Opinion ID: 395210
Heading Depth: 2
Heading Rank: 2

Heading: Vertical Price Fixing

Text: 20 Quality also predicates its price-fixing claim on the alleged existence of vertical arrangements between the defendant insurance companies and certain preferred auto repair shops, which Quality characterizes as provider agreements. Although the district court concluded that for the most part, formal vertical arrangements do not exist, the court assumed, for the purposes of the summary judgment motion, that a trier of fact could infer an agreement between the defendants and some body shops to perform the work for a set price. Quality Auto, 1980-2 Trade Cases at 76,694. On appeal, we must therefore indulge plaintiff in the same assumption. 21 Unlike the horizontal agreements discussed in the previous section, a vertical arrangement between an insurance company and a preferred body shop would not be immune from the antitrust laws under the McCarran-Ferguson Act. See note 4 supra. In Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), the Supreme Court examined a health insurance company's practice of entering into provider agreements with pharmacies to offer policyholders discount prices on prescription drugs. If the insured chose to make the purchase at a participating pharmacy, the insured paid only $2.00 for the drug and Blue Shield, the health insurer, reimbursed the pharmacy directly for the remainder of the cost. If, on the other hand, the insured selected a non-participating pharmacy, the insured paid full price for the prescription and was subsequently reimbursed by Blue Shield for 75% of the difference between that price and $2.00. After engaging in an extensive analysis of the language and legislative history of the McCarran-Ferguson Act, the Court concluded that the agreements between Blue Shield and participating pharmacies were not part of the business of insurance protected by the McCarran-Ferguson Act and therefore were not exempt from scrutiny under the antitrust laws. 22 In order to reach this conclusion, the Court drew a distinction between the business of insurance which is protected by the Act and the business of insurers which is not protected at all. The business of insurance was limited to activities which spread or underwrite a policyholder's risk and directly involve the relationship between an insurer and the insured. Since the provider agreements between Blue Shield and the participating pharmacies were merely arrangements for the purchase of goods, which enable the insurer to minimize cost and maximize profit, these agreements did not constitute the business of insurance but rather represented a sound business practice essentially unrelated to underwriting or the spreading of risk. Id. at 215, 99 S.Ct. at 1075. Thus, the Court concluded that these agreements, like all agreements insurers may make to keep their costs under control whether with automobile body repair shops or landlords are not exempt from the provisions of the antitrust laws. Id. at 233-34, 99 S.Ct. at 1084-85. 23 Quality maintains that Group Life also compels a finding that the alleged provider agreements in the instant case constitute per se violations of the Sherman Act. Upon examination, however, we find this argument to be without merit. The Court in Group Life declined to express an opinion on the antitrust implications of the Pharmacy Agreements noting that a determination as to (w) hether the Agreements are illegal under the antitrust laws is an entirely separate question, not now before us. Id. at 210, 99 S.Ct. at 1072 (emphasis in original). 5 Moreover, the government conceded in its amicus brief in the Group Life case that the Pharmacy Agreements probably (did) not violate the antitrust laws. Id. at 210 n.5, 99 S.Ct. at 1072 n.5. Hence, Group Life does not support Quality's vertical price-fixing claim here. 24 In any event, Quality insists that the alleged agreements between the defendants and preferred shops should be deemed per se illegal under the antitrust laws and that the district court erred by analyzing these agreements under the rule of reason. The Supreme Court explained the significance of per se and rule of reason analyses in National Society of Professional Engineers v. United States, 435 U.S. 679, 98 S.Ct. 1355, 55 L.Ed.2d 637 (1978): 25 There are, thus, two complementary categories of antitrust analysis. In the first category are agreements whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality they are 'illegal per se.' In the second category are agreements whose competitive effect can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint, and the reasons why it was imposed. In either event, the purpose of the analysis is to form a judgment about the competitive significance of the restraint .... 26 Id. at 692, 98 S.Ct. at 1365. Quality suggests that the purported provider agreements in the instant case are so blatantly anticompetitive that the court should invoke the per se rule and avoid the necessity for (an) incredibly complicated and prolonged economic investigation into the entire history of the industry. Appellant's Br. at 19 n.5. 27 Particularly in view of the Supreme Court's reluctance to recognize per se violations of the antitrust laws without considerable knowledge of the business practice in question and the impact of those practices on competition, a per se analysis is not appropriate in the instant case where anticompetitive effect is far from obvious and may be non-existent. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 99 S.Ct. 1551, 60 L.Ed.2d 1 (1979); Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977); United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972). Further, no court which has examined the antitrust implications of insurance provider agreements has used a per se approach. Proctor v. State Farm Mutual Insurance Co., 406 F.Supp. 27 (D.D.C.1975) aff'd, 561 F.2d 262 (D.C.Cir.1977), vacated and remanded, 440 U.S. 942, 99 S.Ct. 1417, 59 L.Ed.2d 631 (1979), on remand, 1980-2 Trade Cases P 63,591 (D.D.C.1980); DeBonaventura v. Nationwide Mutual Insurance Co., 419 A.2d 942 (Del. Ch. 1980) aff'd, 428 A.2d 1151 (Del.1981); Chick's Auto Body v. State Farm Mutual Automobile Insurance Co., 168 N.J.Super. 68, 401 A.2d 722 (1979), aff'd per curiam, 176 N.J.Super. 320, 423 A.2d 311 (1981). See also Travelers Insurance Co. v. Blue Cross of Western Pennsylvania, 481 F.2d 80 (3d Cir.), cert. denied, 414 U.S. 1093, 94 S.Ct. 724, 38 L.Ed.2d 550 (1973). The vertical agreements, to the extent they exist here, are between buyers (the insurance companies) with apparently extensive market power and sellers (the body shops) with what, in comparison, seems slight market power. Since we find no reason on the face of things to regard dealings between such buyers and sellers as violations of the antitrust laws, we think the district court properly subjected these so-called vertical agreements to analysis under the rule of reason. 28 With the exception of Allstate's direct repair program which is premised upon an explicit agreement between the company and participating shops, we have assumed, as did the district court, that some type of informal agreement exists between the defendants and certain repair shops. Under the implicit terms of these alleged agreements, a shop which performs repair work at the company's prevailing competitive rate can expect to be placed on a preferred list and receive a steady stream of referrals from claim adjusters. A contract of this nature between a buyer (the insurance company) and a seller (the body shop) generally does not, without more, appear to violate the antitrust laws at all. Only if such an agreement contains restrictions on one party's activities other than those involved in the immediate purchase and sale does the possibility of a Sherman Act violation arise. In refusing to pay a price higher than what they regard as the competitive rate, defendants have not imposed any restriction on the repair shops beyond the immediate sales transaction. Defendants are simply taking steps to insure the best terms available in the marketplace and firmly indicating their position on price to the seller (the body shops). As the Third Circuit explained in Travelers Insurance Co. v. Blue Cross of Western Pennsylvania, 481 F.2d 80 (3d Cir.), cert. denied, 414 U.S. 1093, 94 S.Ct. 724, 38 L.Ed.2d 550 (1973), this pressure encourages (suppliers) to keep their costs down; and, for its own competitive advantage, (enables the insurer to pass) ... along the savings thus realized to consumers. To be sure, (the insurer's) initiative makes life harder for commercial competitors.... The antitrust laws, however, protect competition, not competitors; and stiff competition is encouraged, not condemned. Id. at 84. Thus, the mere existence of informal (or formal) provider agreements in the instant case, far from establishing a Sherman Act violation, seems merely to show aggressive and competitive dealing by the insurance companies. 29 Quality asserts, of course, that defendants, as large-scale purchasers of services wield substantial market power through the use of these agreements. As the nation's largest automobile insurer, State Farm collected more than $2 billion in direct premiums in 1979, and sustained slightly less than.$1.2 billion in direct losses. Allstate, the second largest automobile insurer, received $1.3 billion in premiums and paid out approximately $800 million in losses. Together these two companies write more than one quarter of the nation's automobile insurance policies and pay out more than one quarter of the claims settlements in the industry. As a result, these defendants have an undeniable impact on the price structure of the auto repair market. But much as this impact may contribute to the discomfiture of the body shops, it probably rebounds to the benefit of competition and consumers. In the absence of proof of some concerted action or an abuse of defendants' buying power, the provider agreements do not illegally restrain trade. Like the small town dairy selling to the A&P, the body shops may be at a huge disadvantage as traders. But the Sherman Act provides no remedy for imbalance of market power as such, absent certain types of abuse. 6 30 Thus, assuming the existence of informal vertical agreements in the instant case, plaintiff is simply unable to establish an antitrust claim. Quality does not deny that the body shops on defendants' preferred list are not obligated to perform work at the price set in the company's estimate. As the district court noted, the only consequence of a refusal to perform the work at that price is that the customer will have to pay the additional charge himself, and may, as a result, decide to take his business elsewhere. Quality Auto, 1980-2 Trade Cases at 76,697. And it is not the fault of the defendants that car owners have decided that the quality of workmanship and materials available at plaintiff's shops is not sufficiently superior to that furnished at the competitive or preferred prices recommended by defendants to its insureds and claimants to warrant the paying of money out of one's own pocket to make up the difference between plaintiff's prices and those offered by those shops which quote more competitive prices. DeBonaventura, 419 A.2d at 950. 31 Other courts that have analyzed the antitrust implications of the damage claim procedures established by automobile insurance companies have similarly found that the insurer's refusal to pay more than the prevailing competitive rate is not illegal. In Proctor v. State Farm Mutual Automobile Insurance Co., 406 F.Supp. 27 (D.D.C.1975) aff'd, 561 F.2d 262 (D.C.Cir.1977), vacated and remanded, 440 U.S. 942, 99 S.Ct. 1417, 59 L.Ed.2d 631 (1979), on remand, 1980-2 Trade Cases P 63,591 (D.D.C.1980), the owners of four automobile repair shops filed suit against the defendant insurance companies complaining as Quality does here that the insurers entered into a horizontal agreement to calculate damage estimates at the lowest prevailing competitive rate and implemented the agreement through the use of vertical arrangements with preferred shops, which agreed to perform the work at defendants' price. When the merits of these claims were finally considered, 7 however, the court concluded that the vertical arrangements ... (did) not offend the antitrust laws. 1980-2 Trade Cases at 77,140. After noting that the questioned practices stemmed solely from (the insurer's) desire to slow the rate of increase in the claims payments required to satisfy the companies' contractual obligations to their policyholders, the court noted, 32 it is well to remind ourselves that a principal purpose of the antitrust laws is to preserve and foster competition in the market place. Appellants' basic thrust that insurance companies must write estimates of repair costs so as to be within the prices sought by high-priced non-competitive shops clearly runs counter to these antitrust principles. 33 Id. at 77,141 (emphasis supplied). 34 Similarly, in Chick's Auto Body v. State Farm Mutual Automobile Insurance Co., 168 N.J.Super. 68, 401 A.2d 722 (1979), aff'd per curiam, 176 N.J.Super. 320, 423 A.2d 311 (1981), the auto body shops alleged, inter alia, that the insurers' refusal to pay more than the prevailing labor rate constituted price-fixing under the New Jersey Antitrust Act. 8 Although the court concluded that the challenged practices were immune from attack under an insurance exemption to the New Jersey antitrust laws, the court went on to consider and reject the merits of plaintiff's charges. Thus, the court stated, the practice of the insurance companies to calculate the reimbursement for its insured based upon the lowest prevailing price in the market place (and to insure the integrity of that estimate by having an open list of competing shops which will generally accept it) is the very essence of competition. Id., 401 A.2d at 731-32 (emphasis supplied). See also DeBonaventura v. Nationwide Mutual Insurance Co., 419 A.2d 942 (Del.Ch.1980) aff'd, 428 A.2d 1151 (Del.1981). 35 In the instant case, the district court concluded that the provider agreements are nothing more than contracts between a buyer and a seller determining the price of services that the seller will perform, and are not illegal. Quality Auto, 1980-2 Trade Cases at 76,696. This decision is not only consistent with Proctor and Chick's Auto, but is also in accord with the longstanding antitrust principle that Section 1 of the Sherman Act does not preclude a party from unilaterally determining the parties with whom it will deal and the terms on which it will transact business. United States v. Colgate & Co., 250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992 (1919). This is true even where, as here, the buyers are big and the sellers are comparatively small. We believe plaintiff failed to establish any contract, conspiracy or combination by defendants to fix prices through vertical arrangements with preferred repair shops. 9 Therefore, summary judgment is also appropriate on this claim.