller & Chevalier.

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“If you are a plaintiffs’ attorney, you are going to want aclass claim under the BIC to be heard in a state court,” saidSweeney. “Under ERISA, plaintiffs can’t pursue punitivedamages—there are no pain and suffering remedies under ERISA. Butin state courts, there is a greater ability to assess punitivedamages under contract claims.”

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Put another way: “The remedies are better in state courts,” saysSweeney.

Confusion over ERISA’s preemptive power

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While breach of contract claims do generally fall under thejurisdiction of state law, the ERISA legal community is unclear onwhether class actions brought under the BIC Exemption by IRAinvestors will be subject to ERISA, which was written to preemptstate law.

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That uncertainty extends to members of the plaintiffs’ bar.

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“As to the necessity for state court actions, it remains to beseen whether courts will interpret the rule as invoking state orfederal jurisdiction,” said Jerry Schlichter, the founding partnerof Schlichter Bogard & Denton, which has won aggregatesettlements exceeding $330 million in 401(k) class actions.

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“In either venue, the rule very clearly sets a standard offiduciary behavior that requires fiduciaries to act in theexclusive best interest of the client, so investors should get fullprotection whether state or federal courts decide the cases.”

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The question of ERISA’s preemptive power over contract claimsbrought under the fiduciary rule was raised by stakeholders incomment letters prior to the rule’s finalization.

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It will certainly be re-raised as the Labor department considersthe merits of rescinding or revising the rule, as the agency hasbeen instructed to do by a Presidential memorandum.

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Carol McClarnon, an ERISA attorney with Eversheds Sutherland,says the fiduciary rule’s lack of clarity on jurisdiction is enoughfor regulators to “slam on the breaks” before allowing the rule’simplementation.

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“Congress gave ERISA preemptive power over state law because itdid not want employer fiduciaries subjected to 50 different statelaws,” said McClarnon. “That’s simply unworkable.”

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Class action contract claims have been brought against IRAproviders in state courts prior to Labor’s promulgation of thefiduciary rule.

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But those cases did not raise the question of ERISA’s preemptivepower, as IRAs did not fall under ERISA’s private right of actionprior to the fiduciary rule.

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Now, all bets are off as to whether ERISA will be applied toclaims under the BIC Exemption, says McClarnon. “This will turnERISA on its head.”

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Moreover, McClarnon says states don’t apply contract lawuniformly, citing varying statutes of limitations as an example.“The possibility of subjecting a service provider to 50 states’different interpretations of contract law is what is so offensiveabout the rule.”

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Lichtenstein, Sweeney, and McClarnon each said they expectlitigation questioning ERISA’s preemptive authority over statecourts will emerge if the rule is implemented as written.

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That prospect could take years to litigate, said Sweeney. “Thequestion of whether class contract claims brought under the BIC areintertwined with ERISA will have to be hashed out at somepoint.”

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Some ERISA specialists don’t expect that class complaintsregarding IRA contract claims will be easily formed. But theprospect certainly exists. Juries in state courts are already usedin complex securities class action litigation, an argumentproponents of the rule’s private right of action will undoubtedlypoint out to the Labor Department during its review of therule.

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“If state court jury actions are allowed, my experience withjuries is that they are fair and try to do the right thing,” saidJerry Schlichter.

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“Some people malign juries based on individual results in highprofile cases, but large verdicts, when they occur, result fromserious illegal misconduct by someone, often coupled with lying orattempts to cover up that conduct. If the fiduciary standard isfollowed, there should be no more fear of a jury than of a judge,”Schlichter added.

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If the fiduciary rule is ultimately implemented as written, thequestion of ERISA’s role in litigating IRA class claims can beexpected to be at the forefront of plaintiffs’ and defendants’arguments.

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“I think everyone is expecting this will be an area of highinterest for litigators,” said Joshua Lichtenstein.

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“This is the most complicated prohibited transaction exemptionthe DOL has ever created. The BIC has a lot of moving parts. Thesheer complexity of complying with it is almost guaranteed to giverise to claims for failure to follow all areas of the contract,”added Lichtenstein.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.