ANTI-TRUST LAWS

ANTI-TRUST LAWS
In general

Congress has enacted laws designed to protect business from monopolies, price-fixing andprice discrimination. The principal federal anti-trust laws are the Sherman Act [15 USCA §§ 1-7]and the Clayton Act [15 USCA §§ 12-27].

The Sherman Anti-trust Act was passed in 1890. This Act prohibits interference with freecompetition in interstate production and distribution of goods.

The Clayton Act was passed in 1914 as an amendment to the Sherman Act. The ClaytonAct prohibits price discrimination, tying arrangements, exclusive-dealing contracts, mergers if theeffect is to substantially lesson competition or create a monopoly.

In the decades of the 1970s and 1980s there was extensive litigation between automobilerepair shops and insurers over the meaning and application of the McCarran Act, the ShermanAnti-trust Act and the Clayton Act with the independent repair shops contending that insurer“horizontal agreements” implemented by “vertical arrangements” between insurers and“preferred” or “captive” repair shops fell outside the McCarran Act and were in violation of boththe Sherman and Clayton Acts. The ultimate resolution of the litigation was that the insurancecompanies’ arrangements with “preferred or captive shops” were not in violation of anti-trustlaws.

The McCarran-Ferguson Act

In 1869 the Supreme Court of the United States ruled that the sale of insurance was notcommerce and thus could not be the subject of regulation by Congress under the InterstateCommerce Act of the Federal Constitution. [Paul v. Virginia (1868) 75 U.S. 168] The Paul v.Virginia decision was overruled in 1944 by the decision of U.S. v. South-Eastern UnderwritersAssoc. (1944) 64 S.Ct. 1162. One year after the South-Eastern Underwriters Assoc. decision,Congress enacted the McCarran-Ferguson Act. [15 U.S.C. §§ 1011-1014] In substance, theauthority of Congress to regulate the “business of insurance” was returned to the 50 states. Thisbeing so, the “business of insurance” being the subject of regulation by the 50 states, the federalSherman Act and the federal Clayton Act did not apply to the “business of insurance”. [Proctorv. State Farm (1982 Ct. App. D.C.) 675 F.2d 308, 316-317; Workman v. State Farm (1981 N.D.Cal.) 520 F.Supp. 610]

The questions in the litigation between independent repair shops and insurers becamewhether the “prevailing hourly labor rate” established by insurers implemented by arrangementswith preferred or captive repair shops fit within the description of the “business of insurance” soas to fall within the immunity of the McCarran-Ferguson Act. If so, then the insurers were freefrom control of the Sherman and Clayton Federal Acts.

The courts held that the issue of establishing a “prevailing hourly rate” based upon localsurveys fell within the McCarran-Ferguson Act immunity. [Workman v. State Farm (1981 N.D.Cal.) 520 F.Supp. 610, fn. 7] The rationale was: “The formula for payment of insurance claimsdirectly bears on rate-making, since it determines how much risk is involved and how much riskwill be assumed by the insurer. Thus functionally, the intra-industry agreements here, which areinextricably intertwined with the premium to be charged, so closely resemble actual rate-makingagreements that identical treatment under the McCarran-Ferguson Act is called for.” [520F.Supp. 610, fn. 7] In the English language this meant that the establishment of an hourly ratewas a fact related to the “business of insurance”.

There remained however a second issue to be resolved, that being whether the agreementsbetween the insurer and the preferred or captive repair shops constituted the “business ofinsurance”. The courts concluded that these arrangements were for goods and services outsidethe insurance industry and therefore did not constitute the “business of insurance” under theMcCarran Act. [Proctor v. State Farm (1982 Ct. App. D.C.) 675 F.2d 308, 336] This being so,the courts then had to determine whether the agreements were violative of the federal anti-trustlaws. The courts found that the insurer-preferred repair shop agreements [now known as “DRP”agreements] are not in violation of the federal anti-trust laws.

The case of Proctor v. State Farm, supra, sets forth a meaningful description of reasonscited by the courts, coming to the conclusion of lawfulness. In Proctor v. State Farm, automobilerepair shops brought suit alleging that automobile insurance companies had conspired to fix priceson automobile body repair work in violation of the Sherman Anti-Trust Act. The Proctor caseinvolved ten years of litigation with two appeals before the Federal Appellate Court in the Districtof Columbia. In specifics, the plaintiffs’ claimed that the insurance companies agreed to acommon formula for reimbursing their insureds for the costs of automobile damage repair work.Plaintiffs alleged a horizontal agreement among the insurance companies to pay automobiledamage claims on the basis of an agreed “prevailing” hourly labor rate, thereby artificiallydepressing the price of automobile repair work. The plaintiffs claimed that the insurancecompanies implemented this horizontal agreement by entering into a vertical arrangement with“preferred or captive” [DRP] repair shops that agree to perform repair work at rates prescribedby the insurance companies. In denying relief to the plaintiff repair shops the court stated in part[675 F.2d 308, 338]:

“The [ ] vertical agreements alleged in this case represent the effort of individual[insurance companies] to secure the services of automobile body repair shops at thelowest possible cost and on the terms most advantageous to them. That such agreementsare not anti-competitive in purpose or effect is in accord with the long standing anti-trustprinciple that Section 1 of the Sherman Act does not preclude a party from unilaterallydetermining the parties with whom it will deal and the terms on which it will transactbusiness. [citation] This is true even where, as here, the buyers are big and the sellers arecompetitively small. (citation) [Insurance companies] may well have been able to securevolume discounts and similar advantages from certain repair shops; however, the ShermanAct was not designed to disallow discounts or other preferential treatment for volumecustomers. [fn. 63]

Footnote 63. It may be true that [plaintiff independent shops] had to lower theirrates to the level charged by shops that had entered into agreements with one ormore of the [insurance companies] or face the prospect of losing some of[insurance companies’] business to those shops. [Plaintiff independent shops] havenot alleged, however, that [insurance companies] had any intentions of boycottingnon-preferred-repair shops or that any of the [insurance companies] limited thenumber of “preferred” shops they used. Although [plaintiff independent shops]may have had to lower their rates, this is an injury stemming from competitionamong repair shops to obtain business from automobile insurers. “The anti-trustlaws, however, were enacted for ‘the protection of competition, not competitors.’”Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 97 S.Ct. 690, 697.” (emphasisadded)

The Proctor court pointed out that the evidence established the hourly rate wasdetermined by surveys in the local areas. [Proctor v. State Farm, supra, 675 F.2d 308, 330, fn.47, 335] The Proctor majority opinion stated that it offered no opinion on whether agreementsbetween the insurer and preferred shops would be unlawful if they were used to implementunlawful agreed hourly labor rates implemented by an agreement or a conspiracy in restraint oftrade.

There was a dissenting opinion in Proctor. The dissent contended that the determinationof an hourly rate by survey had nothing to do with the “business of insurance” and thus felloutside the immunity of the McCarran-Ferguson Act. Therefore the federal Sherman/Clayton Actapplied. Additionally, the dissent referred to the volumes of documents submitted by theindependent repair shop attorneys showing meetings between the several insurance companieswhere discussions about agreements were discussed and stated that there was presented to thecourt sufficient evidence to allow the matter to be presented to a jury. [Proctor v. State Farm,supra, 675 F.2d 308, 339-345] Petition to the US Supreme Court for review by the independentrepair shop was denied.

Allegations of anti-trust in Workman v. State Farm (1981 N.D. Cal.) 520 F.Supp. 610 outlinedThe following allegations were made in the above case. The court granted summaryjudgment in favor of State Farm. The allegations contained a description of State Farm’s claimsprocedures which were described as follows:

a. The policy holder report a damaged vehicle to State Farm Claims Center.
b. State Farm told policy holder to bring vehicle to a claims center for appraisal.[Court notes some insurers did not use claim centers]
c. Adjuster prepared an estimate.
d. Policy holder took car to a repair shop of his choice.
e. If the selected shop price was higher than the insurer estimate the insurer couldnegotiate but some insurers would not negotiate.
f. If no agreement was reached, the policy holder was free to have the car repaired atthe selected shop but would be paid benefits only up to the amount set forth in theinsurer’s estimate. The insured would have to pay the difference. [520 F.Supp.610, 613]
g. The insurer would refer the insured to a preferred shop if the policy holder had nopreference. The preferred shop would perform the work for the estimated price.
h. The preferred shop was under agreement to use a prevailing hourly rateimplemented by arrangements with an agreement with the insurance company.[Proctor v. State Farm (1982 Ct. App. D.C.) 675 F.2d 308, 311] The hourly ratewas determined from surveys. [Proctor, supra, at pages 30, fn. 47, 35] See DIRECT REPAIR PROGRAM.
i. The preferred or captive shop would receive assurances that the insurer wouldrefer business to them.

In addition to the above, while there were allegations of (1) shoddy work being performedat a preferred or captive shop as well as allegations of (2) threats to remove vehicles from theindependent repair shop unless plaintiff yielded to price reductions [520 F.Supp. 610, 623] onlyone example of each was introduced into evidence. The courts noted that individual actions fallshort of concerted activity needed to establish violation of anti-trust laws. [Workman v. StateFarm, supra, 520 F.Supp. 610, 623]

Introduction

Upon commencing reading from various sources of information which included reviewing statutes and legislative history, multiple industry peridicals, business newspapers, insurance industry periodicals, I became acquainted with an industry heavily regulated by statutes, regulations, enforced through a state agency, coupled with monumental financial and legal issues being imposed by the industry's relationship with insurers acting through adjusters.

There existed numerous suggestions concerning improved business operations by auto body repair shops in the literature. Voluminous theories and recommendations are described on multiple sites located on the internet.

After reviewing the contents of many writings, publications and internet materials, it became clear to me that one common factor existed. That common factor was and is a lack of uniform legal definitions of important terms and industry concepts. It appeared clear to me that a legal definitional foundation could be created allowing repair shops to understand its relationship with the insurance industry and its customer. With regards to the Bureau of Automotive Repair, by understanding the reasons for auto body repair legislation coupled with knowledge of BAR regulations, auto body repair shops could develop positive relationships with the BAR and minimize the tension existing between the regulator and the industry.

It is with this background that I prepared a DICTIONARY for the AUTO BODY REPAIR INDUSTRY.

The Auto Body Repair Law Dictionary can serve as an effective vehicle for understanding and communication of legal concepts amongst members of the industry and their counsel. It can serve as a basis for future drafting by the industry of proposed regulations and legislation, should that be deemed desirable. Knowledge of legal principals pertaining to the industry can assist in better understanding of the independent auto body repair shop's relationship to its customer and to the insurer's adjuster, which understanding should enhance the economic position of the repair shop vis-a-vis the insurer.

The text places an emphasis upon California statutes and insurance commissioner regulations.