By: David C. Borucke
The business of insurance is insulated from the full weight of antitrust law under the McCarran-Ferguson Act (the “McCarran Act”).1 This statutory protection, however, may soon disappear. Multiple bills to repeal the McCarran Act are pending in the 114th Congress, with some bi-partisan support. If the McCarran Act is repealed, for example as a step toward replacing the Affordable Care Act, carriers will need to update their antitrust compliance practices. In particular, carriers will need to radically limit information sharing. Thus, with timely reason, we describe the scope of the McCarran Act and then some antitrust basics to underscore the potential impact of repeal.
The federal government once deemed insurance as a purely local matter, i.e., a state concern beyond the constitutional reach of federal regulation. New Deal jurisprudence then expanded the scope of the Commerce Clause.2 However, in 1944 the U.S. Supreme Court ruled that insurance transactions affect interstate commerce and are, therefore, subject to federal antitrust law.3
Congress moved quickly in response to the Supreme Court decision. In 1945 Congress passed the McCarran Act to maintain the predominance of state regulation over the industry. The Act includes a limited but important exemption for the “business of insurance.” The exemption applies where the following three requirements are met:
First, the conduct must be the “business of insurance” and not just any business conducted by an insurance company. The focus is on the nature of the conduct. The conduct is likely exempt where it involves underwriting and the spreading of risk, has a direct connection to the contract between the insurer and insured, and/or involves only entities within the insurance industry. In particular, Congress sought to maintain the industry practice of pricing through rating organizations – the quintessential “business of insurance” that would otherwise be subject to antitrust scrutiny.
Second, the conduct must be regulated by the state. This is a lenient requirement. Active and effective state regulation is not necessary. The mere potential to regulate is sufficient.4 For example, this requirement is readily satisfied in Florida given the broad authority of the Office of Insurance Regulation to enforce the Insurance Code and the Unfair Insurance Trade Practices Act.5
Third, the conduct must not constitute “[a] boycott, coercion or intimidation.”6 The U.S. Supreme Court has clarified that, for purposes of the McCarran Act, a boycott requires something more than an agreement among insurers to set prices and a refusal to deal.7 It requires that extra step of coercing others into conformance, or enlisting third-parties to compel the target to capitulate through conduct in a collateral transaction.
In sum, the McCarran Act is a form of reverse “preemption” – if a state takes minimal steps to regulate the business of insurance, then federal antitrust law is largely preempted. In this way, the McCarran Act provides the breathing space that allows insurers to engage in beneficial, collective action without antitrust concerns, including: joint ratemaking through rating organizations; the standardization of insurance forms; agreements based on the joint collection of underwriting information; and the exchange of pricing information among insurers to determine if rates are competitive.8 Notably, this is a measure of protection for collective action among competitors unheard of in most other industries.
The Sherman Antitrust Act of 1890 is enforced by two federal agencies, the Department of Justice and the Federal Trade Commission.9 Aggrieved private parties may also have standing to bring lawsuits and, if successful, recover treble damages, attorney’s fees, and costs.10 Significant violations may also result in criminal penalties, including incarceration for the individuals involved.
Many states, like Florida, have laws that mirror the Sherman Act.11 Importantly, the McCarran Act does not preempt these state laws. While Florida has adopted federal exemptions and immunities,12 some states have not. For example, in a recent Texas case against a large insurance brokerage, the Fifth Circuit Court of Appeal affirmed the dismissal of federal antitrust claims pursuant to the McCarran Act, but reversed and remanded similar claims brought under a Texas antitrust statute.13
Our focus here is the prohibition against agreements that unreasonably restrain trade. Stated differently, there are two essential elements for a Sherman Act “Section 1” violation: (i) an agreement between separate individuals or entities; and (ii) that agreement is unreasonable. 14
An “agreement” is broadly defined by antitrust law. It does not need to be in writing or expressed; rather, an informal understanding or a “knowing wink” can also be an agreement. For example, three competitors are sitting in a hotel bar after a trade association meeting. One says: “I sure hope prices rise tomorrow.” If not a further word is said between them and prices go up the next day, the competitors may be found guilty of an agreement to fix prices despite the absence of a formal or explicit agreement. However, it is important to note that affiliated companies, even if separately incorporated, as well as officers and employees of the same company are typically (not always) considered part of a single entity and, thus, unable to reach such agreements.
Once an agreement exists, the next question is whether that agreement “unreasonably” restrains competition. Certain trade restraints are so injurious to competition that they are deemed to be automatically unreasonable and, thus, illegal per se. 15 There is no defense to a per se violation. Courts will not consider the business justifications, the good motives of the parties involved, or even a lack of market power.
With few exceptions, per se unlawful agreements are those entered into by competitors. Price fixing among competitors is the most familiar, but the prohibition may be broader than you think. Any agreement or understanding between two or more competitors to fix, raise, maintain or stabilize prices, or one that tends to affect a material term of price, is per se unlawful.
As should be clear, in the absence of the protection afforded by the McCarran Act, many collective ratemaking activities traditional in the insurance industry could be deemed per se unlawful, particularly those involving prospective loss costs, setting final/end rates, and rating plans and schedules. Likewise, insurers exchanging information about their current rates would run a serious risk of being found liable, absent immunity. Other types of per se unlawful agreements include agreements to restrict output or allocate customers or territories, group boycotts, and tied selling (e.g., tying two insurance coverages).
All other agreements are subject to a balancing test, referred to as the “rule of reason,” which uses defined markets to weigh the anti-competitive restraints caused by the agreement against its procompetitive benefits.16 If, on balance, the agreement is pro-competitive, the agreement is deemed reasonable and lawful. Under this analysis, courts will consider a number of factors, including the motives of the parties, all reasonable business justifications, and the impact of the agreement in defined product and geographic markets.
A rule or reason analysis is often complicated and uncertain. There is no bright-line test for determining whether a particular agreement is, on balance, pro-competitive. Agreements typically subject to a rule of reason analysis include exclusive dealing, reciprocal dealing, information exchanges, bundled discounts, and joint ventures or pooling arrangements. These types of agreements can involve complicated assessments to determine their legality.
For example, joint underwriting arrangements and joint data collection typically constitute the “business of insurance” exempt from antitrust scrutiny under the McCarran Act. If the exemption is lost, however, a joint venture analysis may apply. Federal guidelines for analyzing collaborations among competitors typically involve complex assessments of market power and then an assessment of market impact.17
In sum, the McCarran Act permits insurers to cooperate in ways that federal antitrust law would prohibit in other industries. Attention should be paid, therefore, to developments in Congress. If the McCarran Act is repealed, carriers will need to update their antitrust compliance policies and practices. In the meantime, an important objective of compliance will remain avoiding activities that result in the loss of immunity.
1 15 U.S.C. §§ 1011 et seq.
2 See Wickard v. Filburn, 317 U.S. 111 (1942) (holding that a farmer growing wheat not for sale, but to feed his own animals, is engaged in interstate commerce subject to federal regulation).
3 See United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944).
4 See Lawyers Title Co. of Mo. v. St. Paul Title Ins. Corp., 526 F.2d 795, 797 (8th Cir. 1975) (“[T] he McCarran Act exemption does not depend on the zeal and efficiency displayed by a state in enforcing its laws. Congress provided that exemption whenever there exists a state statute or regulation capable of being enforced.”).
5 See Florida Insurance Act, chs. 624-632, 634-636, 641-642, 648, 651, Fla. Stat.
6 15 U.S.C § 1013(b).
7 Hartford Fire Ins. Co. v. California, 509 U.S. 704 (1993); see also Slagle v. ITT Hartford, 102 F.3d 494, 498 (11th Cir. 1996) (“Conduct constitutes a ‘boycott’ [for purposes of the McCarran Act] where, in order to coerce a target into certain terms on one transaction, parties refuse to engage in other, unrelated or collateral transactions with the target … unrelated transactions are used as leverage to achieve the desired ends.”).
8 See Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 221 (1979) (describing the protection of cooperative rate-making as the core purpose behind the McCarran Act exemption).
9 15 U.S.C. § 1 et seq.
10 15 U.S.C. § 15.
11 See, e.g., § 542.18, Fla. Stat. (“Every contract, combination, or conspiracy in restraint of trade or commerce in this state is unlawful.”).
12 See § 542.20, Fla. Stat.
13 Sanger Ins. Agency v. Hub Int’l, Ltd., 802 F.3d 732 (5th Cir. 2015).
14 15 U.S.C § 1. The Sherman Act also prohibits monopolization and related violations, which are beyond the scope of this article.
15 See Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990).
16 See Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).
17 U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidelines for Collaborations Among Competitors (April 2000).