1

United States Court of Appeals,

Fifth Circuit.

No. 95-50559.

UNITED FARMERS AGENTS ASSOCIATION, INC.; Thomas J. Vinson;

Robert D. Moon, Plaintiffs-Appellants,

v.

FARMERS INSURANCE EXCHANGE, a California Reciprocal or InterInsurance Exchange; Fire Insurance Exchange, a California

Reciprocal or Inter-Insurance Exchange; Truck Insurance Exchange,

a California Reciprocal or Inter-Insurance Exchange; Mid-Century

Insurance Company; Farmers New World Life Insurance Company,

Defendants-Appellees.

July 25, 1996.

Appeal from the United States District Court for the Western

District of Texas.

Before GARWOOD, DAVIS and DeMOSS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge.

The United Farmers Agents Association (UFAA) and Farmers

insurance agents Thomas J. Vinson and Robert D. Moon appeal the

district court's order granting Farmers Insurance summary judgment

and dismissing their antitrust class action. We AFFIRM.

I.

Farmers Insurance is a group of five insurance companies with

approximately 14,000 independent contractor agents in 29 states.

Under the contract between Farmers and its agents, Farmers is

obligated to provide policyholder information to the agents. It

has always provided this information through manual records in

paper and book form. In 1981, Farmers set up a computer system,

the Farmers Agency Network System (FANS), to allow agents on-line

access to this information in addition to the traditional manual
2

access. Agents who wished to gain electronic access to

policyholder information through FANS were required to purchase a

specially configured IBM computer from Farmers or to use another

agent's IBM computer purchased from Farmers.

The written agreement between Farmers and agents who purchased

computers and gained access to FANS specifically stated that,

absent written agreement from Farmers, only computers purchased

through Farmers would be allowed to access FANS. Farmers' policy

was to never grant a written waiver of this provision. This policy

continued until 1993 when Farmers began allowing agents to use

personal computers and computers purchased from third-party vendors

to access FANS.

UFAA, Vinson and Moon (plaintiffs) filed this action as an

antitrust class action on behalf of all Farmers agents alleging

that Farmers illegally tied electronic access to policy information

to the purchase of computers from Farmers. The district court

certified the class for liability purposes under Federal Rule of

Civil Procedure 23(b)(1) but deferred a ruling on certification of

a damages class pending the outcome on liability. The district

court referred discovery motions and other dispositive and

non-dispositive motions to a magistrate judge who recommended that

the district court grant summary judgment in favor of Farmers. On

April 19, 1995, the district court adopted the magistrate's Report

and Recommendation in full and dismissed the plaintiffs' suit. On

appeal, plaintiffs argue that the district court erred by granting
 

1Plaintiffs also assert that the district court erred by

failing to review the summary judgment record de novo before

adopting the magistrate judge's recommendation, using an improper

standard in deciding whether summary judgment was appropriate and

failing to certify plaintiffs as a damages class under Federal

Rule of Civil Procedure 23(b)(3). Our de novo review of the

record and use of the proper standard for granting summary

judgment cure the first two of these asserted errors. Our

affirmance of the district court's decision to grant summary

judgment makes it unnecessary for us to consider the third. 

 

2Tying exists when "a seller refuses to sell one product,

which a buyer desires, unless the buyer also agrees to purchase a

second product, which is not otherwise desired from this seller

on the offered terms.... The desired product is called the

"tying' product; the other is the "tied' product." 9 Phillip E.

Areeda, Antitrust Law, ¶ 1700a (Little, Brown & Co., 1991). See

also Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451,

461-62, 112 S.Ct. 2072, 2079-80, 119 L.Ed.2d 265 (1992).

A tying arrangement is per se illegal when it has the

following characteristics: (1) Two separate products (as

opposed to components of a single product), (2) The two

products are tied together or customers are coerced, (3) The

supplier possesses substantial economic power over the tying

product, (4) The tie has an anticompetitive effect on the

tied market, and (5) The tie affects a not insubstantial

volume of commerce. 9 Areeda, Areeda at ¶ 1702. See also

Kodak, 504 U.S. at 461-62, 112 S.Ct. at 2079-80; Jefferson

Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 11-28, 104

S.Ct. 1551, 1558-66, 80 L.Ed.2d 2 (1984).

Tying arrangements and other restraints of trade that

do not fit the criteria for per se illegality are evaluated

under the Rule of Reason. Jefferson Parish Hospital Dist.,

466 U.S. at 29, 104 S.Ct. at 1567 (1984). Under the Rule of

Reason, the plaintiff has the burden of proving that the

tying arrangement "unreasonably restrained competition." 

Id. This burden requires an inquiry into the actual effect

of the tying arrangement on competition in the tied market. 

Id. 

3

Farmers' motion for summary judgment.1

II.

A.

Plaintiffs argue that Farmers' policies regarding electronic

access to FANS constitute a per se illegal tying arrangement2 and
 

3The relevant market in an antitrust inquiry is defined by

the cross-elasticity of demand between a given product and its

substitutes. 2 Phillip E. Areeda & Donald F. Turner, Antitrust

at ¶ 519a. The cross-elasticity of demand for substitutes

measures consumers' propensity to switch from one product to

another, similar product when relative prices change. See

William J. Baumol & Alan S. Blinder, Economics: Principles and

Policy at 343 (Harcourt Brace Jovanovich, Inc., 1979). Products

similar enough that a small relative price change causes

consumers to substitute one for another are in the same market. 

2 Areeda & Turner, Antitrust at ¶ 525a. 

4

allege that the relevant market3 in which Farmers is illegally

exercising market power is the market for electronic access to

Farmers policy information. Farmers responds by arguing that the

relevant market should be insurance sales and even if the court

accepts the plaintiffs' argument that a separate market exists for

electronic access to Farmers policy information, Farmers' has no

power in the market for electronic access to Farmers policy

information because of intense competition in the insurance sales

market. We find that Farmers has no market power in the relevant

market (insurance sales) and no market power even in the

plaintiffs' alleged relevant market (electronic access to policy

information). Market power is a necessary prerequisite to an

illegal tie so we need not make any further inquiry into whether

Farmers' policies constitute an illegal tie.

Under the undisputed facts of this case, we agree with Farmers

that the relevant market is the market for insurance sales. The

only product that Farmers markets to consumers is insurance. We

agree with the magistrate that the summary judgment record is

"replete with evidence that Farmers Insurance sells insurance, not

electronic access, not computers." (emphasis in original).
 

4Information costs in this case are the costs incurred by

new agents in finding out how much Farmers will charge for

electronic access to policy information and other services after

they begin selling Farmers policies. Switching costs are the

costs incurred in switching from selling Farmers insurance to

selling the policies of another company. Compare Kodak, 504 U.S.

at 473-77, 112 S.Ct. at 2083-88. 

5

Plaintiffs' alleged market consists of a single brand (Farmers) and

a tying product (electronic access to policy information) that has

never been available to anyone other than Farmers agents. The

information that the alleged tying product allows agents to access

has always been available to agents in book form for free.

Additionally, plaintiffs' own attorney could offer no justification

at oral argument for choosing electronic access to Farmers policy

information as the relevant market other than that he was trying to

define the market as narrowly as possible (in order to make it look

as if Farmers had market power). Plaintiffs have not alleged that

Farmers has a superior or unique insurance product that allows it

to charge consumers more for policies or pay agents less for

selling them and they have shown no evidence that new Farmers

agents would face significant information or switching costs4 in

deciding whether to sell Farmers insurance or the insurance of

another company. The agents have failed to give us any reason to

view the market for electronic access to Farmers policy information

as the relevant market.

This suit is essentially an intracompany dispute over how to

run a computer system, not a valid claim under antitrust laws.

Economic power derived from contractual agreements such as

franchises or in this case, the agents' contract with Farmers, "has
6

nothing to do with market power, ultimate consumers' welfare, or

antitrust." Benjamin Klein & Lester F. Saft, The Law and Economics

of Franchise Tying Contracts, 28 J.Law & Econ. 345, 356 (1985). We

agree with the magistrate judge and the district court that

plaintiffs fail to raise a question of material fact as to whether

electronic access to Farmers policy information is the relevant

market for our inquiry.

The relevant market for an inquiry into market power in this

case is the market for insurance sales and the agents do not

contend that Farmers could exercise (or has exercised) market power

in that market. The agents' claim is not, therefore, cognizable

under antitrust laws and the magistrate judge and the district

court correctly determined that Farmers was entitled to summary

judgment.

B.

Even if we accept the plaintiffs' alleged market for

electronic access to policy information as the relevant market, the

plaintiffs have failed to prove that Farmers had or exercised

market power. Farmers has 100% of the market share in the tying

product (electronic access to policy information). However, this

does not mean that Farmers has market power in the tying market.

In fact, undisputed evidence showing that the markets for insurance

sales and agents are highly competitive makes plaintiffs' argument

that Farmers has market power in the market for its policy holder

information highly unlikely in the absence of prohibitive
 

5Price discrimination is charging different buyers different

prices for the same item. A price-discriminating monopolist

charges each consumer as much as the consumer is willing to pay

for an item. Consumers who desperately need a particular product

are charged a high price for it while those who do not really

need the product and will refuse to buy it rather than pay a high

price are charged a relatively low price. A price-discriminating

monopolist makes as much money as possible on its product because

it charges high prices to the people who are willing to pay high

prices without losing sales to people willing to pay only a low

price. See 2 Areeda & Turner Antitrust, ¶ 514a. 

7

information costs or the ability to price discriminate5 between

agents with high switching costs and those with low or no switching

costs. See Eastman Kodak Co. v. Image Technical Services, 504 U.S.

451, 475, 112 S.Ct. 2072, 2086-87, 119 L.Ed.2d 265 (1992).

Plaintiffs have cited no evidence that information or switching

costs were high for most agents and offer no evidence that Farmers

attempted to engage in price discrimination.

The plaintiffs argue that Kodak compels us to deny Farmers

motion for summary judgment. However, their reliance on Kodak is

misplaced. The Supreme Court's decision in Kodak was a rejection

of Kodak's assertion that market power could never exist over

repair parts in any case where the defendant did not have market

power over the earlier-purchased machines needing those parts.

Critically, the plaintiffs in Kodak produced evidence that Kodak

was charging above market prices for its service and was engaged in

price discrimination in favor of the knowledgeable customers who

could most easily obtain information or switch companies. Kodak,

504 U.S. at 465, 476, 112 S.Ct. at 2081, 2087. By contrast, the

plaintiffs in this case have failed to proffer any specific

evidence that the computers sold by Farmers were sold at
8

above-market prices or that other equipment of comparable quality

was available for less. The only summary judgment evidence

plaintiffs submitted was general testimony that third party vendors

of used IBM system 36 computers were selling them for less than

Farmers and in larger quantities. They offer no evidence regarding

price, quality, reliability or the expense necessary to configure

these computers to FANS. Except for general disclaimers,

plaintiffs offered no assurance that these used computers would

maintain the security of Farmer's policy information and would not

introduce viruses into the system. Additionally, plaintiffs offer

no evidence of an appropriate market price for electronic access to

policy information and have failed to even allege that the tied

bundle of electronic access and computers cost more than the sum of

their market prices. See Will v. Comprehensive Accounting Corp.,

776 F.2d 665, 672-73 (7th Cir.1985) cert. denied 475 U.S. 1129, 106

S.Ct. 1659, 90 L.Ed.2d 201 (1986) ("unless plaintiff shows that the

package price was elevated, the suit must be dismissed without

further ado"); Kypta v. McDonald's Corp., 671 F.2d 1282 (11th

Cir.) cert. denied, 459 U.S. 857, 103 S.Ct. 127, 74 L.Ed.2d 109

(1982) (same). In sharp contrast to Kodak where the plaintiffs

supported their claims of market power with evidence that Kodak

charged above-market prices and engaged in price discrimination,

the plaintiffs here simply allege that Farmers charged prices above

the market price for computers without offering any evidence of

what the market price for reliable computers was or alleging that

the bundle of products, taken together, was sold at an above-market
9

price.

The plaintiffs have failed to raise a question of material

fact as to whether Farmers has sufficient market power in the

market for electronic access to Farmers policy information to force

agents to buy computers at higher than market prices. The fact

that Farmers required agents to purchase a computer from it in

order to obtain electronic access to policy information does not

prove that Farmers had market power. See Breaux Bros. Farms, Inc.

v. Teche Sugar Co., 21 F.3d 83, 86-87 (5th Cir.) cert. denied ---

U.S. ----, 115 S.Ct. 425, 130 L.Ed.2d 339 (1994). As noted above,

the summary judgment record contains no evidence that the computers

were sold at a premium price or that acceptable alternatives were

available for less. It also contains no evidence of what

electronic access to policy information should cost. In fact, the

summary judgment record strongly supports Farmers' argument that it

had no power in the electronic-access-to-policy-information market.

Plaintiffs do not dispute that the insurance sales market is

highly competitive. Absent high information or switching costs,

intense competition in the market for insurance agents will force

Farmers to pay competitive wages and preclude it from imposing

above-market prices on its agents for the services it provides

them. Additionally, availability of manual access to policy

information was a good substitute for electronic access. This

seriously limited Farmers' ability to charge more than the market
 

6Substitutes limit market power by giving consumers an

alternative to paying an above-market price for a product. The

existence of a good substitute at a competitive price (in this

case manual access to policy information for free) prevents a

producer from selling its product at an above-market price. An

attempt to raise price of the product above a competitive level

will be met with a shift in demand from the product to its

substitute. See 2 Areeda & Turner, Antitrust at ¶ 525a. 

10

price for electronic access to the same information.6 The summary

judgment record here contains no evidence that information or

switching costs were high enough to produce any substantial market

power for Farmers and no evidence that manual access to policy

information was so seriously inadequate as a substitute for

electronic access as to allow Farmers to exercise market power over

electronic access.

Information and switching costs for Farmers agents hired after

1981 when FANS was implemented were virtually nonexistent. The

summary judgment record shows that Farmers openly required agents

wishing to access FANS to do so only with computers purchased from

Farmers. Any agent hired would have known of the two ways to

obtain policy information and could have easily inquired about the

cost of electronic access. The computer installment contract

clearly states that no non-Farmers computer will be allowed to

access FANS without the written consent of Farmers. Division

manager Bob Akers testified that he regularly told his agents that

Farmers' policy was to not allow any computers purchased from

third-party vendors to access FANS. Internal correspondence shows

that a corporate officer who led an agent to believe that he could

hook up his computer to FANS even though it was purchased from a
 

7It is important to note that even agents who faced high

switching costs in the decision to switch insurance companies

could easily have continued selling policies with the manual

system. Farmers clearly did not require agents to use FANS and

continued to supply its agents with manual policy information for

free. Even, if manual access to policy information was inferior

to electronic access, it was a reasonably good substitute that

11

third party was quickly reprimanded and informed that Farmers

policy was to not allow FANS access to any computers purchased from

third parties. The plaintiffs produce no evidence that suggests

that this information was difficult to obtain. Agents would

clearly have become aware of Farmers' policy long before they faced

significant switching costs.

If an agent, unhappy with Farmer's computer policy, wished to

move to a new company, he was free to do so. Switching costs for

most agents were very low. The only switching cost evident in the

summary judgment record is the inability to continue earning

commission from Farmers policies which agents have already sold.

New agents have virtually no switching costs because they have sold

no policies or only a few. These agents can switch to selling

insurance for another insurance company without incurring any

significant cost. The only group of agents that faced switching

costs of any significance were Farmers agents hired before 1981

when FANS was implemented. Switching costs for these agents could

have been high because the agents could not take their customers

with them if they left. Policyholders are Farmers' customers under

the terms of the agency agreement and departing agents would be

forced to give up the income from the numerous policies they had

sold in previous years.7
would have seriously limited Farmers' ability to charge

above-market prices for electronic access and computers even to

those agents with many policies in force. 

12

The absence of significant information costs to the agents and

the existence of switching costs for some agents but not for others

means that in order for Farmers to have exercised market power in

the markets for electronic access and computers, it must have

engaged in price discrimination. Farmers could exercise market

power and sell electronic access or computers at above-market

prices only to those agents with high switching costs. Agents with

low switching costs would refuse to pay an above-market price for

the bundled electronic access and computers. Rather than pay a

premium, these agents could simply leave Farmers and move to

another insurance company.

Plaintiffs submit no evidence that Farmers charged agents with

many policies in force more than it charged new agents or those

with few policies in force. They do not even allege that Farmers

attempted to engage in price discrimination. Without an allegation

that price discrimination occurred or evidence that Farmers agents

faced prohibitive costs in discovering Farmers' computer policy,

the plaintiffs cannot seriously argue that Farmers had or exploited

any market power. Plaintiffs fail to raise a question of material

fact as to whether Farmers had market power in the market for

electronic access to policy information.

Conclusion

We agree with the district court and the magistrate judge that

electronic access to policy information is merely a component of
13

Farmers' insurance product and that the relevant market for an

antitrust inquiry is the insurance sales market. Farmers exercised

no market power in this highly competitive market and plaintiffs'

antitrust action fails for this reason alone. Additionally, even

if we accept plaintiffs' alleged markets as the relevant markets

for our inquiry, plaintiffs still fail to raise a question of

material fact on the issue of whether Farmers has market power.

Plaintiffs fail to offer any evidence of above-market computer

prices or high switching or information costs. They present no

evidence that Farmers engaged in price discrimination and they

offer no plausible economic argument that would support market

power. For all of these reasons, we find that plaintiffs have

failed to raise a question of material fact as to whether Farmers

violated antitrust laws. The judgment of the district court is,

therefore, AFFIRMED.

AFFIRMED.