Opinion ID: 3006618
Heading Depth: 2
Heading Rank: 2

Heading: McCarran-Ferguson Act Exemption

Text: In light of our conclusion that Sanger has presented a fact issue on whether it was sufficiently prepared to enter the market to establish antitrust 15 Case: 14-40854 Document: 00513215665 Page: 16 Date Filed: 10/01/2015 No. 14-40854 standing, we must address whether the challenged activities are immune from federal antitrust scrutiny under the McCarran-Ferguson Act. The Act was a response to United States v. South-Eastern Underwriters Ass’n, a criminal price-fixing case involving premiums and commissions for fire insurance in which the Supreme Court departed from its earlier view that insurance was not commerce subject to federal regulation. 322 U.S. 533, 552–53 (1944). Enacted the year after that ruling, McCarran-Ferguson restored the primacy of the states in regulating insurance by providing that general federal laws not directed at insurance do not “invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance.” 15 U.S.C. § 1012(b). This has been aptly labelled a “reverse preemption” clause because it has the effect of displacing federal law when a state maintains its traditional role of regulating insurance. See, e.g., Safety Nat. Cas. Corp. v. Certain Underwriters at Lloyd’s, 587 F.3d 714, 720 (5th Cir. 2009) (en banc). Although the McCarran-Ferguson Act’s reverse preemption clause applies generally to “Act[s] of Congress” that do not “specifically relate[] to the business of insurance,” it also not surprisingly includes language directed at the antitrust laws that gave rise to its enactment. 15 U.S.C. § 1012(b). It provides that the Sherman Act is “applicable to the business of insurance [only] to the extent that such business is not regulated by State law.” Id. Antitrust law remains applicable, however, to any “act of boycott, coercion, or intimidation.” Id. § 1013(b). Thus, the McCarran-Ferguson Act exempts from antitrust law activities that (1) constitute the “business of insurance,” (2) are regulated by state law, and (3) do not amount to acts of “boycott, coercion or intimidation.” See Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 124 16 Case: 14-40854 Document: 00513215665 Page: 17 Date Filed: 10/01/2015 No. 14-40854 (1982); Arroyo-Melecio v. Puerto Rican Am. Ins. Co., 398 F.3d 56, 66 (1st Cir. 2005). Given this federalism role of the McCarran-Ferguson Act in precluding federal antitrust regulation that might undermine state regulation of insurance, it is not surprising that Texas antitrust law, despite mirroring federal law in most respects, does not incorporate a similar exemption. See Tex. Bus. & Com. Code § 15.05(g) (“[T]he McCarran-Ferguson Act does not serve to exempt activities under this Act.” (citation omitted)). Whatever issues might arise from applying Texas antitrust law to the insurance industry that the state separately regulates, doing so does not upset the federal-state balance. Whether HUB is entitled to the exemption thus has no effect on Sanger’s state antitrust claims. With respect to the federal claims, the district court found in favor of HUB on each element of the exemption and thus granted summary judgment on the Sherman Act claims. We address each issue in turn.
The scope of the exemption from federal antitrust scrutiny turns largely on the phrase “the business of insurance.” As with the notoriously terse language in the Sherman Act itself, see Kimble v. Marvel Entertainment, LLC, 135 S. Ct. 2401, 2412 (2015) (“Congress, we have explained, intended that law’s reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’”), the McCarran-Ferguson Act necessarily leaves many questions to be answered through the development of case law. The law’s “primary concern” is protecting “cooperative ratemaking 17 Case: 14-40854 Document: 00513215665 Page: 18 Date Filed: 10/01/2015 No. 14-40854 efforts” like the fixing of premiums at issue in South-Eastern Underwriters, 8 and the Supreme Court has emphasized that “[t]he exemption is for the ‘business of insurance,’ not the ‘business of insurers.’” Grp. Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 211, 221 (1979) (holding that an agreement between an insurer and pharmacies to set the prices of prescription drugs was not exempt). To hold otherwise would capture “almost every business decision of an insurance company.” See In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 352 (3d Cir. 2010) (citing Royal Drug, 440 U.S. at 213–17). The Supreme Court has “identified three criteria relevant in determining whether a particular practice is part of the ‘business of insurance’ exempted from the antitrust laws” under the Act: first, whether the practice has the effect of transferring or spreading a policyholder’s risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry. Pireno, 458 U.S. at 129. The parties dispute only the first two criteria; the third plainly applies. Furthermore, although “[n]one of these criteria is necessarily determinative in itself,” id., the “underwriting or spreading of risk [is] an indispensable characteristic of insurance.” Royal Drug, 440 U.S. at 212. The absence of the first criterion—that “the practice has the effect of transferring or spreading a policyholder’s risk”—is thus “decisive.” See In re Ins. Brokerage, 618 F.3d at 352, 356. 8 This primary concern followed from a “widespread view that it is very difficult to underwrite risks in an informed and responsible way without intra-industry cooperation.” Grp. Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 221 (1979). 18 Case: 14-40854 Document: 00513215665 Page: 19 Date Filed: 10/01/2015 No. 14-40854 Before applying these standards to this case, we address disagreement about the nature of Sanger’s allegations. HUB appears to characterize Sanger’s suit mainly as a challenge to HUB’s role as the exclusive broker for members of the American Veterinary Medical Association. Sanger responds that it does not seek to broker insurance through the Association’s Program or otherwise challenge that HUB arrangement, but rather only challenges HUB’s use of its market power to prevent insurers from working with other brokers who seek to insure members of other veterinary associations. We rely on Sanger’s characterization of its claims, as it is supported by the allegations in the complaint and evidence in the summary judgment record, and because we must accept the plaintiff’s theory of the case in conducting the McCarranFerguson inquiry. See In re Ins. Brokerage, 618 F.3d at 356 (“[T]he precise characterization of the defendants’ conduct can be dispositive.”); Am. Standard Life & Acc. Ins. Co. v. U.R.L., Inc., 701 F. Supp. 527, 532 (M.D. Pa. 1988) (“Determination of whether defendants’ alleged conduct is exempt ‘depends largely upon how one defines the “practice”’ which is being challenged. . . . [W]e must look to the gravamen of the complaint.”) (quoting FTC v. Mfrs. Hanover Consumer Servs., Inc., 567 F. Supp. 992, 994 (E.D. Pa. 1983)). We therefore ask: do HUB’s alleged exclusive dealing arrangements with insurers constitute “the business of insurance”? In its argument for reversal, Sanger relies primarily on In re Insurance Brokerage Antitrust Litigation, 618 F.3d 300 (3d Cir. 2010). In that decision, an insurance broker’s clients alleged that the broker’s “insurer-partners agreed with one another not to compete for incumbent business” (that is, for accounts up for renewal). Id. at 340, 356. The court noted that “plaintiffs do not allege that defendants’ agreement involved who could receive insurance coverage, or 19 Case: 14-40854 Document: 00513215665 Page: 20 Date Filed: 10/01/2015 No. 14-40854 the type of coverage they could obtain.” Id. at 357. Instead, “the complaint asserts conduct affecting not whether or to what extent a prospective insurance purchaser would transfer its risk to an insurer, but merely to which insurer that risk would be transferred.” Id. The court also found it significant that “defendants’ alleged agreement not to compete for incumbent business . . . appears to have been unrelated to [the] reliability” of insurers; that is, “it does not involve any restriction on the type of coverage offered or the risk profile of insurable entities.” Id. That mention of risk profiles identifies what is different about this case. Assuming that HUB is engaged in exclusive dealing that prevents the insurers from writing insurance for other group plans, that conduct fortifies the Program HUB operates through the American Veterinary Medical Association. Keeping a large, geographically and professionally diverse pool of veterinarians in the Program—including significant numbers of small- animal, large-animal, mixed, and equine veterinarians—spreads risk. For that reason, this case is closer to Feinstein v. Nettleship Co. of L.A., 714 F.2d 928 (9th Cir. 1983), in which the plaintiffs contested “the agreement between the medical association and the insurers to offer the malpractice insurance only to members of [the L.A. County Medical Association].” Id. at 932. The Ninth Circuit held that this constituted the business of insurance because the practice was demonstrably related to the allocation and spreading of risk, for, as the district court pointed out, it defines a pool of insureds over which 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 20 Case: 14-40854 Document: 00513215665 Page: 21 Date Filed: 10/01/2015 No. 14-40854 area, and that is precisely what the Supreme Court described when it formulated the risk spreading criterion. Id. at 932. Similarly, the scheme alleged by Sanger inevitably involves the transferring or spreading of risk because HUB’s role as the broker is to funnel a broad risk pool to particular insurers. To the extent Sanger would have been able to siphon off HUB’s vets by offering group plans through other veterinary associations, its actions would alter the composition of policyholders in the Program and thus would likely impact the Program’s ability to spread risk. Indeed, although Sanger did not sue the insurance companies, the alleged exclusive dealing with HUB serves their interests at least as much, and very likely more, than it does HUB’s. Yet even if viewed more narrowly as just a “broker” case, most courts have held that routine dealings between insurers and brokers or agents 9 do constitute the business of insurance even if that relationship may not be “distinctively different from ordinary relationships with dealers marketing a product or service.” Areeda & Hovenkamp, supra, ¶ 219b5, at 21–22. The Supreme Court has said the following on this issue: It is clear from the legislative history that the fixing of rates is the “business of insurance.” The same conclusion does not so clearly emerge with respect to the fixing of agents’ commissions. . . . One inference that can be drawn from [the legislative history] is that Congress was aware of the existence of agreements regarding agents’ commissions, and chose not to include them within the exemption for the “business of insurance.” On the other hand, the fact that the indictment in South-Eastern Underwriters had included a charge that insurance companies did boycott agents 9 “Bluntly stated, an ‘insurance agent’ represents the insurance company, whereas an ‘insurance broker’ represents the insured.” 7 Appleman on Insurance 2d: Law of Insurance Agents § 47.5, at 326 (1998) (footnotes omitted). 21 Case: 14-40854 Document: 00513215665 Page: 22 Date Filed: 10/01/2015 No. 14-40854 who insisted on selling other lines of insurance, together with the fact that [the boycott exception] presumably removes an exemption that, but for its absence, would be conferred by [the Act], suggests that the “business of insurance” may have been intended to include dealings within the insurance industry between insurers and agents. Royal Drug, 440 U.S. at 224 n.32; see also Areeda & Hovenkamp, supra, ¶ 219b5, at 22 (observing that the “apparent motivation [for the boycott exemption] was to protect agents from insurer ‘boycotts’—a protection that would be unnecessary if ‘the business of insurance’ did not embrace insureragent agreements in the first place”). In re Insurance Brokerage aside, a number of courts of appeals have generally followed the latter inference, and have characterized challenged dealings between insurers and agents as the business of insurance despite the fact that “an agreement not to compete to sell a particular product to a particular customer . . . would be expected . . . in any industry.” In re Ins. Brokerage, 618 F.3d at 359. See, e.g., Arroyo-Melecio, 398 F.3d at 68 (holding that an agreement among insurers “not to use brokers to sell policies” is the business of insurance); Owens v. Aetna Life & Cas. Co., 654 F.2d 218, 226 (3d Cir. 1981) (holding that “authorizing agents to solicit individual or group policies” and “accepting or rejecting coverages tendered by brokers” are exempt activities); Black v. Nationwide Mut. Ins. Co., 429 F. Supp. 458, 463 (W.D. Pa. 1977), aff’d, 571 F.2d 571 (3d Cir. 1978) (“The size of insurance commissions paid by companies to agents because they affect rate structures, is the ‘business of insurance’.”). So have we. Thompson v. New York Life Insurance Co. held that an insurance company’s contract with an agent prohibiting him from engaging in “any other business or occupation for remuneration or profit” and offering “various incentives . . . so that [he] would 22 Case: 14-40854 Document: 00513215665 Page: 23 Date Filed: 10/01/2015 No. 14-40854 agree to focus all his entrepreneurial skills solely on selling insurance” was “within the business of insurance.” 644 F.2d 439, 444 (5th Cir. Unit B May 1981). The insurers’ alleged agreements with HUB not to insure other brokers’ competing group plans are more fundamental to the risk spreading characteristics of insurance than are the noncompete agreement at issue in Thompson. HUB has therefore established the first criterion in assessing whether the challenged activity constitutes the business of insurance. For similar reasons, the second criterion, “whether the practice is an integral part of the policy relationship between the insurer and the insured,” is also met. HUB’s conduct as described by Sanger plainly “affect[s] the insurers from which a prospective purchaser could obtain coverage,” In re Ins. Brokerage, 618 F.3d at 356, and thus impacted “the core relationship between insurer and insured.” Thompson, 644 F.2d at 444. And the third criterion is undisputedly met. We thus hold that HUB’s conduct constitutes the “business of insurance,” and is therefore potentially subject to exemption from federal antitrust law.
The second element of the exemption requires that the challenged activities “are regulated pursuant to state law.” This is not a high bar for antitrust defendants to clear given how courts have interpreted the statutory language that on its face seems to require a more concrete conflict between the federal and state regulation. “[I]f the state’s insurance industry is ‘regulated by state law,’ then the antitrust laws simply do not apply, notwithstanding that the application of antitrust law in the particular case in no way ‘invalidate[s], impair[s], or supersede[s]’ state law and may even be consistent with it.” Arroyo-Melecio, 398 F.3d at 66 n.7 (alterations in original) 23 Case: 14-40854 Document: 00513215665 Page: 24 Date Filed: 10/01/2015 No. 14-40854 (quoting Areeda & Hovenkamp, ANTITRUST LAW, ¶ 219c, at 339 (2d ed. 2000)); see also Fed. Trade Com’n v. Nat’l Cas. Co., 357 U.S. 560, 564–65 (1958); Crawford v. Am. Title Ins. Co., 518 F.2d 217, 219 (5th Cir. 1975) (prohibition on “all unfair methods of competition” sufficient). The district court found this element satisfied. Sanger does not challenge this ruling as to Texas law, but contends, for the first time, that the district court erred by granting summary judgment without finding that numerous states outside of Texas in which HUB operates also regulate insurance. There are a number of problems with this argument. First, because the evidence of Sanger’s preparedness to enter the market that we found sufficient to confer standing primarily involved activity in Texas (such as its dealings with the Texas Equine Veterinary Association), we doubt that the allegations are sufficient to allege injury in other states’ markets. Second, although it is HUB’s burden to demonstrate its entitlement to the McCarran-Ferguson Act exemption, see Seasongood v. K & K Ins. Agency, 548 F.2d 729, 732 (8th Cir. 1977), Sanger did not identify this issue below as one on which a dispute existed. HUB’s motion for summary judgment discussed only Texas law on this issue, but clearly sought dismissal of Sanger’s claims in full. Finally, even assuming HUB’s conduct in other states is relevant to Sanger’s federal antitrust claims and that this issue was preserved, we have previously recognized and can do so again via judicial notice that other states also regulate insurance. See Shurley v. Tex. Commerce Bank—Austin, N.A. (In re Shurley), 115 F.3d 333, 345 n.43 (5th Cir. 1997) (“Texas, like all states, comprehensively regulates insurers and insurance policies.”); Jeffrey E. Thomas, Insurance Law Between Business Law and Consumer Law, 58 AM. J. COMP. L. 353, 353 (2010) (“[E]ach of the fifty states has a comprehensive and 24 Case: 14-40854 Document: 00513215665 Page: 25 Date Filed: 10/01/2015 No. 14-40854 robust system of insurance regulation through statutes, administrative regulations, and common law rules.”). Indeed, Sanger does not identify any particular states that it contends do not regulate insurance. This requirement of the exemption is satisfied.
Even when conduct involves the business of insurance that is regulated by state law, the McCarran-Ferguson Act does not exempt it from antitrust scrutiny when it amounts to a “boycott, coercion, or intimidation.” At first glance, the allegations in this case may seem close to the “paradigm situation [involving] the collective refusal by insurance companies to deal with agents doing business with other insurers.” Areeda & Hovenkamp, supra, ¶ 220, at 35. But the allegations in this case focus on a single broker, HUB, which turns out to make a big difference. Sanger’s primary argument on appeal is that HUB’s activities alone constituted a boycott—the company’s briefing repeatedly argues that “HUB engaged in a boycott” by using its alleged monopoly power to pressure insurers into not doing business with Sanger. But “conduct by individual actors falling short of concerted activity is simply not a ‘boycott’ within § 3(b).” St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 555 (1978); see also Areeda & Hovenkamp, supra, ¶ 220a, at 36 (“[T]he term ‘boycott’ clearly requires an agreement of at least two firms to exclude or discriminate against another.”). HUB’s independent conduct seeking to leverage its supposed monopoly position as sole broker for the Program with insurers thus cannot constitute a boycott within the meaning of the exemption. Though less emphasized on appeal than its allegations that HUB is engaging in monopolization, Sanger also intimates that the unlawful 25 Case: 14-40854 Document: 00513215665 Page: 26 Date Filed: 10/01/2015 No. 14-40854 arrangement is a horizontal agreement between HUB and the insurers. 10 If that is the case, there is a different problem for Sanger: the refusal to deal at issue in a boycott must expand “beyond the targeted transaction” to “unrelated transactions [that] are used as leverage to achieve the terms desired.” Hartford Fire Ins. Co. v. California, 509 U.S. 764, 802–03 (1993). In other words, a boycott is “the refusal to deal in a collateral transaction as a means to coerce terms respecting a primary transaction.” Gilchrist v. State Farm Mut. Auto. Ins. Co., 390 F.3d 1327, 1335 (11th Cir. 2004) (citing Hartford Fire, 509 U.S. at 801–05). For example, the Supreme Court long ago held that an agreement by lumber retailers not to purchase from lumber wholesalers that sell directly to customers is a boycott because it seeks an objective—“the wholesale dealers’ forbearance from retail trade”—that is collateral to the retailers’ transactions with the wholesalers. 11 See Hartford Fire, 509 U.S. at 803 (citing E. States Retail Lumber Dealers’ Ass’n v. United States, 234 U.S. 600 (1914)). The only “collateral transaction” plausibly claimed in this case is 10 Sanger also claims that HUB’s agreements with the American Veterinary Medical Association constitute contracts, combinations, or conspiracies in restraint of trade, but it does not appear to claim that the Association had a role in any alleged boycott. 11 Sanger contends that HUB and the insurers’ refusal to deal is a boycott under the definition used in Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959). In that case, a retail chain used its “‘monopolistic’ buying power to bring about” a conspiracy with manufacturers and distributers of appliances to exclude Klor’s, an independent retailer, from selling their brands. Id. at 209. The Court characterized the conspiracy as a group boycott forbidden by the Sherman Act, though the opinion does not disclose any “collateral transaction” involved. Id. at 209–11. To the extent Klor’s conflicts with Hartford Fire, we follow the latter case, which is the only one that involves the McCarran-Ferguson Act’s boycott exception. See Hartford Fire, 509 U.S. at 803 (“The proper definition of ‘boycott’ is evident from the Court’s opinion in Eastern States Retail Lumber . . . . [T]he associations’ activities were a boycott because they sought an objective—the wholesale dealers’ forbearance from retail trade—that was collateral to their transactions with the wholesalers.”); but see NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 134–37 (1998) (citing and relying upon Klor’s in a non-insurance case). 26 Case: 14-40854 Document: 00513215665 Page: 27 Date Filed: 10/01/2015 No. 14-40854 HUB’s refusal to work with insurers who would insure Sanger’s clients, but as discussed above that transaction does not involve concerted action. The actions of the insurers as a group—refusing to work with Sanger—do not involve any “collateral transactions” (they directly implicate potential transactions between the insurers and Sanger) and therefore do not constitute a boycott. Sanger has thus not alleged a boycott that avoids the McCarran-Ferguson exemption. 12