 |
Application of Antitrust Laws to Primary,
Excess and Reinsurance Carriers
Periodical: Antitrust Law Journal
I.
History of the McCarran-Ferguson Act
In
its 1868 Term, the United States Supreme Court reviewed the criminal
conviction of Samuel Paul, a Virginia resident who had been appointed
to sell fire insurance by a New York company in the State of Virginia.
Because Paul had refused to deposit interest-bearing bonds with
the state in compliance with Virginia law, Virginia refused to issue a
license to Paul to permit him to sell insurance.
When Paul proceeded to sell fire insurance in the state, he was
indicted and convicted for selling insurance without a license.
Paul argued that the law under which he was prosecuted was
invalid because Virginia’s statutory scheme regulating the insurance
industry within the state improperly impinged on Congress’s
constitutional powers to regulate commerce among the several States.
The Supreme Court rejected Paul’s constitutional argument and affirmed
his conviction. Paul v. Virginia, 75 U.S. (8 Wall.) 168.
In doing so, the Court held that the statute regulating
insurers’ business in Virginia did not violate the commerce clause
because insurance was not “commerce” and thus was subject only to
state, not federal, regulation.
"Issuing
a policy of insurance is not a transaction of commerce.
The policies are simple contracts of indemnity against loss
by fire, entered into between the corporations and the assured, for
consideration paid by the latter.
These contracts are not articles of commerce in any proper
meaning of the word. They
are not subjects of trade and barter offered in the market as
something having an existence and value independent of the parties
to them. They are not
commodities to be shipped or forwarded from one State to another,
and then put up for sale. They
are like other personal contracts between parties which are
completed by their signature and the transfer of the consideration. Such contracts are not inter-state transactions, though the
parties may be domiciled in different States.
The policies do not take effect -- are not executed
contracts -- until delivered by the agent in Virginia.
They are, then, local
transactions, governed by local law.
They do not constitute a part of the commerce between the
States any more than a contract for the purchase and sale of goods
in Virginia by a citizen of New York whilst in Virginia would
constitute a portion of such commerce.
75 U.S. (8 Wall.) at 183 (emphasis supplied)."
In view of the Court’s
conclusion in Paul that
insurance contracts were “local transactions, governed by local
law,” courts, legislatures and insurance companies operated on the
assumption that if insurers were to be regulated, the regulation would
flow from the States rather than from the federal government.
Hooper v. California, 155
U.S. 648, 655 (1895) (“[t]he business of insurance is not
commerce”); New York Life Insurance Company v. Deer Lodge County, 231 U.S. 495,
510 (1913) (“contracts of insurance are not commerce at all, neither
state not interstate”). This
assumption lasted for three-quarters of a century until 1944 when the
Supreme Court decided the case of United
States v. South-Eastern Underwriters, 322 U.S. 533 (1944).
In South-Eastern
Underwriters, the Government indicted the South-Eastern
Underwriters Association, its membership of nearly 200 fire insurance
companies and 27 individuals for engaging in price fixing on fire
insurance premiums and for monopolization of commerce of fire
insurance and allied lines. 322
U.S. at 534-535. The
district court dismissed the indictment on the ground that the
business of insurance was not commerce and therefore not subject to
the Sherman Act’s proscriptions against combinations in restraint of
commerce or monopolization of commerce.
The Supreme Court reversed, concluding (i) that insurance was
“commerce” subject to Congressional regulation [322 U.S. at
539-553] and (ii) that the Sherman Act’s prohibitions extended to
the insurance industry just as it extended to other types of commerce
[id. at 553-562].
South-Eastern
Underwriters prompted Congressional action in response to concerns
that application of federal laws to the insurance industry would
abrogate the States’ traditional power to regulate insurance.1
These concerns, coupled with worries that application of
federal antitrust laws in particular to the insurance industry would
render unlawful traditional (and presumably salutary) practices such
as joint efforts at rate-setting and sharing of actuarial and loss
data, led to passage of the McCarran-Ferguson Act in 1945.2
The Supreme Court has indicated
that the former concerns about preserving state regulation were the
paramount considerations in enacting legislation in response to South-Eastern
Underwriters.
There
is no question that the primary
purpose of the McCarran-Ferguson Act was to preserve state
regulation of the activities of insurance companies, as it existed
before the South-Eastern Underwriters case.
The power of the States to regulate and tax insurance
companies was threatened after that case, because of its holding
that insurance companies are in interstate commerce.
Group Life &
Health Insurance Company v. Royal Drug Company,
440 U.S. 205, 218, n.18 (1979) (emphasis in original). “[A] secondary
concern was the applicability of the antitrust laws to the
insurance industry.” Id.
at 218 (emphasis supplied)
However, Congress determined
that exempting insurance companies entirely from the application of
the antitrust laws was unwarranted, and for this reason, Congress
rejected attempts to overrule South-Eastern
Underwriters in its entirety and revert to the pre-South-Eastern Underwriters legal environment where insurers operated
totally outside the antitrust laws or other federal regulation.
Instead
of a total exemption, Congress provided in § 2(b) that the
antitrust laws “shall be applicable” unless the activities are
the business of insurance and regulated by state law.
Moreover, under § 3(b) the Sherman Act was made
applicable in any event to acts of boycott, coercion or
intimidation. To allow
the States time to adjust to the applicability of the antitrust laws
to the insurance industry, Congress imposed a 3-year moratorium.
[Court’s footnote: . . . The purpose of the
moratorium was to allow the States three years to take steps to
regulate the business of insurance. . . .] After the expiration of the moratorium on July 1, 1948,
however, Congress clearly provided that the antitrust laws would be
applicable to the business of insurance “to the extent that such
business is not regulated by State law.”
[footnote omitted]
By
making the antitrust laws applicable to the insurance industry
except as to conduct that is the business of insurance, regulated by
state law, and not a boycott, Congress did not intend to and did not
overrule the South-Eastern
Underwriters case. [footnote
omitted] While the power of the States to tax and regulate insurance
companies was reaffirmed, the McCarran-Ferguson Act also established
that the insurance industry would no longer have a blanket exemption
from the antitrust laws. It
is true that § 2(b) of the Act does create a partial exemption
from those laws. Perhaps
more significantly, however, that section, and the Act as a whole,
embody a legislative rejection of the concept that the insurance
industry is outside the scope of the antitrust laws -- a
concept that had prevailed before the South-Eastern
Underwriters decision.
Royal Drug, supra, 440
U.S. at 219-220.
The
Ninth Circuit has succinctly summarized the manner in which the
McCarran-Ferguson Act limits application of federal antitrust laws3
to the business of insurance as follows:
[McCarran-Ferguson]
provides an exemption from the antitrust laws for the business of
insurance, but only to the extent that such business is regulated by
the state, and does not involve a boycott, coercion or intimidation.
Feinstein v.
Nettleship Co. of Los Angeles, 714 F.2d 928, 931 (9th Cir.
1983). Thus, in ascertaining whether McCarran-Ferguson provides an
exemption for conduct allegedly violative of the antitrust laws,
three issues must be resolved:
(i) does the alleged antitrust violation
occur within the “business of insurance”?
(ii) is the business of insurance
“regulated by the state”? and
(iii) does the alleged violation involve a
“boycott, coercion or intimidation”?
This paper will address each of
these issues separately.
II. What is the "Business of
Insurance" within the meaning of the McCarran-Ferguson Act?
The Supreme Court has repeatedly
emphasized that McCarran-Ferguson Act provides an exemption for the
“business of insurance,” not the “business of insurance
companies.”
It
is important, therefore, to observe at the outset that the statutory
language in question here does not exempt the business of insurance
companies from the scope of the antitrust laws.
The exemption is for the “business of insurance,” not the
“business of insurers:”
“The
statute did not purport to make the States supreme in regulating all
the activities of insurance companies;
its language refers not to the persons or companies that are subject
to state regulation but to laws ‘regulating the business
of insurance.’ Insurance
companies may do many things which are subject to paramount federal
regulation; only when they are engaged in the ‘business of
insurance’ does the statute apply."
Group Life &
Health Insurance Company v. Royal Drug Company, supra, 440 U.S.
at 210-211 (1979) [quoting SEC
v. National Securities, Inc., 393 U.S. 453, 459-460 (emphasis in
original)]. See
also Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129
(1982); Hartford Fire
Insurance Co. v. California, 113 S.Ct. 2891, 2901 (1993).
In Royal
Drug and Pireno supra, the Supreme Court developed three criteria to be
utilized in determining whether a given business practice alleged to
be violative of the federal antitrust laws involved the “business of
insurance”:
(i) Whether
the practice has the effect of transferring or spreading a
policyholder’s risk;
(ii) Whether
the practice is an integral part of the relationship between the
insurer and the insured; and
(iii) Whether
the practice is limited to entities within the insurance industry.
Union Labor Life
Ins. Co. v. Pireno, supra,
458 U.S. at 129. None
of these criteria is necessarily determinative in and of itself.
Id.
Application of these criteria by
both the Supreme Court and lower courts has established beyond
peradventure that not every aspect of an insurance company’s
business falls within the “business of insurance” to render it
immune from antitrust attack under McCarran-Ferguson.
The contours of the term “business of insurance” can be
gleaned both from cases in which the exemption has held to be
inapplicable as well as from cases in which the exemption has been
invoked successfully.
A.
Activities held to be outside the "business of insurance":
1. Agreements between health insurers and independent pharmacies limiting
reimbursement to the pharmacies for drugs purchased by insureds
The
Supreme Court addressed the question of what criteria should be used
to define the “business of Insurance” in Group
Life & Health Insurance Company v. Royal Drug Company, 440
U.S. 205 (1979). Royal Drug was a private antitrust action initiated by independent
pharmacists against Group Life and Health Insurance Co. (also known as
“Blue Shield”) and three pharmacies in San Antonio, Texas. The arrangement challenged by the plaintiffs involved
insurance policies issued by Blue Shield which entitled policyholders
to purchase prescription drugs at participating pharmacies at a cost
of $2. Blue Shield paid
the participating pharmacy the difference between the cost (wholesale
price) of the drug and the $2 received from the policyholders.
Policyholders were not required to purchase their drugs from a
participating pharmacy, but if a policyholder purchased a drug from a
non-participating pharmacy, he was required to pay full price and then
seek reimbursement from Blue Shield for 75% of the difference between
the price paid and $2. Royal
Drug, 440 U.S. at 209.
Blue
Shield offered to enter into pharmacy agreements with all licensed
pharmacies in Texas.
As a practical matter, however, only those pharmacies able to
distribute prescription drugs at a cost of $2 or less per prescription
could become participating pharmacies; if the pharmacies’ costs of
distribution were more than $2, the $2 markup would not be sufficient
to allow the pharmacy to earn a profit under the Blue Shield plan.
Royal Drug, 440 U.S.
at 209, n.3. In essence,
the program fixed retail prices of drugs sold by pharmacies
participating under the plan to wholesale cost plus $2, whereas
pharmacies who were not part of the plan could charge prevailing
market prices for the drugs, even if the markup over wholesale
exceeded $2.
The
plaintiffs charged the defendants with price-fixing and group boycott
in violation of Sherman Act §1.
The only issue before the Supreme Court in Royal
Drug was whether the activities challenged as violative of the
Sherman Act constituted the “business of insurance.”4
In addressing this question, the Royal
Drug Court initially observed that the McCarran-Ferguson Act
contained no definition of the “business of insurance;”
consequently, the Court looked to the structure of the Act and its
legislative history for guidance.
Royal Drug, 440 U.S.
at 211. Having done so,
the Royal Drug Court engaged in the following analysis to determine
whether the challenged practice involved the “business of
insurance”:
First
the Court considered whether the practice under examination had the
effect of transferring or spreading a policyholder’s risk.
Royal Drug, 440 U.S. at 211. In
this part of its analysis, the Court rejected the defendants’
argument that the pharmacy agreements involved payment of premiums by
policyholders to Blue Shield in exchange for Blue Shield’s
assumption of the risk that during the term of the policy the
policyholder might suffer a loss occasioned by the need to purchase
prescription drugs (or that he might be unable to purchase
prescription drugs):
The fallacy of the petitioners’
[defendants’] position is that they confuse the obligations of
Blue Shield under its insurance policies, which insure against the
risk that the policyholder will be unable to pay for prescription
drugs during the period of coverage, and the agreements between Blue
Shield and the participating pharmacies, which serve only to
minimize the costs Blue Shield incurs in fulfilling its underwriting
obligations. . . .
The Pharmacy Agreements thus do not involve
any underwriting or spreading of risk, but are merely arrangements
for the purchase of goods and services by Blue Shield.
By agreeing with pharmacies on the maximum prices it will pay
for drugs, Blue Shield effectively reduces the total amount it must
pay to its policyholders. The
Agreements thus enable Blue Shield to minimize costs and maximize
profits. Such
cost-savings arrangements may well be sound business practice, and
may well inure ultimately to the benefit of policyholders in the
form of lower premiums, but they are not the “business of
insurance.” [footnote omitted]
The Pharmacy Agreements are thus legally
indistinguishable from countless other business arrangements that
may be made by insurance companies to keep their costs low and
thereby also keep low the level of premiums charged to their
policyholders.
Royal Drug,
440 U.S. at 213-215.
Second,
the Court addressed the question of whether the practice being
challenged was part of the contractual relationship between the
insurer and the insured, observing that “the Pharmacy Agreements are
not ‘between insurer and insured.’
Royal Drug, 440 U.S.
at 215. “They are
separate contractual arrangements between Blue Shield and pharmacies
engaged in the sale and distribution of goods and services other than
insurance.” Id.
at 216. The Court
rebuffed the notion that “the Pharmacy Agreements so closely affect
the ‘reliability, interpretation and enforcement’ of the insurance
contract and ‘relate so closely to their status as reliable
insurers’ as to fall within the exempted area” as an argument
which “proves too much”:
At
the most, the petitioners have demonstrated that the Pharmacy
Agreements result in cost savings to Blue Shield which may be
reflected in lower premiums if the cost savings are passed on to
policyholders. But, in
that sense, every business decision made by an insurance company has
some impact on its reliability, its ratemaking, and its status as a
reliable insurer. . . . If terms such as “reliability”
and “status as a reliable insurer” were to be interpreted in the
broad sense urged by the petitioners, almost every business decision
of an insurance company could be included in the “business of
insurance.” Such a
result would be plainly contrary to the statutory language, which
exempts the “business of insurance” and not the “business of
insurance companies.”
Royal Drug, 440
U.S. at 216-217.
Finally
the Court considered the question of whether the activities
being challenged involved parties other than insurers, finding it
significant that “the Pharmacy Agreements involve parties wholly
outside the insurance industry. In
analogous contexts, the Court has held that an exempt entity forfeits
antitrust exemption by acting in concert with nonexempt parties.”
Royal Drug, 440 U.S.
at 231.5
Having
applied the foregoing criteria to the challenged activities before it,
the Royal Drug Court
concluded that the defendants were not entitled to exemption under the
McCarran-Ferguson Act because the allegedly unlawful activities they
engaged in did not constitute the “business of insurance.”
The Court thus affirmed the judgment of the Court of Appeals
reversing the summary judgment of the district court which had been
entered in favor of the defendants based on the district court’s
conclusion that the defendants’ activities enjoyed exemption under
the McCarran-Ferguson Act. Royal
Drug, 440 U.S. at 232-233.
2. Agreements between insurers and peer review committees to
review reasonableness and necessity of provideers' charges
The
Court had occasion to refine and apply the Royal
Drug “business of insurance” criteria in Union Labor Life Insurance Company v. Pireno, 458 U.S. 119 (1982). In
Pireno, a chiropractor sued
the New York State Chiropractic Association and Union Labor Life
Insurance Co. alleging violations of Sherman Act §1.
The plaintiff’s complaint was directed at an arrangement
between Union Life and the Association whereby the Association’s
peer review committee advised and assisted Union Life in evaluating
the necessity of chiropractic services rendered to Union Life
policyholders and the reasonableness of charges therefor.
Because certain of Union Life’s policies limited the
company’s ability to pay for chiropractic services to
“reasonable” charges for “necessary” care, the concerted
action of the Association’s peer review committee and the insurer
tended to reduce fees payable to chiropractors like plaintiff.
Thus, the plaintiff charged that the defendants had violated
Sherman Act §1 by using the peer review Committee as a vehicle for a
conspiracy to fix prices which doctors like the plaintiff would be
permitted to charge for their chiropractic services.
After
the district court had granted the defendants’ motion for summary
judgment on the ground that the defendants’ activities were exempt
from antitrust scrutiny under McCarran-Ferguson, the Court of Appeals
reversed. The Supreme
Court affirmed, finding no McCarran-Ferguson immunity, concluding, as
it had in Royal Drug, that
the practices before it did not involve the “business of
insurance.”6
Applying
the first Royal Drug criterion, the Pireno
Court observed that the peer review committee played no part in
the “spreading and underwriting of a policyholder’s risk.”
458 U.S. at 130.
Quoting the Court of Appeals, the Supreme Court noted as
follows:
“The
risk that an insured will required chiropractic treatment has been
transferred from the insured to [Union Life] by the very purchase of
insurance. Peer review
takes place only after the risk has been transferred by means of the
policy, and then it functions only to determine whether the risk of
the entire loss (the insured’s cost of treatment) has been
transferred to [Union Life] -- that is, whether the insured’s
loss falls within the policy limits.”
Pireno, 458
U.S. at 130 (quoting from
the opinion in the Court of Appeals in Pireno).
[B]ecause
the challenged peer review arrangement is logically and temporally
unconnected to the transfer of risk accomplished by [Union Life’s]
insurance policies . . . [t]he transfer or risk from insured
to insured . . . is complete at the time that the contract
is entered.
Pireno, 458
U.S. at 130. The peer
review committee -- by determining what is or is not a
reasonable and necessary charge for chiropractic services
-- does not spread risk but merely determines whether a
particular charge is unreasonable or unnecessary and thus part of a
risk which was never transferred to the insurer but rather was always
retained by the insured. Id.
Second,
the use of the peer review committee is not an integral part of the
contract between the insurer and the insured.
The arrangement between Union Life and the Association is
distinct from Union Life’s contracts with its policyholders.
Rather, the contract “is a separate arrangement between the
insurer and third parties not engaged in the business of insurance.”
Pireno, 458 U.S. at
131.
Finally,
“it is plain that the challenged peer review practices are not
limited to entities within the insurance industry.”
Pireno, 458 U.S. at 132. Rather,
the contract between the Association and the insurer “inevitably
involves third parties wholly outside the insurance industry
-- namely, practicing chiropractors.”
Id.
While conceding that the involvement of non-insurer third
parties might not be dispositive in supporting a denial of
McCarran-Ferguson exemption, the Pireno
Court nonetheless felt it a relevant factor to be considered under the
Royal Drug analysis.
Id. at 133.
Arrangements
between insurance companies and parties outside the insurance industry
can hardly be said to lie at the center of that legislative concern.
More importantly, such arrangements may prove contrary to the
spirit as well as the letter of § 2(b), because they have the
potential to restrain competition in noninsurance markets.
Indeed, the peer review practices challenged in the present
cases assertedly realize precisely this potential:
Respondent’s claim is that the practices restrain competition
in a provider market -- the market for chiropractic
services - rather than in an insurance market. [cite to record
omitted] Thus we cannot
join petitioners in depreciating the fact that parties outside the
insurance industry are intimately involved in the peer review
practices at issue in these cases.
Pireno, 458
U.S. at 133-134.
The
Supreme Court concluded that application of none of the three Royal
Drug criteria supported the defendants’ assertion that the
arrangement between the insurer and the peer review committee fell
within the “business of insurance.”
Consequently, the practices challenged in Pireno
enjoyed no immunity under McCarran-Ferguson.
3. Title search and examination services performed by title
insurance companies
The
Federal Trade Commission challenged the practice of setting uniform
rates for title search and examination services by title insurers in Ticor Title Insurance Company v. Federal Trade Commission, 998 F.2d
1129 (3d Cir. 1993). Title
insurance is insurance designed to indemnify buyers and lenders for
loss resulting from non-record defects in the title of a parcel of
real estate. Since title
insurance policies generally except from coverage matters that a
search and examination of public records has revealed, it is customary
for the title insurer to conduct a title search and examination prior
to issuing its title insurance policy.
Originally title insurers relied upon independent examiners to
perform these title searches, but as the business evolved, some title
insurers began performing the title examination and search services
themselves while others continued to rely on independent examiners to
perform this function. 998
F.2d at 1132.
The
FTC charged Ticor, a group of title insurers, with engaging in unfair
methods of competition in violation of the Federal Trade Commission
Act by setting uniform rates to be charged for title examination and
search services in thirteen states.
Ticor accomplished this through state-licensed “rating
bureaus” with which Ticor filed its rates.
Ticor argued that it was exempt from liability under the FTC
Act because the title and examination and search services to which the
fixed rates pertained were within the “business of insurance.”
The FTC disagreed, and the Third Circuit Court of Appeals
affirmed, concluding that title examination and search services do not
meet any of the criteria set forth in Royal
Drug and Pireno to be
utilized in determining whether an activity was within the “business
of insurance.”
The
Third Circuit first observed that “title search and examination does
not itself spread or transfer risk.
At most, title searchers identify defects of title.
Title searchers themselves have no power to insure against any
risk they identify.
The search and examination are like many other arrangements
title companies make for services in an effort to reduce costs.”
Ticor, 998 F.2d at
1134. Nor did the Court
find that the challenged practice was integrated into or encompassed
with the relationship between the insurer and insured, noting that
“[h]istorically, title search and examination services were provided
by persons and entities separate from the issuer of the title policy
itself.
Even today, entities other than title insurance companies
provide the search and examination services.”
Id.
Finally, “[t]he fact that title search and examination
services, in many cases, still are not provided or performed by the
title insurance companies themselves also indicates that the third Pireno
criterion, whether the challenged practice is limited to entities
within the insurance industry, is not satisfied either.”
Id.
In
rejecting Ticor’s contention that title search and examination
services were within the “business of insurance,” the Third
Circuit distinguished the case of Gahn
v. Allstate Life Insurance Co. 926 F.2d 1449 (5th Cir. 1991),
which had considered the question of whether a state statute
precluding medical insurers from discontinuing coverage after an
insured had been diagnosed with a terminal illness was preempted under
ERISA. ERISA preempted
state laws unless they regulated the “business of insurance.”
The insurers in Ticor
had argued that Gahn stood
for the general proposition that a practice designed to exclude risks
from the insurer’s coverage was part of the business of insurance.
The Third Circuit disagreed with this broad reading of Gahn, noting that the statute under consideration in Gahn
was found to be part of the “business of insurance” (thus
avoiding pre-emption under ERISA) because the statute “established
certain conditions precedent to an insurer’s power to cancel a pre-existing
insurance contract. As
such, the statute affected the substantive terms of the insurance
contract, and thus squarely regulated insurance under ERISA’s
exemption of statute insurance law from preemption.”
Ticor, 998 F.2d at 1134 [citing
Gahn, 926 F.2d at 1454 (emphasis supplied)].
Moreover, the statute in Gahn
prohibited insurers from transferring risk of terminal illness
back to the insured (since it prohibited cancellation of insurance
policies under certain circumstances), and thus the statute dealt
directly with the transfer or spreading of an insured risk.
Id.
Thus, even though the statute in Gahn
-- like the title searches in Ticor
-- dealt with a practice designed to exclude risks from
the insurer’s coverage, the former involved the business of
insurance while the latter did not.
The
Third Circuit likewise rejected Ticor’s claim that the title search
and examination directly affected the relationship between the insurer
and insured by determining what risks are excluded from the title
insurance policy.
[T]he
proposition that the insurance policy defines the scope of the risk
assumed by the insurer does not logically imply that the person
conducting the title search and examination has defined the risk.
The two are separate. . . .
We
think the title search and examination at issue in the present case is
analogous to the peer review process in Pireno and the
insurer-pharmacy requirement in Royal Drug.
Like those processes, the title search and examination has
nothing to do with the actual performance of the title insurance
contract. Instead, the
title search and examination is “‘a matter of indifference to the
policyholder, whose only concern is whether his claim is paid, not why
it is paid’”.
Ticor, 998
F.2d at 1135-1136 [quoting
Pireno, 458 U.S. at 132 and United
States Department of the Treasury v. Fabe, 113 S.Ct. 2202 (1993)]
The
Third Circuit thus concluded “that the title search and examination
procedures at issue do not constitute the ‘business of insurance’
under the standards of the McCarran-Ferguson Act that Pireno
sets forth. Ticor’s
actions in setting rates for these services is [sic] therefore not
entitled to immunity from the antitrust laws under the
McCarran-Ferguson Act.” Ticor,
998 F.2d at 1138.
4. Escrow services provided in connection with title insurance
In United States v. Title Insurance Rating Bureau of
Arizona, Inc., 700 F.2d 1247 (9th Cir. 1983), the
Government filed suit against a title insurance rating bureau, along
with its members and subscribers who were engaged in the title
insurance business. Under
Arizona law, title insurers (either themselves or through a rating
bureau of which they were a member or subscriber) were required to
file a schedule of fees for escrow services with the state director of
insurance. The Government
charged that the directors of the Title Insurance Rating Bureau of
Arizona (“TIRBA”) had held a series of meetings designed to fix
fees for escrow services in Arizona. The district court had granted the Government’s motion for
summary judgment. On
appeal, the Ninth Circuit observed that the evidence established that
“[v]arious title insurers jointly set their prices for escrow
services and filed those rates with the state through TIRBA. . . .
Thus, the question is whether the provision of escrow services by
title insurance companies is part of the business of title
insurance.” Title
Insurance, 700 F.2d at 1249. The Ninth Circuit concluded it was not.
The
Ninth Circuit initially noted that “it is not dispositive that
Arizona law defines the ‘business of title insurance’ to include
‘the performance by a title insurer or title insurance agent of
escrow services, . . . because the definition of ‘business
of insurance’ for McCarran Act purposes is a matter of federal
law.” Title Insurance, 700
F.2d at 1250. Proceeding
to apply the federal
criteria for the “business of insurance” developed by the Supreme
Court in Royal Drug and Pireno, the
Ninth Circuit concluded that the provision of escrow services by title
insurers was not part of the “business of insurance” exempting
that activity from federal antitrust regulation.
First,
the Court noted that providing escrow services does not affect or
impact the underwriting and spreading of risks insured by the title
insurer. The Court
accepted the Government’s arguments that an escrow agent was simply
a stakeholder performing ministerial functions.
The charges for escrow services established by the defendants
in the manner alleged by the Government to constitute price-fixing set
prices for a wide array of escrow services, including escrow services
for customers who did not purchase title insurance.
While the Court agreed with the defendants “that performance
of escrow services is crucial to underwriting and spreading risks in
that title insurers evaluate and define the risk to be insured during
escrow,” the Government successfully persuaded the Court that “the
use of escrow agents by title insurers to perform services that the
title insurer could perform itself, such as verifying that liens have
been removed, at most reduces costs to the insurer.”
Relying on the holdings in Royal
Drug and Pireno which rejected the contention “that mechanisms that merely
reduce costs to the insurer are part of the business of insurance,”
the Ninth Circuit concluded “that the escrow process itself does not
spread or underwrite title insurance risk
The first criterion of Royal Drug and Pireno was thus not
met.”
Title Insurance, 700
F.2d at 1251.
Nor
did the defendants in Title Insurance successfully establish that the second Royal
Drug-Pireno criterion -- that the challenged policy is
an integral part of the policy relationship between the insurer and
insured -- was met. The
Government successfully argued that the buying of escrow services is
separate from buying title insurance.
First, some people who buy escrow services do not buy title
insurance and vice versa. Second,
those who buy both enter into two separate agreements, one for title
insurance, the other for escrow services.
Third, escrow services are performed either by a separate
department within insurance companies or by independent agents who
keep the entire escrow fee.
Thus the provision of escrow services was not an integral
part of the title insurance policy relationship.
Title Insurance, 700
F.2d at 1251-1252.
Finally,
the Ninth Circuit noted that it was relevant under Royal
Drug and Pireno whether
the practice involved was limited to those within the insurance
industry.
Since “other entities besides insurance companies perform
escrow services, so that immunizing price-setting by insurance
companies who perform escrow services would distort competition by
those who are not insurance companies,” the Court concluded that the
provision of escrow services was not peculiar to the insurance
industry and were thus outside the scope of the “business of
insurance.”
We
conclude that application of the Pireno-Royal
Drug criteria clearly indicates that performance of escrow
services is not the “business of insurance” for the purposes of
the McCarran Act exemption.
Title Insurance, 700
F.2d at 1252.
5. Insurance company’s policy limiting ability of insurance
agents to transfer positions
The
plaintiff in Bogan
v. Northwestern Mutual Life Insurance Company, 953 F.Supp. 532 (S.D.N.Y.
1997), was an insurance agent who was challenging his termination
as a District Agent for the defendant Northwestern Mutual Life (“NML”). NML marketed its life insurance policies through a system of
General Agents, District Agents, Sales Agents and Special Agents. The General Agents were at the top of the marketing structure
and were assigned territories by NML. The General Agents in turn contracted with District Agents, who
then contracted with Sales Agents. 953 F.Supp. at 535.
Bogan
was a District Agent who worked under the agency of the defendant
General Agent Hodgkins.
The plaintiff contended that he was improperly terminated as
a District Agent by Hodgkins, and he asserted claims under various
state law theories challenging his termination
The plaintiff also asserted a federal antitrust claim directed
at an NML policy denominated as the “Metropolitan Policy” which
prevented District Agents who were terminated for cause from seeking
to work for another NML General Agent.
The plaintiff contended that the effect of the Metropolitan
Policy was to exclude him from the NML marketing system in violation
of Sherman Act §1. The
only defendant named in the antitrust cause of action was Hodgkins,
the General Agent who terminated the plaintiff as a District Agent;
the plaintiff did not accuse NML itself of violating the Sherman Act.
953 F.Supp. at 538.
Moving
for summary judgment on the antitrust claim, defendant Hodgkins
contended that the challenged Metropolitan Policy was immune from
antitrust attack under McCarran-Ferguson.
The district court disagreed.
Referring to the three-part Pireno
test to determine whether a given practice fell within the “business
of insurance,” the Bogan
court concluded that the practice was not within the business of
insurance and thus was not exempt under McCarran-Ferguson:
Our
application of this test leads us to conclude that restrictions upon
the transfer of subordinate agents does not constitute the business of
insurance, and the McCarran-Ferguson Act therefore does not bar
Bogan’s claims. The
basic purpose of the Act was to allow insurance companies to
coordinate their policy structures to facilitate spreading their
risks. We do not see how
the Metropolitan Policy meaningfully furthers this goal.
NML’s proffered justification -- that transfer
restrictions result in increased training and thus better qualified
NML Sales Agents -- is evidence of a procompetitive
advantage of the Policy. We
are not convinced by Hodgkins’ argument that this training serves
the purposes of the McCarran Ferguson-Act and satisfies the Pireno
test (promoting the spreading of risks and constituting an
integral part of the contract between the insurer and the insured).
Moreover, Hodgkins has not adequately established that the
Metropolitan Policy is a matter regulated by state law.
Thus, we deny Hodgkins’ motion insofar as it contends that
Bogan’s claim is barred by the McCarran-Ferguson Act and proceed to
a consideration of the merits of the claim under the Sherman Act.
Bogan, 953 F.Supp. at 539.
B.
Activities held to be within the “business of
insurance”
1. Reinsurance
Hartford Fire Insurance Co. v. California, 113 S.Ct. 2891 (1993),
involved an antitrust challenge to concerted activity by primary
insurers and reinsurers regarding policy terms.
The suit was brought by nineteen
states and certain private plaintiffs against four domestic primary
insurers, domestic reinsurers, two domestic trade associations, a
domestic reinsurance broker and reinsurers based in London.
The plaintiffs alleged that the defendants had violated the
Sherman Act by engaging in a conspiracy to force primary insurers to
change the terms of the standard CGL policies to conform with the
policies the defendants wanted to sell.
Among the changes which the defendants allegedly wanted to
force on the primary insurers was a change from an “occurrence”
policy to a “claims made” policy; inclusion of a retroactive date
provision which would further restrict coverage to claims made on
incidents after a certain date; elimination of the “sudden and
accidental” pollution exclusion in favor of an absolute pollution
exclusion; and provision that defense costs would be counted against
policy limits.
Hartford, 113 S.Ct.
at 2896. The defendants
sought to enforce this arrangement through various means, including
refusing to write reinsurance on primary insurance policies which did
not conform to these changes. Id.
at 2898. The defendants
claimed immunity under the McCarran-Ferguson on the ground that the
alleged conspiracy involved the “business of insurance.”
The district court agreed, dismissing all claims before it, but
the Ninth Circuit Court of Appeals reversed.
The Supreme Court affirmed in part and reversed in part.
Both
the district court and Court of Appeals found that the business of
reinsurance was part of the business of insurance within the meaning
of McCarran-Ferguson. The
district court analyzed the question thus:
There
is no authority for excluding reinsurance from the business of
insurance. On the
contrary, reinsurance was specifically referred to as a part of the
business of insurance in the legislative history of the McCarran Act.
. . .
[Plaintiffs]
describe reinsurance as a transaction whereby one insurance company,
the reinsurer, agrees to indemnify another company, the primary (or
”ceding”) insurer, for a designated portion of the insurance risks
underwritten by the primary insurer.
Reinsurance protects the primary insurer from catastrophic
losses, and is heavily relied upon by prudent primary insurers.
It also allows the primary insurer to sell more insurance than
its own financial capacity might otherwise permit.
Thus, the availability of reinsurance affects the ability and
willingness of primary insurers to provide insurance to their
customers [citing to plaintiffs complaints].
Thus,
reinsurance is no less a part of the process of underwriting and
spreading risks than primary insurance.
Plaintiffs’ allegations rest, moreover, on the premise that
the terms on which reinsurance is available affect the terms on which
primary insurance is written and that the terms and availability of
reinsurance directly affect the availability of insurance coverage to
consumers. . . . Because reinsurance is thus an element of
the policy relationship with the insured, it is part of the business
of insurance.
In re Insurance
Antitrust Litigation, 723 F.Supp. 464,
473-474.
On
appeal, the Ninth Circuit, without engaging in further analysis,
adopted the district court’s conclusion that reinsurance was part of
the business of insurance.
The
district court correctly found that the first condition was met: the
defendants are in the business of insurance.
Reinsurance and retrocessional insurance7
are as much the business of insurance as the offering of primary
insurance.
In re Insurance
Antitrust Litigation, 938 F.2d 919, 927 (9th
Cir. 1991).8
The
Supreme Court did not quarrel with the lower
courts’ conclusion that the defendants’ activities regarding the
terms of reinsurance policies were within the “business of
insurance.” Rather, the
Supreme Court confined its discussion of the “business of
insurance” to addressing the question of whether the defendants lost
their exemption under McCarran-Ferguson by participating with foreign
reinsurers because those foreign insurers’ activities were not
regulated by state law. Hartford,
113 S.Ct. at 2900. The
Court concluded that the defendants’ conduct, if otherwise immune
from antitrust liability under Section 2(b) of the McCarran-Ferguson
Act, did not lose its immunity because the domestic defendants
conspired with foreign insurers.
Id. at 2901.
The
Court of Appeals had concluded that § 2(b) of the
McCarran-Ferguson Act did not exempt foreign reinsurers from antitrust
liability because their activities were not “regulated by State
law.” In re Insurance Antitrust Litigation, 938 F.2d at 928.
The Court of Appeals had reached this conclusion by reference
to language in Royal Drug to
the effect that “an exempt entity forfeits antitrust exemption by
acting in concert with nonexempt parties.”
440 U.S. at 231.9
The Hartford Court
disagreed with the Court of Appeals’s reading of this language from Royal
Drug.
Stressing
that the McCarran-Ferguson Act immunizes activities
rather than entities (since
the Act immunizes the “business of insurance” rather than the
“business of insurance companies”), the Hartford
Court noted that the foreign reinsurers “are hardly ‘wholly
outside the insurance industry’” like the nonexempt pharmacies in Royal
Drug, and the respondents (plaintiffs) “do not contest the Court
of Appeals’s holding that the agreements concern ‘the business of
insurance.’” Hartford,
113 S.Ct. at 2902.
Thus,
we think it was error for the Court of Appeals to hold the domestic
insurers bereft of their McCarran-Ferguson Act exemption simply
because they agreed or acted with foreign insurers that, we assume for
the sake of argument, were “not regulated by State law.”
Hartford, 113
S.Ct. at 2903.
2. Establishment by health services benefits plan of an HMO and
implementation of premium pricing practices based upon characteristics
of the group insured
Determination of whether
McCarran-Ferguson exemption is available is to be made by focusing on
the nature of the conduct alleged to violate the antitrust laws, not
whether the defendant is a traditional insurance company or even
whether the defendant is deemed to be part of the insurance industry
in the state in which it operates.
Thus, the exemption has been found to immunize conduct by
companies such as Blue Cross which are not traditional insurance
companies.
In Ocean
State Physicians Health Plan v. Blue Cross, 883 F.2d 1101 (1st
Cir. 1989), an HMO, Ocean State Physicians Health Plan, Inc.
(“Ocean State”), and physicians practicing with Ocean State sued
Blue Cross and Blue Shield of Rhode Island (“Blue Cross”) alleging
that Blue Cross had acted unlawfully to exclude Ocean State from the
health care market. Blue
Cross purchased health services from providers on behalf of its
subscribers, and the risk of health care expenses was spread among the
subscriber groups. Ocean
State competed with Blue Cross. Physicians
could sell their services to Ocean State, Blue Cross or both.
883 F.2d at 1102-1103.
Ocean State grew rapidly at the
expense of Blue Cross’s subscriber base.
To meet the challenge of Ocean State’s competition, Blue
Cross developed a three-prong strategy.
- First, Blue Cross launched its own HMO, HealthMate, which it
marketed to employers in competition with Ocean State. HealthMate was offered at a cost 5% below traditional Blue
Cross.
Ocean State, 883
F.2d at 1103.
- Second, Blue Cross instituted “adverse selection” pricing.
Adverse selection pricing was based on the tendency for
younger, healthier people to choose HMO’s, leaving older and sicker
people (on the average) in the traditional Blue Cross pool.
With the approval of the Rhode Island Department of Business
Regulation, Blue Cross instituted three-tier pricing, with the lowest
prices offered to employers who offered only Blue Cross (forcing
younger, healthier employees into the traditional Blue Cross pool with
older employees), an intermediate plan for an employer which also
offered a competing HMO (usually Ocean State) and HealthMate, and the
highest premium for an employer who offered a competing HMO but
declined to offer HealthMate.
Ocean State, 883
F.2d at 1103.
- Third, Blue Cross instituted a “prudent buyer” policy which
provided that Blue Cross would not pay a physician more for any
service or procedure than the physician was accepting from any other
health care provider (such as Ocean State).
As a result of this practice -- pursuant to which
Blue Cross required participating physicians to certify that he or she
was not accepting any lower fees from other providers than he or she
was receiving from Blue Cross for the same service or face a 20%
reduction in the fee received from Blue Cross if the certification was
not provided -- many Ocean State physicians resigned from
the Ocean State program in order to avoid a reduction in the fees they
received from Blue Cross.
Ocean State, 883
F.2d at 1103-1104.
Ocean State and a certified
class of its physicians brought suit against Blue Cross alleging that
Blue Cross had violated Sherman Act § 2 which prohibits
monopolization, attempted monopolization and conspiracies to
monopolize. The
plaintiffs charged Blue Cross with implementing its three-pronged plan
not because HealthMate was a viable alternative to Ocean State but
rather that Blue Cross had taken these measures in order to put Ocean
State out of business through persuading employers not to offer Ocean
State and inducing physicians to terminate their relationship with
Ocean State. After jury
returned a verdict in favor of the plaintiffs, the trial court entered
judgment notwithstanding the verdict in favor of the defendants.
The Court of Appeals affirmed the judgment for defendants.
Among the reasons advanced by
the Court of Appeals in affirming the trial court’s defense judgment
was its conclusion that the defendants’ activities allegedly
violating the antitrust laws were exempt under McCarran-Ferguson.
We
find, however, that the McCarran-Ferguson exemption applies both to
HealthMate and to the use of the adverse selection factors.
Ocean State, 883
F.2d at 1107. The Court
of Appeals supported its conclusion with the following reasoning:
Both
HealthMate and the adverse selection policy10
qualify as the “business of insurance” under these [Royal Drug-Pireno] criteria. HealthMate
is an insurance policy which operates by spreading policyholders’
risk; adverse selection is a pricing policy that inherently involves
risk-spreading. Both
HealthMate and adverse selection directly involve the relationship
between the insurer (Blue Cross) and the insured (its policyholders).
Such policies are, more or less by definition, limited to
entities in the “insurance industry” as broadly construed.
Ocean State, 883
F.2d at 1107.
The Ocean
State court rejected the plaintiffs’ argument that Blue Cross
was a “service benefit plan” rather than an insurer for purpose of
McCarran-Ferguson.
Since
Royal Drug, the focus of the
McCarran-Ferguson inquiry has been the nature of the conduct alleged
to violate the antitrust laws, not whether the defendant is a
traditional insurance company.
Ocean State, 883
F.2d at 1108.
For McCarran-Ferguson purposes,
it was thus irrelevant whether Blue Cross was deemed to be an insurer
under Rhode Island law:
For
this reason, Ocean State’s observation that under Rhode Island law
Blue Cross is considered not to be “part of the insurance
industry” [cite omitted] is not dispositive.
Whether or not Blue Cross is considered to be “in the
insurance business” for certain purposes, the challenged activities
still constitute “the business of insurance.”
“The exemption is for the ‘business of insurance,’ not
the ‘business of insurers.’”
Ocean State, 883
F.2d at 1107, n.7 (quoting Royal
Drug) (Court’s emphasis, internal cites omitted).
Nor did the Court deem it
relevant that the challenged activities related to marketing and
pricing rather than to the contents of the Blue Cross policies
themselves.
Ocean
State also argues that Blue Cross’s marketing and pricing practices
with respect to HealthMate do not in themselves have the effect of
transferring or spreading the policyholder’s risk.
But inasmuch as a health insurance policy is itself part of the
“business of insurance” [cite omitted], we believe that the
marketing and pricing are also part of the same business.
The exemption offered to state-regulated insurance activities
by the McCarran-Ferguson Act would be thin indeed if it were deemed to
cover the content of policies, but not the marketing and pricing
activities which necessarily accompany these policies.
Indeed, in Securities and
Exchange Commission v. National Securities, Inc., 393 U.S. 453,
460 . . . (1969), the Supreme Court noted that “the fixing
of rates” and “[t]he selling and advertising of policies” are
part of the “business of insurance” under the McCarran-Ferguson
Act.
We
conclude, therefore, that both HealthMate and adverse selection are
part of the “business of insurance” under the McCarran-Ferguson
Act.
Ocean State, 883
F.2d at 1108.
3. Agreements between medical association and malpractice insurer
granting exclusive rights to underwriter to act as agent for
association’s malpractice program and limiting eligibility to
purchase malpractice insurance to association members
In
Feinstein
v. Nettleship Co. of Los Angeles, 714 F.2d 928 (9th Cir. 1983), a
group of doctors sued the Nettleship Company, which was the
underwriting manager for medical malpractice and insurance and the
approved agent of the Los Angeles County Medical Association for
handling group malpractice coverage for association members.
The plaintiffs also sued an insurance company which wrote
malpractice coverage for association members along with reinsurers for
the program. Nettleship
had been given exclusive rights to be the agent for its malpractice
program. Although
Association members could purchase malpractice coverage outside the
Nettleship program, only association members were eligible to purchase
coverage through the Nettleship program.
When Nettleship substantially raised the premiums charged to
Association members buying coverage through its program, the plaintiff
doctors sued Nettleship and the defendant insurers for monopolization,
conspiracy to monopolize price-fixing, tied sales, boycott, fraud and
coercion. 714 F.2d at
930. The district court
granted summary judgment on the ground that the action was barred by
the McCarran-Ferguson Act. The
Ninth Circuit Court of Appeals affirmed.
In
challenging the defendants’ conduct as unlawful under the antitrust
laws, the plaintiffs focused their attention on the agreement between
the medical association and the insurers to offer the malpractice
insurance only to members of the county medical association.
The Ninth Circuit -- after initially observing that
the “primary characteristic of the business of insurance is the
transferring or spreading of risk” [714 F.2d at 931] --
held that this agreement was within the business of insurance because
it possessed this key characteristic.
That
practice is, however, demonstrably related to the allocation and
spreading of risk, for as the district court pointed out, it defines a
pool of insureds over which the risk is spread.
The medical association sought to provide a single insurance
broker for all of its members in order to assure coverage for certain
high-risk specialties, thereby distributing risk across the
membership. The effect is
to spread risk across a wide area, and that is precisely what the
Supreme Court described when it formulated the risk spreading
criterion.
Feinstein, 714
F.2d at 932.
The
Ninth Circuit rejected the notion that the challenged arrangement did
not constitute the “business of insurance” because the agreement
included non-insurer participants, in this case, the county medical
association. Distinguishing
Pireno and Royal Drug, the Feinstein court
suggested that “a non-insurer (or non-insured) party’s involvement
does not necessarily defeat antitrust exemption, but is of concern
where the agreement has the potential to restrain competition in
non-insurance markets” [citing
Pireno, 458 U.S. at 133]. Thus,
Pireno appears to be
satisfied where, as here, the only role of the non-insurer is in
negotiating the terms of the policy relationship between the insurer
and insured, and the gravamen of the complaint is lack of competition
in the insurance market itself. . . . We therefore conclude
that the agreement between [the medical association] and defendants is
the ‘business of insurance’ within the meaning of the
McCarran-Ferguson Act.” Feinstein,
714 F.2d at 932-933.
4.
Utilization of captive pharmacy by health care insurer to fill
prescriptions for insureds
In
Royal Drug, the Supreme
Court held that agreements between a health care insurer and
independent pharmacies limiting the prices charged by those pharmacies
for prescription drugs fell outside the business of insurance.
Royal Drug was
distinguished by the Ninth Circuit to turn back an antitrust challenge
to a pharmaceutical benefit plan in Klamath-Lake
Pharmaceutical Association v. Klamath Medical Service Bureau, 701
F.2d 1276 (9th Cir. 1983). The
plaintiff Association was the assignee of antitrust claims from
independent pharmacies which were losing business to a pharmacy
utilized by the defendant health care provider to distribute
prescription drugs to policyholders.
Until 1976, the defendant health care provider had distributed
its drugs exclusively through its designated pharmacy.
The provider had invited independent pharmacies, including
assignors of the antitrust claims being asserted in this action, to
join the provider’s distribution network.
The provider proposed that the pharmacies could join the
network if they would accept reimbursement of the average wholesale
cost of the drugs provided, plus a ten percent markup, less a $1
copayment from the policyholder.
The providers had declined this proposal, insisting upon a
markup of $2.50 per prescription over the wholesale cost, less the
co-pay. Because expanding
the plan to include these pharmacies and acceding to their insistence
upon a higher markup would have made the prescription program more
expensive to operate, the provider declined to permit the pharmacies
to participate on this basis. 701
F.2d at 1280.
In
1976, the provider decided to acquire the pharmacy outlet through
which it had been distributing prescription drugs to policyholders.
It thereafter dissolved the independent pharmacy and set up its
own pharmaceutical outlet. Policyholders
were required to use the provider’s pharmacy to utilize the
prescription drug benefit unless they acquired their drugs after hours
or during holidays, in which case they could use independent
pharmacies and receive full reimbursement for their cost, less a
co-pay. The provider’s
pharmacy did not sell drugs to persons not having the prescription
drug benefit, and those uninsured persons used community pharmacies
for their prescription drug needs.
Klamath-Lake, 701 F.2d at 1280.
Because
the provider’s pharmacy diverted substantial patronage from
independent pharmacies, the pharmacies asserted claims of antitrust
violations against the provider and its pharmacy.
Among the allegations of antitrust wrongdoing was the
contention that the defendants had improperly tied a health care
contract and a prescription drug benefit which could only be obtained
if the policyholder also obtained the basic plan.
Without addressing the merits of the antitrust claim, the
district court granted summary judgment in favor of the defendants on
the ground that the challenged conduct was exempt under the
McCarran-Ferguson Act. The
Ninth Circuit affirmed.
Applying
the Royal Drug criteria, the
Ninth Circuit concluded that the arrangements challenged as unlawful
were within the “business of insurance” under McCarran-Ferguson.
In doing so, the Ninth Circuit focused on the contractual
arrangements between the insurer and its insureds and not (as the Royal
Drug Court had done) on the arrangements between the insurer and
the pharmacy used by the provider to dispense prescription drugs.
The
insurer-insured agreement embodied in the basic health care contract
and its supplemental pharmacy benefit settles the distribution of the
risk that insureds will need medical goods and services, including
prescription drugs. It
defines the relationship between insurer and insured.
And it is limited to these two traditional actors in the
insurance industry.
Klamath-Lake,
701 F.2d at 1286. “Thus
we agree with the district court that the health care policy between
the provider and its insureds constituted part of the business of
insurance. . .” Id.
at 1288.
5. Agreements among automobile insurers regarding repair shop
rates
Application
of the Royal Drug-Pireno criteria to agreements involving automobile
insurers designed to lower rates paid to repair shops for repairs to
insureds’ automobiles may be found in Proctor
v. State Farm Mutual Automobile Insurance Company, 675 F.2d 308
(D.C. Cir. 1982). Proctor
involved a challenge by automobile repair shops to arrangements
among automobile insurers and competing repair shops regarding the
handling of automobile repairs for policyholders of the defendant
insureds. Two types of
arrangements were challenged by the plaintiffs: (i) a “horizontal”
arrangement among the defendant insurers to pay automobile damage
claims at “prevailing” rates, a practice which allegedly depressed
the price of automobile repair work to the detriment of repair shops
like those operated by the plaintiffs; and (ii) “vertical”
arrangements between the defendant insurers and certain
“preferred” repair shops that agreed to perform repair work at
rates prescribed by the defendant insurers.
Proctor, 675 F.2d at
311. The Court found
McCarran-Ferguson immunity for the former “horizontal”
arrangements but not for the latter “vertical” agreements.
With
regard to the “horizontal” arrangement among the insurers fixing
prices which they would pay for policyholders’ repairs, the Court
concluded that the practice fell within the “business of
insurance” and was thus exempt under McCarran-Ferguson.
The Court distinguished the non-exempt activities challenged in
Royal Drug because Royal
Drug involved vertical arrangements between insurers and providers
of goods and services other than insurance.
By contrast, the horizontal arrangements challenged in Proctor
were agreements exclusively among automobile insurers.
Proctor, 675 F.2d 321. Moreover,
the Proctor court observed
that the Royal Drug Court
had emphasized “that Congress’ primary concern in exempting the
‘business of insurance’ from the antitrust laws was to protect
cooperative ratemaking and joint collection and sharing of statistical
data by insurance companies.” Id.
In
light of the foregoing, we think it is fair to say that at least some
horizontal arrangements among insurers fall within the “business of
insurance” exemption, and that the tests of Royal
Drug for determining what constitutes the “business of
insurance” are more easily satisfied by an intra-industry agreement
than by a vertical agreement with an entity outside the insurance
industry.
Proctor, 675
F.2d at 322.
Paying
particular heed to the legislative history of the McCarran-Ferguson
Act which disclosed Congressional intent to protect and exempt
combined efforts among insurers to share statistical data and set
rates, the Proctor Court
concluded that the insurers’ practices in the case before it were
like those which Congress sought to exclude from antitrust scrutiny.
Given
this view of the legislative history of the Act, it seems clear that
Congress intended the exemption to cover the sharing of data on the
rate of past losses and other information on the probability that
particular losses will occur. Risk
probability is only one element of the ratemaking formula, however.
Insurers must also factor in the magnitude of loss, i.e.,
the magnitude of the payments the insurer must make if the loss
insured against occurs. [cites omitted]
In the automobile liability insurance industry, the magnitude
of loss includes the cost of repairing (or replacing) the damaged
vehicle.
The premiums charged by the insurers must directly reflect
the cost of repair. . . . In this case, insurers have
allegedly collected and shared data on the cost of repair, labor costs
in particular, and agreed on a prevailing hourly labor rate to be used
in estimating damage claims. Such
activity is closely akin to cooperative ratemaking since it involves a
necessary part of the ratemaking process.
Proctor, 675
F.2d at 323.
Proctor acknowledged that Royal Drug precluded
a conclusion that every insurer practice that might result in cost
savings having an impact on premiums was the “business of
insurance.” 675 F.2d at
324.
Such
concerns, however, are not justified in the context of this case.
We stress not that the cost of repair merely has
an impact on premiums, but that it is directly
related to the calculation of premiums; it is virtually a part of the
ratemaking process. In
short, we believe that the alleged horizontal agreement in this case
is distinguishable from general cost-saving arrangements than are less
directly related to the calculation of rates.
Proctor, 675
F.2d at 324 (emphasis in original) [footnotes omitted]
In
addition to the impact which the challenged practice had on ratemaking
in Proctor, the Court
further noted “that the alleged agreement pertains to the adjusting
and settling of claims, a practice traditionally regarded as part of
the insurance business.” Proctor,
675 F.2d at 324-325.
[W]e
think it permissible, in deciding whether the alleged horizontal
agreement constitutes the “business of insurance” to consider the
fact that an alleged horizontal agreement involves a complicated
determination of the extent of the insurers’ liability to their
insureds.
Proctor, 675
F.2d at 325.
The
Proctor Court thus adopted
the conclusions of other courts that the agreements among insurers
before it constituted the “business of insurance.”
Proctor, 675 F.2d at
325 [citing Quality Auto Body v.
All-state Insurance Co., 660 F.2d 1195 (7th Cir. 1981); Workman
v. State Farm Mutual Automobile Insurance Co., 520 F.Supp. 610 (N.D.Cal.
1981)].11
6. Joint rate-setting by workers’ compensation insurers for
assigned risks
Workers’
compensation insurance may be obtained in one of three markets: (i)
the voluntary market, (ii) the self-insured market or (iii) the
assigned risk or residual market.
Policyholders who were assigned risks are required to pay
higher premiums than those able to purchase coverage through the
voluntary or self-insured market.
The plaintiff in Uniforce
Temporary Personnel, Inc. v. National Council on Compensation
Insurance, Inc., 87 F.3d 1296 (11th Cir. 1996), was a
temporary employment agency relegated to the assigned risk market.
The defendants were the National Council on Compensation
Insurance, the National Workers Compensation Reinsurance Pool and
various insurance companies. The
plaintiff alleged that the defendants had violated Sections 1 and 2 of
the Sherman Act by monopolizing the administration of workers
compensation insurance and price fixing and by otherwise conspiring in
restraint of trade. 87
F.3d at 1298.
The
district court granted the defendants’ motion for summary judgment
on the plaintiffs’ antitrust claims, and on appeal, the Eleventh
Circuit affirmed. The
Court of Appeals rejected the plaintiffs’ argument “that the
McCarran-Ferguson Act’s bar on antitrust claims involving the
business of insurance does not apply in this case because the
appellees’ rate-making, classification and allocation of risk, and
other activities involving the administration of workers compensation
insurance concern the ‘business of insurers’ and not the
‘business of insurance.’” 87
F.3d at 1299. Observing
that the plaintiffs’ claims in Uniforce
were that the defendants’ “activities create and impose
unreasonable premiums for ‘assigned risk’ policies while depriving
the temporary employment industry of access to the voluntary market,
the Eleventh Circuit determined that it “must determine whether
appellees’ rate-making activity falls within the McCarran-Ferguson
Act.” Id.
Applying
the three-prong Pireno test, the Eleventh Circuit concluded that insurers’
rate-setting activities were part of the business of insurance and
thus exempt from antitrust scrutiny under McCarran-Ferguson.
First,
in computing the premium for the “assigned risk” policies,
appellees combine the loss experiences of insurance carriers in the
residual market and in effect spread the policyholder’s risk.
Second, appellees’ rate-making activity produces the premiums
for the “assigned risk” policies and this premium is an integral
part of the policy relationship between the insurer and the insured.
Third, the appellees’ rate-making activity is limited to
entities within the insurance industry [footnote omitted].
Thus, appellees’ rate-making activity clearly constitutes the
business of insurance for purposes of the McCarran-Ferguson Act.
Uniforce, 87 F.3d at 1300.
7.
Agreements limiting availability of windstorm insurance
Slagle
v. ITT Hartford Insurance Group, 102 F.3d 494 (11th Cir. 1996),
involved a claim by an insurance consumer alleging that the defendant
insurers had violated the antitrust laws by combining to eliminate
competition in the writing of windstorm insurance in the high-risk
coastal areas of Florida and to limit availability of windstorm
insurance in those areas except at artificially high rates.
The State of Florida had created the Florida Windstorm
Underwriting Association (“FWUA”) in response to the voluntary
market’s inability to provide windstorm-only insurance in these
high-risk areas; the State required described insurers to belong to
the FUWA and to provide coverage through the program to applicants
otherwise unable to obtain the windstorm insurance.
The plaintiff alleged that the insurers had entered into an
agreement to fix and stabilize insurance premiums for windstorm
insurance pursuant to which they refused to write windstorm insurance
in an open market. As a
result, plaintiff alleged she was relegated to purchasing windstorm
insurance only from the FUWA at higher rates than would have been
offered in a voluntary market. 102
F.3d at 496.
The trial court granted the
defendants’ motion for judgment on the pleadings, and the Eleventh
Circuit affirmed, finding that the defendants’ challenged activities
were immune from liability under McCarran-Ferguson.
In doing so, the Slagle court found that all the alleged wrongdoing was part of the
business of insurance under the Pireno
criteria.
There
is no doubt that the appellees’ conduct in setting the FWUA premium
rate has the effect of spreading and transferring a policyholder’s
risk. . . . Nor can it be questioned that this practice,
which affects only the parties within the insurance industry, remains
an essential part of the policy relationship.
Accordingly, we conclude that the appellees’ alleged
rate-fixing conduct is the “business of insurance.”
Slagle,
102 F.3d at 498 [internal
citations omitted]
III. What degree of state regulation is required before the
business of insurance is entitled to McCarran-Ferguson exemption?
As
the foregoing demonstrates, the Supreme Court has adopted fairly
stringent criteria which must be met before an insurer’s business
practices will be deemed to be part of the “business of insurance”
within the meaning of the McCarran-Ferguson Act.
Moreover, even if a practice is found to be part of the
“business of insurance,” McCarran-Ferguson exemption does not
attach unless the particular conduct is also “regulated by state
law.”
15 U.S.C. § 1012(b). Nevertheless,
the body of case law dealing with the extent of state regulation
required before a practice within the business of insurance is
entitled to McCarran-Ferguson exemption is not large.
Inasmuch as most of the business of insurance companies
-- whether or not within the “business of insurance”
as that term has been construed by the courts -- is
subject to some form of state regulation, very few practices will
satisfy the Supreme Court’s criteria for the “business of
insurance” without being regulated, at least to some extent, by
state law.
The Supreme Court has not
required that the particular aspect of an insurance company’s
practices challenged as antitrust violation be subject to detailed
state regulation in order to claim McCarran-Ferguson immunity if the
practice otherwise constitutes the business of insurance.
To the contrary, the Supreme Court has suggested that the
requirement of state regulation is satisfied if the insurer operates
under general standards set by the state.
See Federal Trade
Commission v. National Casualty Co., 357 U.S. 560, 564-65 (1958).
This relatively lenient standard has been reiterated by the
Ninth Circuit, which has stated that “[i]t is not necessary to point
to a state statute which gives express approval to a particular
practice; rather it is sufficient that a state regulatory scheme
possess jurisdiction over the challenged practice.”
Feinstein v. Nettleship
Co. of Los Angeles, supra, 714 F.2d at 933.
Thus, the adequacy of state regulation for McCarran-Ferguson
Act purposes is usually upheld where other requirements of
McCarran-Ferguson immunity are present.
For example, in evaluating the
lawfulness of Blue Cross’s activities designed to attract customers
from a competing HMO in Ocean
State Physicians Health Plan v. Blue Cross, supra,12
the First Circuit found the level of state regulation over the
challenged practices to be sufficient, concluding that “it is clear
that both HealthMate and the adverse selection policy were
‘regulated by state law.’ The
Rhode Island Department of Business Regulation approved the marketing
of HealthMate, as well as the adverse selection rating formula.”
883 F.2d at 1108.
The Ocean
State Court rejected the plaintiffs’ contention that state
regulation was insufficient because the Department did not approve the
specific elements of HealthMate and the adverse section plan which the
plaintiffs were challenging.
In
demanding this level of specificity, however, Ocean State
misinterprets the provision of the [McCarran-Ferguson] Act that limits
the exemption to conduct that is “regulated by State law.”
15 U.S.C. § 1012(b). The
Supreme Court has suggested that this requirement is satisfied by
general standards set by the state.
See Federal Trade Commission v. National Casualty Co., 357 U.S. 560,
564-65 . . . (1958). As
the Fourth Circuit has put it more recently, “A body of state law
which proscribes unfair insurance practices and provides for
administrative supervision and enforcement satisfies the state
regulation requirement of the exemption.”
Ocean State, 883
F.2d at 1108-1109 [quoting Mackey
v. Nationwide Insurance Cos., 724 F.2d 419, 421 (4th Cir. 1984)]
The state regulation of the
practices alleged to be unlawful in Slagle
v. ITT Hartford Insurance Group,
supra,13
was also found by the trial court to be adequate to confer immunity on
the practices under McCarran-Ferguson.
In the face of the plaintiff’s challenge that the defendant
insurers had unlawfully combined to limit the availability of
windstorm insurance in Florida, the Slagle
Court noted that Florida had a comprehensive statutory scheme
which regulated the activities of the defendants with respect to rates
and terms of windstorm insurance in Florida.
This
is enough regulation to make the McCarran-Ferguson Act exemption
applicable. “The
McCarran-Ferguson Act renders the federal antitrust laws inapplicable
when state legislation generally prescribes, permits or otherwise
regulates the conduct in question and authorizes enforcement through a
scheme of administrative supervision.”
Slagle v. ITT Hartford Insurance Group,, 904 F.Supp. 1346, 1349
(N.D. Fla. 1995), aff’d
102 F.3d 494 (11th Cir. 1996)
(cites omitted)
Sometimes
a reduction in state scrutiny over a particular aspect of the business
of insurance gives rise to the possibility that formerly exempt
activities might lose their immunity under McCarran-Ferguson.
In In
re Workers’ Compensation Insurance
Antitrust Litigation, 867 F.2d 1552 (8th Cir. 1989), the
plaintiffs were employers who charged the defendant workers’
compensation carriers in Minnesota and the Workers’ Compensation
Insurers Rating Association of Minnesota (WCIRAM) with unlawful price
fixing and group boycott in violation of the Sherman Act.
Prior to 1979, the State of Minnesota, through its insurance
commissioner, had adopted a schedule of workers’ compensation
insurance rates, and carriers in Minnesota were required to charge
only rates which had been established by WCIRAM and approved as
reasonable by the Commissioner. In
1979, the Legislature amended the law to permit workers’
compensation carriers in the state to charge rates lower than those
approved by the Commissioner “provided that the rates are not
unfairly discriminatory.” 867
F.2d at 1555.
The
plaintiffs in Workers’ Compensation alleged that after enactment of the 1979
amendment by the Minnesota Legislature, the defendant insurers and
WCIRAM had (i) entered into a price-fixing arrangement among
themselves not to charge rates below the maximum set by the
Commissioner (even though state law now permitted price competition
through the setting of rates below those maximums approved by the
Commissioner and (ii) agreed to boycott, coerce and intimidate other
insurance companies and purchasers of workers’ compensation
insurance in order to fix prices and prevent competition.
Workers’ Compensation, 867
F.2d at 1554. The
district court granted summary judgment in favor of the defendants on
the ground that their conduct was exempt under McCarran-Ferguson.
On appeal, the Eighth Circuit affirmed in part and reversed in
part.
A
threshold question confronting the court in Workers'
Compensation was whether the 1979 amendment to Minnesota law which
permitted workers’ compensation carriers to set rates below those
approved by the insurance commissioner removed rate-setting for
workers’ compensation coverage from state regulation, inasmuch as
aspects of the “business of insurance” are not subject to
antitrust immunity under McCarran-Ferguson “to the extent that such
business is not regulated by State law.”
15 U.S.C. § 1012(b). Thus,
if the 1979 amendment had the effect of taking rate-setting outside
the scope of the State of Minnesota’s regulatory scheme, such
rate-setting among workers’ compensation insurers would be subject
to antitrust scrutiny in the same manner as concerted efforts to set
prices in other industries.
The
Eighth Circuit held that notwithstanding the 1979 amendment enacted by
the Minnesota legislature, rate-setting by workers’ compensation
carriers operating in Minnesota was sufficiently regulated by state
law to confer McCarran-Ferguson immunity on it.
The 1979 amendment did not withdraw state regulation of
rate-making entirely, since the Commissioner was still required under
state law to adopt a schedule of workers’ compensation rates which
were not excessive, inadequate or unfairly discriminatory.
Workers’ Compensation, 867
F.2d at 1557. In
addition, the Commissioner was given specific authority over persons
engaged in the business of insurance participating in unfair or
deceptive competitive practices.
Id.
Moreover, the 1979 amendment itself prohibited rates which were
excessive or unfairly discriminatory.
Id. at 1558.
The Eighth Circuit thus concluded that “these provisions show
that the Commissioner still retains the general power to regulate
rates.” Id.
Under
such circumstances we find that the application of the federal
antitrust laws is suspended under section 2(b) of the
McCarran-Ferguson Act. The
federal antitrust laws therefore do not apply to the alleged rate
fixing practices of the defendant workers’ compensation carriers.
Workers’
Compensation, 867 F.2d at 1560.
Workers’
Compensation is also instructive on the question of whether
generalized state laws dealing with unfair competition or antitrust
matters can meet the standards of “state regulation” required by
McCarran-Ferguson. The
Eighth Circuit rejected the argument advanced by the plaintiffs and
made by some commentators “that the state unfair methods of
competition statute and the model unfair trade practices act are not
regulatory laws intended to exempt the applicability of the federal
antitrust laws.” Workers’
Compensation, 867 F.2d at 1552.
It
is urged that such laws do not serve to “impair, invalidate or
supercede” state laws and that they are not regulatory in nature.
Also, it is asserted that they should be read merely to
accommodate federal antitrust laws and not to preempt. . . .
Although
some of these arguments contain logical appeal, we find them
unpersuasive. In FTC v.
National Casualty, 357 U.S. 560, 78 S.Ct. 1260, the Supreme Court
applied general language from a state unfair practice act to preclude
the FTC from exercising its control over deceptive advertising.
It has been urged that FTC v. National Casualty be limited to
its facts and that such an interpretation should be limited only to
the applicability of the FTC Act and not the Sherman Act. . . .
We decline such an invitation.
The fundamental issue is whether a general prohibition
providing an insurance commissioner with authority under a state
unfair method of competition or unfair practice act is regulation
under the McCarran-Ferguson Act.
In FTC v. National Casualty the Supreme Court held such a
provision to be sufficient regulation of the business of insurance to
exempt the application of the FTC Act. [footnote omitted]
It would be highly incongruous to reason that a general
provision may be regulatory for the purposes of exempting the FTC Act
and not the Sherman Act.
Workers’
Compensation, 867 F.2d at 1559.
Adopting
a similar approach in Klamath-Lake
Pharmaceutical Association v. Klamath Medical Service Bureau, supra,
the Ninth Circuit concluded that the health insurer’s practices
challenged in that case were subject to state regulation because the
State of Oregon regulated health insurance policies and prohibited
certain unfair or deceptive practices.
701 F.2d at 1287. “This
meets the McCarran-Ferguson requirement that the state regulate the
challenged activity.” Id.
It thus appears that once a
practice is found to be within the “business of insurance,” only
the most generalized state oversight of the practice is necessary to
satisfy the “regulated by State law” requirement of
McCarran-Ferguson.
IV. What type of conduct constitutes a “boycott, coercion,
or intimidation” not immunized by McCarran-Ferguson?
Section 3(b) of the
McCarran-Ferguson Act provides that nothing in the Act “shall render
the said Sherman Act inapplicable to any agreement to boycott, coerce
or intimidate, or act of boycott, coercion or intimidation.”
15 U.S.C. § 1013(b). Thus,
even conduct involving the business of insurance and subject to state
regulation can still give rise to antitrust liability if it
constitutes a “boycott, coercion or intimidation.”
Section
3(b) of the McCarran-Ferguson Act provides an exception to immunity
from the antitrust law when the state has regulated the business of
insurance. If there
exists any agreement to or act of “boycott, coercion or
intimidation,” the exemption is lost.
Workers’
Compensation, supra,
867 F.2d at 1560.
The
“boycott” exception to McCarran-Ferguson exemption has been
recently addressed on two occasions by the Supreme Court.
The Court’s first consideration of the scope of the
“boycott” exception was in St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531 (1978),
where the Court considered a class action challenge brought by
physicians and their patients in Rhode Island against St. Paul’s
-- an insurer which had announced that it would no longer
write medical malpractice coverage on an “occurrence” basis but
would henceforth only write insurance on a “claims-made” basis.
Also named as defendants were other insurers who, in
furtherance of a conspiracy with St. Paul’s to force the acceptance
of claims made malpractice coverage by doctors, allegedly refused to
accept applications from any of St. Paul’s insureds for malpractice
coverage. The result of
this alleged conspiracy was that “occurrence” malpractice coverage
was no longer available to the class of physicians for the protection
of their patients. The
district court had dismissed the complaint, but the Court of Appeals
reversed, concluding that the complaint alleged a “boycott” which
was outside the McCarran-Ferguson exemption.
The Supreme Court affirmed.
There
was no contention in Barry that the practices challenged did not involve the “business
of insurance.” 438 U.S.
at 540, n.9. Rather, the
Supreme Court was “called upon”14
to decide whether the “boycott” exception to McCarran-Ferguson
exemption should be given its ordinary interpretation under the
Sherman Act, e.g., “a
concerted refusal to deal” [438 U.S. at 540] or “concerted
refusals by traders to deal with other traders” [id.
at 543, quoting Klor’s v. Broadway-Hale Stores, 359 U.S. 207, 212 (1959)],
or whether it should be given a narrower interpretation (resulting in
a broader exemption for the business of insurance) as extending only
to cases where concerted refusals to deal are used to exclude or
penalize insurance companies or other traders which refuse to conform
their competitive practices to terms dictated by the conspiracy.
Id. at 540.
The Court declined to accept the narrow interpretation of a
boycott advanced by the insurers:
We
hold that the term “boycott” is not limited to concerted activity
against insurance companies or agents or, more generally, against
competitors of members of the boycotting group.
Barry,
438 U.S. at 552.
Instead,
the Barry Court adopted a
broader interpretation of the term, noting that “the enlistment of
third parties in an agreement not to trade, as a means of compelling
capitulation by the boycotted group, long has been viewed as conduct
supporting a finding of unlawful boycott.”
Id. at 544-545.
The Court thereupon analyzed the boycott claim before it in Barry
relying on antitrust precedent interpreting the concept of
“boycott” in non-insurance contexts.
Observing that the plaintiffs had alleged that the “four
insurance companies that control the market in medical malpractice
insurance are alleged to have agreed that three of the four would not
deal on any terms with the policyholders of the fourth [St.
Paul’s],” the Court concluded that such an agreement “erected a
barrier between St. Paul’s customers and any alternative source of
the desired coverage, effectively foreclosing all possibility of
competition anywhere in the relevant market.”
438 U.S. at 553.
This
concerted refusal to deal went well beyond a private agreement to fix
rates and terms of coverage, as it denied policyholders the benefits
of competition in vital matters such as claims policy and quality of
service. . . . We conclude that this conduct, as alleged in
the complaint, constitutes a “boycott” under § 3(b).
Barry, 438
U.S. at 553-554.
Barry’s holding that the term “boycott” in section 3(b) extended to any
concerted refusal to deal otherwise unlawful under the Sherman Act was
subsequently refined by the Court in Hartford
Fire Insurance Co. v. California, supra.
Hartford narrowed
the meaning of the term “boycott,” thus enlarging the scope of
McCarran-Ferguson immunity not withdrawn by the boycott exception of
§ 3(b).
As
more fully set forth at page G-15, supra, Hartford involved
an antitrust challenge to concerted activity by primary insurers and
reinsurers regarding policy terms.
At the behest of certain primary insurers who wanted a change
in policy terms in CGL policies and as a result of an agreement among
themselves, certain reinsurers agreed not to issue reinsurance to
primary insurers who refused to change their CGL policies to change
from an “occurrence” policy to a “claims made” policy; to
include a retroactive date provision which would further restrict
coverage to claims made on pre-policy period incidents occurring after
a certain date; to eliminate the “sudden and accidental” pollution
exclusion in favor of an absolute exclusion; and to provide that
defense costs would be counted against policy limits.
113 S.Ct. at 2896. The
defendants in Hartford were charged with pressuring primary insurers into acceding
to policy language changes desired by the defendants through various
acts, including withholding all reinsurance until the Insurance
Services Office, Inc. (“ISO”) incorporated all four desired policy
language changes on its standard primary insurance form and refusing
to write new or renew existing reinsurance contracts with primary
insurers unless they were prepared to switch from occurrence to a
claims-made form. The
plaintiffs further charged that the London reinsurers met and agreed
that they would withhold reinsurance for pollution coverage.
See generally Hartford, 113
S.Ct. at 2897-2899.
The
Court of Appeals for the Ninth Circuit held that the acts alleged in Hartford
constituted a boycott outside the protection of McCarran-Ferguson:
A
second, independent ground exists why the McCarran-Ferguson Act
defense does not work for any of the defendants.
The Sherman Act applies to persons or companies in the
insurance business if they agreed to a boycott or engaged in acts of
boycott or coercion. The
allegations of the plaintiffs, here accepted as true, charge
agreements by the defendants to boycott nonconforming insurers and
acts of boycott and coercion. No
immunity for such agreements and acts exists.
In re Insurance
Antitrust Litigation, 938 F.2d 919, 928 (9th
Cir. 1991).
The
Supreme Court unanimously affirmed the Ninth Circuit’s conclusion
that the plaintiffs had adequately pleaded claims of boycott to
trigger Section 3(b)’s boycott exception to McCarran-Ferguson
exemption. However, the
majority opinion by Justice Scalia and the separate, minority opinion
by Justice Souter15
-- while both finding that the plaintiffs had stated
claims of boycott sufficient to withstand a motion to dismiss
-- reached their conclusions by differing analyses.
In
Barry, the Supreme Court had
concluded that the term “boycott” in the McCarran-Ferguson Act
should be construed in the same manner as that term is used generally
in Sherman Act cases. Under
those cases, a boycotts are “concerted refusals by traders to deal
with other traders.” Klor’s
v. Broadway-Hale Stores, 359 U.S. 207, 212 (1959).
Thus, while the Supreme Court has made it clear that a business
may permissibly make a unilateral decision not to deal with another
business,16
the Supreme Court has held that concerted refusals to deal, i.e.,
refusals to deal resulting from joint decision-making between two or
more businesses, are illegal. Klor’s, supra.
In
Hartford, the defendant
reinsurers were charged with jointly refusing to offer coverage unless
the primary insurers accepted certain modifications in policy terms
insisted upon by the reinsurers.
While such a concerted refusal to deal would normally seem to
be a paradigmatic boycott under the Supreme Court’s Sherman Act
cases, as well as under Barry,17
the majority in Hartford concluded
that reinsurers had not engaged in an unlawful boycott simply because
they engaged in a “concerted agreement to seek particular terms in
particular transactions.” 113
S.Ct. at 2912.
Under
the standard prescribed, it is obviously not a “boycott” for the
reinsurers to “refuse[e] to reinsure coverages written on the ISO
CGL forms until the desired changes were made. . . .”
Hartford, 113
S.Ct. at 2914. |
