Ohio National Trailing Commissions Litigation

In Trail Commissions Case, Ohio National Moves Court for Quick Action on Contract Language but Literally Alters the Language of the Contract in its Argument

Soon after we filed the first nationwide class action lawsuit against Ohio National on behalf of LPL representative Lance Browning in Ohio federal court, several other lawsuits were filed by broker-dealers. In our lawsuit, we assert that Ohio National is trying to change the rules after the game has already started, and that the Cincinnati-based mutual insurance company does not have the right to unilaterally terminate its contractual obligation to pay trailing commissions on its existing variable annuity policies that include a guaranteed minimum income benefit (GMIB) rider.

While Ohio National has the right to discontinue future sales of these policies, our position is that it may not unilaterally terminate its obligation to pay trailing commissions on existing policies. Ohio National is obligated, pursuant to the terms of selling agreements it drafted, to pay commissions as set forth in the applicable commission schedule in effect at the time Ohio National receives the customer’s lump sum payment. The selling agreements also state that the terms of compensation shall survive the agreement unless the agreement is terminated for cause by Ohio National (which they weren’t).

Last week, Ohio National chose to file a motion for summary judgment in a case filed by a small broker-dealer named Veritas. We do not represent the broker-dealer in that lawsuit but I have read Ohio National’s motion. By filing this motion, Ohio National is trying to get a quick win in this one case with the hope it will have a ripple effect on the other cases. It claims that the language in the selling agreements unequivocally establishes that Ohio National is permitted to stop paying trailing commissions on existing GMIB policies by cancelling the selling agreements.  

First, when a defendant moves for summary judgment in a contract action, based solely on the supposedly “unequivocal” language of the contract, one might reasonably expect that the “dispositive” language would speak for itself.  Ohio National opens its motion for summary judgment by quoting the language that they claim is both unequivocal and dispositive, yet, stunningly, it alters the language of the contract.  Of course, if contractual language is truly unequivocal and dispositive, it need not be altered to exhibit those qualities.

Here is what the contract actually says:

“Trail commissions will continue to be paid to broker dealer of record while the Selling Agreement remains in force and will be paid on a particular contract until the contract is surrendered or annuitized.”

In an effort to “clarify” the interpretation of this language (keep in mind that granting summary judgment in favor of Ohio National requires contract language that needs no clarification and requires no interpretation), Ohio National re-casts the contract provision as follows:

“Trail commissions will continue to be paid to broker dealer of record [a] while the Selling Agreement remains in force and [b] will be paid on a particular contract [individual annuity] until the contract is surrendered or annuitized.” 

In other words, Ohio National creates out of whole cloth the [a] and [b] labels, and inserts them into the precise locations in the contract that would be most likely to lead a court to interpret this contractual provision in the way that it would like it to be interpreted in this case.  There is good reason not to accept Ohio National’s preferred interpretation, but most notably is this – it makes the sentence grammatically incomprehensible.

One might properly write: “When on vacation, I enjoy [a] reading for pleasure, and [b] fishing.”  Of course, it makes perfect sense to write, “When on vacation, I enjoy reading for pleasure,” and it separately is perfectly coherent to write, “When on vacation, I enjoy fishing.”  The construction of the contract language unilaterally imposed by Ohio National in its motion for summary judgment does not comply with this basic rule of grammar.  If one were to deconstruct its re-writing of the contract language, it would break down into two separate parts, one of which makes no sense.  It is perfectly coherent, of course, to separate part [a], and say, “Trail commissions will continue to be paid to broker dealer of record while the Selling Agreement remains in force.”  It is, however, nonsensical to separate part [b], and say, “Trail commissions will continue to be paid to broker dealer of record will be paid on a particular contract [individual annuity] until the contract is surrendered or annuitized.” 

I would humbly suggest that if a court is inclined to insert some [a] and [b] brackets to assist in interpreting the contract language, the following construction merits consideration:

“Trail commissions [a] will continue to be paid to broker dealer of record while the Selling Agreement remains in force and [b] will be paid on a particular contract until the contract is surrendered or annuitized.”

Broken down, this language asserts two things.  First, “Trail commissions will continue to be paid to broker dealer of record while the Selling Agreement remains in force.”  Fair enough.  And, second, “Trail commissions will be paid on a particular contract until the contract is surrendered or annuitized.”  That actually makes sense.

The idea that the conjunctive “and” compels Ohio National’s interpretation is illogical.  The conjunctive “and” can just as easily conjoin two sufficient conditions as it can two necessary conditions.  For instance, if someone says, “I am always happy when I’m riding a horse and reading a book,” they mean that either riding a horse or reading a book is sufficient to make them happy.  They surely don’t mean that they are always happy when reading a book while atop a horse.  In short, the use of the conjunctive “and” is of no particular help in distinguishing between the competing interpretations of the contract.

In addition, Ohio National claims that its interpretation of the contractual language is the only plausible interpretation, because a contrary interpretation would render the first portion of the clause meaningless.  This is wrong.  Our interpretation does no such thing.  Under our interpretation, Ohio National agrees to pay trail commissions as long as the selling agreements are in force.  (That’s the first part of the clause.)  And, in addition, Ohio National agrees to pay trail commissions, even when the selling agreement is no longer in force, so long as the particular contract has not been surrendered or annuitized.  (That’s the second part of the clause.)  Perfectly consistent, and also consistent with the rules of English grammar, common sense, and the course of dealing that all parties to these contracts have been operating for many years.

Indeed, it is Ohio National’s interpretation of the clause that is ultimately untenable under Ohio law, not merely because of its glaring grammatical deficiencies, but also because to accept Ohio National’s interpretation would be to render a separate portion of the contract meaningless.  Comparing language that exists in one section of a contract with language that exists in another is an important method of contract interpretation.  A court must assume that distinct language within the same contract is intended to convey distinct meaning. 

Paragraph 9 of the selling agreements address “Commissions Payable,” and it explicitly states: “The terms of compensation shall survive this Agreement unless the Agreement is terminated for cause by ONL, provided that BD remains a broker-dealer in good standing with the FINRA and other state and federal regulatory agencies and that BD remains the broker-dealer of record for the account.”  (I have added nothing to this sentence, and I certainly didn’t create some new punctuation the way Ohio National did.) 

Thus, by its very terms, the selling agreements themselves states that the terms of compensation “shall survive this Agreement.”  This is wholly inconsistent with Ohio National’s interpretation of the contract, and entirely consistent with ours.  Under Ohio National’s theory, both (a) the selling agreements remaining in force, and (b) the contract not being surrendered or annuitized, are necessary conditions for Ohio National’s continued payment obligations.  But if that is true, then if the selling agreements are terminated – and are thus no longer in force – condition (a) is not met, and thus the terms of compensation do not survive.  The contract, however, at Paragraph 9, explicitly states that the terms of compensation shall survive the selling agreements, that is, payment must still be made even if the selling agreements are no longer in force.  Therefore, Ohio National must continue to pay trail commissions even if the selling agreements are terminated, so long as the particular contract has not been surrendered or annuitized.

It will be interesting to see if Ohio National tries to come up with some new or different arguments, because if this is the best it can do, we believe that all the courts to consider these arguments will agree that Ohio National’s decision to stop paying trail commissions is dead wrong.

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