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Regulation and Compliance > Federal Regulation

Trump DOJ’s Aversion to Class Actions Will Have Wide Impact

By Marcia Coyle

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The recent switch by the Trump administration’s Justice Department from opposing to defending bans on class actions in workplace arbitration agreements will have consequences beyond a trio of challenges the U.S. Supreme Court is set to hear this fall.

On June 16, acting solicitor general Jeffrey Wall informed the justices that the Justice Department was reversing its position in a key labor case, National Labor Relations Board v. Murphy Oil, which tests employee arbitration agreements. The government said it would no longer support the NLRB’s position that arbitration agreements barring class actions violate federal labor law.

Less than three weeks later, on July 3, the Justice Department relied on that reversal in the high court to justify abandoning its support for a class action provision in the U.S. Labor department’s fiduciary rule. On June 2, the Justice Department allowed a deadline to lapse for its appeal of a temporary injunction against a nursing home rule that banned mandatory arbitration agreements.

The two reversals and the lapsed appeal signal a broadening effort by the Trump administration to prohibit or restrict class actions through litigation or regulation.

The Justice Department continues to defend the fiduciary rule, an Obama-era regulation that raised standards for financial advisors giving retirement advice, even as the Labor Department moves to revise provisions in the rule. There’s only one part of the rule the Trump Justice Department won’t now support in court: a class action provision. In its July 3 filing in the U.S. Court of Appeals for the Fifth Circuit, the Justice Department, represented by Deputy Assistant Attorney General Hashim Mooppan, urged the court to strike down a provision restricting class action waivers in arbitration clauses.

The restriction on class action waivers is a condition on financial advisors who want to qualify for the fiduciary rule’s best interest contract exemption, or BICE. If they qualify, those advisors are exempt from certain prohibited transaction provisions in federal retirement laws. The U.S. Chamber of Commerce, a lead plaintiff in the case, has argued the condition violates the Federal Arbitration Act, or FAA. The Justice Department now agrees.

DOL lawyers said in their brief that the BICE’s condition restricting class action waivers is “a discriminatory obstacle to arbitration that cannot be harmonized” with the FAA and existing precedent.

The government’s flipped position in Murphy Oil “complicates things a lot,” said Deepak Gupta of Washington’s Gupta/Wessler, who has supported the provisions of the best interest contract exemption on behalf of the American Association of Justice.

“Depending on how expansively you read the solicitor general’s brief, the worst reading is the FAA forecloses any effort to limit arbitration and class litigation unless there is some very, very specific delegation, a clear statement [in the statute],” Gupta said Thursday.

In the fiduciary rule case, Gupta added, the government is not just announcing a change in position, but also telling the appellate court to vacate a provision in a government rule that regulators had successfully defended in lower courts.

“It leaves the case in this awkward position where the circuit court doesn’t have an adversarial position,” Gupta said. “This is not how you’re supposed to repeal rules. This is a faster, backend way of repealing an unwanted provision of the rule.”

The Labor Department is seeking comment on any proposed changes to the fiduciary rule, which went into partial effect in June. The rule doesn’t fully kick in until Jan. 1, 2018 — an effective date that federal regulators are weighing whether to delay.

Other lawsuits challenging the rule are pending in Washington, Minnesota and Kansas federal courts. In Minnesota, the plaintiff there, Thrivent Financial for Lutherans, seized on what it called the Justice Department’s “surprise” filing in the Fifth Circuit.

The government’s refusal to defend the fiduciary rule’s class action provision “supports entry of judgment in Thrivent’s favor, not an indefinite stay of this matter. Staying this litigation would only prolong Thrivent’s business uncertainty about its compliance obligations, in a manner that would be highly prejudicial to Thrivent,” Mark Johnson of Greene Espel wrote in a letter to the court this week.

The nursing home rule prohibiting mandatory arbitration agreements was issued by the Centers for Medicare and Medicaid Services, or CMS, last year. The American Health Care Association quickly challenged it and on Nov. 7, a Mississippi federal court imposed a temporary injunction blocking the rule.

The government had a June 2 deadline for an appeal, but the deadline lapsed with no government action. On June 5, CMS proposed a rule revision that would eliminate provisions that prohibit binding pre-dispute arbitration.

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