Fraternal face-off: Thrivent Financial for Lutherans, the largest fraternal benefit society in the United States, doesn't turn the other cheek when it comes to former agents allegedly violating noncompete agreements.

In the first-half of 2003, Thrivent Financial for Lutherans took legal action against 14 former agents for allegedly violating noncompete agreements, and sent about 140 letters to other former agents reminding them of their contract obligations.

The company, which was formed when Lutheran Brotherhood of Minneapolis and Aid Association for Lutherans merged in 2002, is the largest fraternal benefit society in the United States. Thrivent Financial serves the Lutheran community through charity programs, and sells life insurance, annuities, mutual funds and other products to its nearly 3 million members--about a third of the 9.5 million Lutheran adults in the United States. All of Thrivent Financial's agents are Lutherans, and while some products also can be sold to non-Lutherans, the Lutheran community is the main marketing target and represent the vast majority of the company's members.

Those former agents being targeted with letters and legal actions left the company after the merger. But it is not a sign that the company is in turmoil, said Paul Kelash, a spokesman for the company.

"This goes on with other companies. No one is going to raise their hand and say, 'yeah, we take action against agents,' but it happens throughout the industry," Kelash said. In fact, both predecessor companies have taken similar actions against former agents from time to time, he said.

Noncompete clauses are commonly included in insurance agents' contracts, said Jeffrey L. Braff, an attorney with the Philadelphia-based law firm of Cozen O'Connor.

"Typically there are restrictive covenants either on an employment agreement or some sort of contract, or they would be part of the condition of employment," Braff said. "They're intended to prevent a former employee from soliciting the customers that they used to serve."

Braff said lawsuits against former agents, financial advisers or brokers are very common. "Companies put a lot of investment into training these folks and putting them in a position where they can be successful in the Merrill Lynches and Thrivents of the world. They want to protect that investment. As the result of making that investment, consumers get attracted, and it's too easy for a person to say 'I can get a better deal taking my client base across the street.' That's what these companies are trying to avoid."

Braff said the cases can be difficult to prove. "The courts don't like to enforce these types of restrictions to begin with. There is a bias against them. Those that are enforced, are enforced narrowly. It becomes a public policy issue. If you enforce these restrictions, you are punishing the customer because the customer has built a relationship with these agents."

A Common Practice

John Ella, an attorney with the law firm Mansfield, Tanick & Cohen, is experienced in dealing with noncompete litigation, and represented one of the former Thrivent agents. While Ella said he couldn't speak specifically about the Thrivent cases, he said that in general, these types of actions are becoming more common.

"We see it in all industries, and frankly, it's starting to grow wider and deeper. There are more industries where you didn't see it before, and it's going down to lower-level employees where you didn't see it before," Ella said. Sales people are often targeted, no matter what they sell. In a new twist, even hair stylists and massage therapists are being asked to sign noncompete agreements, he said.

The ability to enforce the contract depends on the state and the language used. "California has a law that generally forbids noncompete agreements. Minnesota is right in the middle of the country, and right in the middle of the law. It is enforceable if you do it right, but it's disfavored, according to case law. If there's a reason to kick it out of court, generally, the judge will," Ella said.

Noncompete agreements can have different requirements, ranging from promising not to sell similar products in a geographic area for a period of time to promising not to interfere with the relationship between a company and its clients, Ella said. Some stipulate that sales people aren't allowed to contact their former clients if they leave the company, while others say they just shouldn't solicit business from their former clients for a set period of time.

Under the terms of their contracts, former Thrivent Financial agents are not prohibited from talking to former clients or selling additional products to them, but they are barred from influencing the clients to surrender, lapse, cancel or replace Thrivent products for one year, Kelash said. Former agents also aren't allowed to take confidential or proprietary information with them when they leave the company.

"We feel we have an obligation to protect our members' financial information and overall interests," Kelash said. "When we see patterns of egregious replacement activity and misuse of member information ... that's the foundation for the actions that we're taking."

Thrivent Financial has taken action against 14 agents, either suing them in state courts or pursuing arbitration actions against them with the National Association of Securities Dealers, depending on the product in question. Thrivent Financial declined to name the agents, but said they are from Minnesota, Wisconsin, Iowa and Washington. One case against a former agent. Greg Collins, has already been settled, and Collins said as part of the settlement, he couldn't discuss the lawsuit.

Merger Brought New Contracts

Kelash said the former agents that may have violated noncompete agreements are just a tiny fraction of the company's 2,500 agent force of "financial associates." Thrivent's predecessor companies had 2,875 financial associates as of Jan. 1, 2002. But alter the merger, agents were asked to sign a new contract, and some refused and left the company.

The new contracts rewarded agents with more commission up-front for sales, rather than trailing commissions over several years. "Part of this was to reward financial associates who do a better job of identifying and meeting needs of current members and prospects, not encouraging them to just sit back and wait for trailing commissions to come in," Kelash said. "This is consistent with industry trends, and is competitive with other companies."

The ranks of Thrivent's financial associates shrank by several hundred, but Thrivent hired another 737 agents in 2003 and looks to add another 650 by the end of 2004. Still, Kelash points out that even during the turmoil of the merger, Thrivent Financial's agent turnover rote of 24% in 2002 was well below the industry average of 32%, according to Limra International, an industry trade group. Thrivent Financial's predecessor companies averaged a turnover rote between 16% and 18% before the merger, and in 2003, Thrivent Financial's rate returned to 18%, Kelash said.

That turnover rate also includes agents who retired, or left the agency business altogether, Kelash said.

"We, like other organizations, value our field organization. These are the people who are the foundation of our work; they are out there meeting the needs of our members. We regret the departure of any of them. We try to do as much as we can to retain them and keep them recognized and happy as part of our organization," Kelash said. "The real number is our turnover rate: 18%. We feel comfortable and good about the decisions we've made."

The Saint Paul Pioneer Press reported that several agents, who refused to speak due to fear of retribution, left Thrivent's culture because it had changed "to focus on sales and growth rather than its benevolent mission and long-term customer satisfaction." Kelash said he disagreed with that assessment.

"We've been unwavering in our commitment to being a benevolent organization serving Lutherans," Kelash said.

Thrivent has 1,378 local chapters in all 50 states, where its customers, also called members, can volunteer and raise money tot local needs. Thrivent Financial backs those projects. For instance, when a local chapter raises money for a local family in need, Thrivent Financial will match the money raised.

"We've seen unprecedented change: New technologies, new products, new contracts, new compensation program ... but we continue to believe that we need to do well on the business side, so we can do more good in communities. That's our mantra: do well to do good," Kelash said.

The merger has been a success, Kelash said. "We have not only done new and innovative things, we've exceeded sales goals in 2003. We converted a $292 million loss (in 2002) to $252 million in positive net income. All signs are pointed in the right direction. We have more work to do, but we're on the right track."

Thrivent Financial For Lutherans

Formed: In 2002 when Lutheran Brotherhood in Minneapolis merged with Aid Association for Lutherans, Appleton, Wis.

Company Type: Fraternal benefit society, which is a not-for-profit membership organization that offers life insurance and other financial products to its members. Fraternal benefit societies also have volunteer programs serving a variety of interests, including church support, educational scholarships and preservation of ethnic heritage.

Target Market: 9.5 million Lutherans in the United States

Headquarters: Minneapolis

President and Chief Executive Officer: Bruce Nicholson

2003 Net Income: $252 million

Assets Under Management: $62.5 billion

Source: Thrivent Financial