Dec. 17, 2012 – The class of Wisconsin plaintiffs fighting to keep its case against Northwestern Mutual out of federal court recently lost, as the U.S. Court of Appeals for the Seventh Circuit concluded that annuity contract issues must remain in federal court for resolution.

Northwestern Mutual Life Insurance Company sold a specific annuity product to approximately 36,000 people across the country. About 3,000 live in Wisconsin. In 1985, the insurance company changed the method for calculating the annual annuity dividend.

In 2001, annuity policyholders filed a class action lawsuit in Wisconsin state court seeking to represent annuitants nationwide. They alleged the changes violated annuity contract terms.

After the court refused to certify the nationwide class, plaintiffs sought to proceed as a class limited to annuitants who live in Wisconsin. They wanted a declaratory judgment that Northwestern Mutual’s 1985 change to annuity dividend calculations was invalid.

The Wisconsin circuit court judge certified the class and in a “sweeping decision,” declared that Northwestern Mutual violated the annuity contracts and breached fiduciary duties.

The class then sought damages for annuitants in every state through an amended complaint, based on the declaratory judgment announced in Wisconsin.

Northwestern Mutual asked for removal to federal court under the federal Class Action Fairness Act (CAFA). But the plaintiffs asked for remand to state court, arguing that CAFA specifically excludes class action claims involving “internal affairs or governance of a corporation.”

The internal-affairs doctrine recognizes that only one state should have the authority to regulate a corporation’s internal affairs, and Northwestern Mutual is based in Wisconsin.

The class plaintiffs said Northwestern Mutual is a mutual insurer, and the policyholders have ownership interests in the governance and profits of mutual insurers.

Northwestern Mutual argued that suits involving annuity contracts don’t involve a corporation’s “internal affairs” and choice-of-law provisions in the annuity contracts prevent application of Wisconsin corporate law to policyholders in other states.

The U.S. District Court for the Eastern District of Wisconsin remanded the case to state court, concluding that disputes of policies issued by mutual insurers relate to “internal affairs.”

However, a three-judge panel for the Seventh Circuit Court of Appeals recently vacated the district court decision in LaPlant v. Northwestern Mutual Life Ins. Co.

“LaPlant and the class have not cited any decision, by any state court, applying the internal-affairs doctrine to claims by annuitants based on promises made in their policies, and we conclude that §1453(d)(2) does not apply,” wrote Judge Frank Easterbrook.

“This is a contract case, not a corporate governance case,” Judge Easterbrook wrote. “Every state enforces promises, but states differ in how they calculate damages and when (if ever) punitive damages are available for breach of contract.”