NAFA’s suit challenges the Labor Department rule on six counts, ranging from questions of the Labor Department's statutory authority to redefine the term “fiduciary,” to the rule’s requirement that any advice to roll over 401(k) assets to an IRA rises to the level of a fiduciary recommendation, to the rule’s allegedly vague definition of reasonable compensation, and to the question of whether fixed indexed annuities can legally be regulated under the rule’s Best Interest Contract Exemption.

Private right of action

NAFA also alleges that the Labor Department rule creates a new private right of action in crafting the fiduciary rule.

So, too, does the lawsuit brought in U.S. District Court for the Northern District of Texas, on behalf of the U.S. Chamber of Commerce, the Securities Industry Financial Market Association, the Insured Retirement Institute, and several other insurance and financial industry trade groups. That suit has been consolidated with two others brought in the same court, which also allege the Labor Department created a new private right of action in its rule.

That question — whether the Labor Department rule creates a new private right of action — figures to factor significantly in how courts decide the cases, say attorneys expert in securities law and the Employee Retirement Income Security Act.

In laymen’s terms, a private right — or cause — of action is the right for people to sue, as individuals or as a class, under an existing law.

Related: 5 things to know about the DOL fiduciary rule

Only Congress can create that right. In a 2001 Supreme Court decision, Alexander v. Sandoval, the high court wrote: “like substantive federal law itself, private rights of action to enforce federal law must be created by Congress.” That case is cited in the lawsuits brought against the Labor Department.

DOL denies it created a 'new' private right of action

In its defense against NAFA’s lawsuit, the Labor Department denies that the rule “creates” a new private right of action.

Under the rule’s Best Interest Contract Exemption, advisors to 401(k) plans and IRAs are allowed to receive commission-based compensation that the rule otherwise prohibits, so long as the contractual terms of the Best Interest Contract Exemption are met — namely, that an advisor is operating as a fiduciary and selling products only in the best interest of investors.

A provision in the Best Interest Contract Exemption includes language articulating investors’ right to sue if they find an advisor is not acting in their best interest.

That right is vital for the Labor Department and the agency’s proponents hoping to see the rule fully implemented, and enforced.

At a recent gathering of fiduciary proponents in Philadelphia, Phyllis Borzi, assistant secretary of labor and head of the division charged with crafting, implementing and enforcing the at-issue rule, said the question of how the rule would be enforced was the “most difficult” challenge regulators faced.

That’s because the Employee Retirement Income Security Act does not give the Labor Department “direct enforcement authority” over IRAs, said Borzi in comments at the symposium.

To enforce a new fiduciary requirement on advisors to IRAs, regulators at the Labor Department are relying on the power of private legal action, she said.

“The consumer has to enforce the rules through state contract actions,” added Borzi.

In its brief calling for NAFA’s lawsuit to be dismissed, attorneys at the Labor Department and the U.S. Department of Justice argued that NAFA “mischaracterizes” the provision in the Best Interest Contract Exemption that makes insurance and financial services companies subject to lawsuits if the contract’s fiduciary requirements are breeched.

While the Best Interest Contract Exemption expands ERISA’s fiduciary requirements to advisors in the retail market, and creates new prohibited transactions, and exemptions to those transactions, the right to sue is not new, but exists “under the laws already in existence governing such contracts,” according to the brief filed by the Justice Department.

The brief continues: “Because the [Labor] Department has not, in fact, created any new private right of action, this claim fails.”

Dissenting expert opinions

The question of whether or not the Labor Department rule creates a new private right of action, or merely relies on existing rights to sue, is certainly not the only weighty legal question courts will have to parse in coming months.

But it is a substantial one, says James Fleckner, a partner and chair of the Employee Retirement Income Security Act litigation practice at Goodwin LLP, a Boston-based law firm.

As far as the fate of the lawsuits, Fleckner is reluctant to handicap the at-issue rule’s ultimate fate.

“I don’t think anyone knows where the courts are going to come down,” said Fleckner in an interview with BenefitsPro.com.

“I can imagine both circumstances — the courts striking down the rule or sustaining it,” he added. “The DOL wasn’t surprised by the legal challenges. They’ve given a lot of thought in advance of the litigation as to how they would defend this rule — that’s part of the reason they took five years to draft a final rule they thought would have the best chance of standing up in court.”

Notwithstanding the impossibility of predicting how different courts will rule on the myriad claims made by myriad plaintiffs, Fleckner is certain of one aspect of the allegations.

“The DOL has created a new private right of action,” said Fleckner, who led Goodwin’s successful defense of an excessive fee claim against John Hancock in the 3rd Circuit Court of Appeals in 2014, and was a signatory to an amicus brief filed with the Supreme Court on behalf of the Securities Industry Financial Markets Association in Tibble v. Edison.

Related: DOL fiduciary rule: Great for lawyers, but what about advisors?

Fleckner, who disclosed no legal relationship with any of the parties in the cases against the Labor Department, says two aspects of the rule’s Best Interest Contract Exemption create what in his opinion is a new private right of action.

Under existing securities laws, investors have the right to, and do sue IRA providers under state law.

But prior to the finalization of the at-issue rule, those providers were allowed to issue contracts to investors that waived their right to bring class action claims.

With the Best Interest Contract Exemption, providers can no longer include a contractual waiver releasing investors from the right to bring class actions.

That seemingly simple provision is a game changer, says Fleckner.

“DOL absolutely is intending to rely on private litigation to enforce the new rule,” he said. “They wanted to craft an enforceable regulation, and they want the prospect of class actions to be a meaningful check. The agency is resource constrained. They can’t enforce everything on their own.”

Beyond prohibiting waivers on class actions, Fleckner says the core design of the Best Interest Contract Exemption, which requires all providers of financial advice and investment products to acknowledge themselves as fiduciaries, also constitutes the creation of a new private right of action.

Under existing securities law, investment providers have been able to successfully defend their actions, often in arbitration hearings, on the grounds that they were not legally required to act as fiduciaries, but were rather beholden only to a suitability standard.

Related: 5 providers on the DOL fiduciary rule's effects

“The DOL has created an enhanced standard, and will make it harder for providers to defend claims,” he said.

Not a new private right of action

Professor Jill Fisch, a securities law expert and co-director of the Institute for Law and Economics at the University of Pennsylvania Law School, disagrees with Fleckner on the question of whether or not the Labor Department has created a new private right of action — mostly.

The Bes Interest Contract Exemption “does not rise to the level of creating a new private right of action,” said Fisch. “But it does change the nature of existing contracts. And that raises some legitimate concerns.”

Fisch says that when Congress wrote the Employee Retirement Income Security Act, which she described as a “fairly decent statute” relative to other securities laws, lawmakers were restrictive in creating litigation rights.

“Congress didn’t create a whole lot of private enforcement,” in ERISA, she said. “What the DOL has done does look like a backdoor attempt to create an enforcement mechanism that is the equivalent to a private right of action. The courts are going to have to decide whether that amounts to the creation of a new right.”

Both Fleckner and Fisch say they think existing case law provides some indication on how courts may come down on the at-issue rule. But even on that benchmark their interpretations vary — evidence, perhaps, of the depth and complexity of the legal questions raised with the finalization of the Labor Department's new fiduciary standard.

Related: RIA 401(k) specialists greatly advantaged by DOL fiduciary rule

“As a general statement, courts approach cases like this with the instinct that the DOL was within its authority crafting this rule,” thinks Fleckner. “But there certainly are compelling arguments on the other side.”

That said, the District of Columbia appellate circuit, where the National Association for Fixed Annuities case is being heard, has been “critical of administrative agency overreach through aggressive rule making” in a number of decisions, notes Fisch.

Moreover, the U.S. Supreme Court’s general attitude towards questions of private enforcement has been deferential to the laws already on the books, added Fisch.

“Generally, the Supreme Court has ruled that where Congress limited private enforcement, they did so for good reason,” she explained. Courts can be expected to look closely at a rule that attempts to change that balance, predicted Fisch.