A federal judge dealt a big blow to broker-dealer representatives suing Ohio National for the insurer’s decision to stop paying commission on certain variable annuities last year. And in two other cases, Ohio National entities’ motion to quash litigation by broker-dealers was denied.
U.S. District Judge Susan J. Dlott ruled in favor of Ohio National entities, granting their motion to dismiss two lawsuits brought by reps.
Judge Dlott rejected a July report and recommendation of a magistrate's court that, as reported, denied Ohio National’s bid to quash the two lawsuits and recommended consolidating them.
At the heart of the matter was whether individual reps had any standing to stake claims against Ohio National for non-payment of trail commissions.
Ohio National entities argued that the advisors themselves were not party to the selling agreement. Additionally, the company argued that matters of compensation between the reps and their broker-dealers were governed by separate agreements.
The Judge acknowledged that the selling agreement is enforceable by the broker-dealer and not the representative, adding the Ohio National entities did not hire the representatives, was not their employer nor did they pay them compensation. The compensation flowed between Ohio National and the broker-dealer firm. Therefore, Judge Dlott came to the conclusion that two plaintiffs, Lance Browning and Stephen Cook, “were not third-party beneficiaries under the Selling Agreement.”
“We are pleased with Judge Dlott’s dismissal of the Browning and Cook suits. We believe the Court has reached the right decision as the individual registered representatives who filed these suits are not parties to Ohio National’s selling and servicing agreements,” an Ohio National spokesperson wrote in an emailed statement.
In November last year, LPL Financial advisor Browning filed a class action complaint against Ohio National Life Insurance Company, Ohio National Life Assurance Corporation and Ohio National Equities, along with Ohio National Financial Services, the parent company for Ohio National Insurance.
In January 2019, that complaint was amended such that it was no longer a class action lawsuit but a case by Browning individually and on behalf of ‘similarly situated’ LPL advisors.
Almost two months later, Triad Advisors representative Cook also filed a class action complaint against the same Ohio National entities.
In the July report and recommendation, a magistrate judge had relied on an April 2019 decision by a federal court in Massachusetts that ruled in favor of a Commonwealth Equity Services advisor, Margaret Benison, to compel arbitration against Ohio National for stopping trails for variable annuities.
“[T]his Court respectfully disagrees with the dicta conclusion in Benison and with the Magistrate Court to the extent she was persuaded by Benison,” read Judge Dlott’s order.
But this is not the only lawsuit challenging Ohio National’s decision not to pay trails.
In separate cases, two federal judges have denied Ohio National’s request for summary judgment, effectively prolonging the long-running legal battles between the insurer and broker-dealers.
A federal judge in Texas adopted the recommendations of the magistrate's court by denying a request for partial summary judgment by both parties: plaintiffs NEXT Financial and defendants Ohio National entities.
In the other case, it was Judge Dlott again who this time ruled against Ohio National and denied its motion for summary judgment in a lawsuit filed by Arkansas-based broker-dealer Veritas Independent Partners.
These rulings are being carefully watched by other broker-dealers in similar litigation with Ohio National. In fact, proceedings in the NEXT Financial lawsuit were twice cited by Veritas to support its own arguments.
Both NEXT Financial and Veritas filed their respective lawsuits against the same four Ohio National entities in November 2018.
The NEXT Financial Lawsuit
After reviewing a magistrate court’s recommendations and objections filed by both parties, U.S. District Judge Alfred H. Bennett effectively branded the sales contracts between the two parties as ambiguous, which meant neither side could exclusively rely on their own reading of the agreement.
“This decision does not mean that we are obligated to pay trail commissions after we ended our contract with this broker-dealer, but [is] simply a denial of both parties’ request of early disposition, and the case will now move into the discovery phase as part of the normal litigation process. We believe the language in the selling agreements states that our obligation to continue paying trail commissions on these variable annuity contracts is contingent on having a selling agreement in force,” an Ohio National spokesperson wrote in an emailed statement.
When reached for comment, a spokesperson for NEXT Financial responded via email: “We do not comment on ongoing or pending litigation.”
As reported, in its memorandum and recommendation on August 12, 2019, the magistrate court had said the terms of the selling agreement and the commissions schedule could not be harmonized and that the contract was “ambiguous,” which is why summary judgment could not be granted.
Both parties then filed their objections, as previously reported.
In its objections filed before the court, NEXT Financial stated that the selling agreement and commission schedule can indeed be harmonized when read together.
Ohio National, on the other hand, argued that the magistrate judge’s recommendations fell “short of completing the full, contractual analysis required under controlling Ohio law.”
Both parties raised some concerns about a lack of clarity in the ruling.
The magistrate court then issued an amended memorandum and recommendation with clarifications on August 30, 2019.
Since then, both the plaintiff and the defendants have filed their responses to the objections raised by the other party.
After the magistrate court’s first ruling in August, both UBS and Veritas cited the recommendation in support of their own arguments.
Veritas also filed the federal judge’s order to support its claims.
“As set forth in the Order of September 26, 2019, the District Court of Texas has now finally rejected ONL’s motion for summary judgment on the same claims and selling agreement language at issue here. Veritas respectfully requests this Court do the same. Ohio National Life’s motion for summary judgment should be denied,” Veritas said in its September 30th filing.
The Veritas Lawsuit
The Veritas suit against Ohio National was last heard by Judge Dlott in July.
In her order denying summary judgment to Ohio National, Judge Dlott also dealt with the interpretation of the clauses in the selling agreement and the commission schedule.
She writes that Ohio National entities “have not established as a matter of law that their obligation to pay trail commissions to Veritas ended in December 2018 when they terminated the Selling Agreement. Section 9 in the Selling Agreement and the 'trail commission clause' in the attached Commission Schedule are ambiguous and possibly contradictory on the issue of whether Defendants had to pay trail commissions after terminating Selling Agreement without cause.”
Further adding that more evidence may help shed light on the intent of the parties but since there has been no opportunity for discovery, the motion for summary judgment is denied and both parties are allowed to proceed for discovery.
Geoffrey Moul, of Columbus, Ohio-based Murray, Murphy, Moul & Basil, who is representing Veritas, welcomed the decision.
“The Court got it right. The decision is a welcomed one and a well-reasoned one, after the Court gave considerable thought to the issue. Now the broker-dealer class can continue to move forward in the efforts to collect trail commissions that have been rightfully earned,” Moul told FA-IQ via email.
An Ohio National company spokesperson responded to the decision saying, “Regarding the Veritas Independent Partners suit, this decision is not a ruling on the obligation to pay trail commissions after we ended our contract with this broker/dealer, but is simply a decision to move the case into the discovery phase as part of the normal litigation process. Further, we believe that under the selling agreement our obligation to continue paying trail commissions on these variable annuity contracts is contingent on having a selling agreement in force.”
The class action lawsuit filed by Veritas on behalf of itself and other similarly situated broker-dealers sought the court to declare that the Ohio National entities are obligated to pay trail commissions, both prior to and after the termination of the selling agreement. It also seeks monetary damages, interest and punitive damages.
Almost two months after Veritas’ complaint, Ohio National entities filed a motion for summary judgment in January 2019.
Ohio National enitites argue in their motion that they are not in breach of contract since they "were relieved of any obligation to continue paying trail commissions to Veritas on individual variable annuities (including GMIB Annuities) after the termination of the Selling Agreement."
“Since all of Veritas’ claims are premised on the existence of such a breach, they necessarily fail,” the motion adds further.