Friday, October 31, 2008

Guest Essay: Professor S. Beth Farmer on Competition Law

My colleague, Professor S. Beth Farmer, has recently written an excellent and provocative essay on competition law. Professor Farmer has graciously permitted me to post the essay here. She will present this essay at an important competition law conference, the Korean Competition Law Association--International Conference, held in Seoul, Republic of Korea November 7, 2008.

The essay is copyright S. Beth Farmer. All rights, including moral rights, reserved to the holder thereof. Please contact Professor Farmer for permissions to reproduce other than as otherwise permitted by law.

References in the essay are to end notes that follow the text of the essay below.

Professor Farmer may be contacted via e-mail at

The McCarran-Ferguson Exemption from the United States Antitrust Laws Recent Developments
Susan Beth Farmer
Professor of Law Pennsylvania State University
Dickinson Law School1


The McCarran-Ferguson Act provides a limited exemption from the American federal antitrust laws. It is a complex and controversial doctrine that seeks to chart an appropriate balance between competition and the need of firms in the insurance industry to share information that may be competitively sensitive yet allow the firms to provide better services to their customers. Effective antitrust enforcement and information exchanges among competitors may, depending on the circumstances, promote consumer welfare. Consumer welfare is generally recognized as the touchstone and dominant goal of competition laws and enforcement.

Additionally, the analysis contemplated by the statutory scheme directly implicates the allocation of competence between the federal and state governments. Thus, the allocation of power and deference is at the center of this doctrine and issues of federalism predominate. This facet of the American political system is relevant for other jurisdiction whethersimilar antitrust exemptions are necessary in their circumstances.

Therefore, in analyzing the McCarran-Ferguson Act, this paper starts from the perspective that the competitive process usually promotes consumer welfare in the form of increased output and lower prices, allocative efficiency and may serve distributive goals. Regulation is appropriate to deal with market failures, true natural monopolies or to advance social welfare. Antitrust “exemptions should be made only where ‘compelling evidence of the unworkability of competition or a clearly paramount social purpose’ exists, and any exemptions should use the ‘least anti-competitive method of achieving the regulatory objective.’”2 This paper will discuss recent developments in McCarran Ferguson law and policy in four areas:

First, there has been considerable debate among the antitrust bar, the insurance industry, enforcement agencies and consumer representatives on the merits and potential competitive risks of the McCarran exemption. The American Bar Association has long proposed a compromise position to replace the existing exemption, but this proposal, too, has never been adopted. The Antitrust Modernization Commission held extensive hearings on all aspects of substantive antitrust doctrine and enforcement, including exemptions and antitrust immunity, and issued a report warning against excessive exemptions, but not recommending specific reform or repeal of the McCarran-Ferguson Act. The National Association of Attorneys General also opposes industry-specific legislation that would weaken antitrust enforcement, and therefore supports a complete repeal of the McCarran Ferguson exemption for the insurance industry. National consumer groups join in recommending total repeal, while the insurance industry supports a strong exemption. Finally, some have approached the federalism question directly and urge repeal of McCarran and substitution of federal, not state, regulation of the insurance industry and ultimate pre-emption of federal antitrust laws in deference of a national regulatory scheme.

Secondly, Congressional hearings have contributed to the debate. Several bills have been introduced and various committees have held periodic hearings, but no legislation has been adopted by the United States Congress. The general trend of proposed legislation began with recommendations to modifythe scope of the immunity, then moved towards complete repeal of the exemption and now include some calls for repeal and permissive federalization of insurance regulation.

Third, there have been few recent Supreme Court cases but many, and conflicting cases from lower federal and state courts. The overall effect of these cases has been to complicate the already complex state of the law. To the extent that the McCarran-Ferguson was designed to clarify the balance of state and federal power to regulate and to set a clear substantive standard, the project has failed.

Fourth, antitrust immunity is generally discouraged by international policy groups including the International Competition Network and OECD. However, a version of the American immunity covering information exchanges among firms in the insurance industry is currently the subject of a block exemption of the European Commission., which is due to sunset in 2010 unless extended. As part of its oversight responsibilities, the European Commission enforcement agency, DG Comp, conducted a sector inquiry into the insurance sector and opened a public consultation into the need for the block exemption. DG Comp concluded, as a preliminary matter, that claims for the block exemption are unpersuasive, and is inclined to allow the block exemption to expire and rely on the general competition rules to protect necessary and pro-competitive activities in the business of insurance.

Thus, the future of American McCarran-Ferguson Act and review of similar exemptions by other jurisdictions implicates important issues of substantive antitrust law and policy, legislative priorities, federalism concerns, and international harmonization.

The Debate and Commentary: Pro and Anti-Competitive Effects3

The McCarran-Ferguson Act provides an absolute exemption from the federal antitrust liability for activities that meet three conditions: (1) the conduct must be the “business of insurance,” (2) it must be “regulated” by State law, and (3) it must not “consist of boycott, coercion or intimidation.”4 In an act of reverse preemption, the McCarran-Ferguson Act also provides that State laws regulating the business of insurance preempt any other federal law unless it (that federal law) relates specifically to the business of insurance.

As Prof. Bauer has described, the McCarran-Ferguson Act was a direct response by Congress to a decision of the United States Supreme Court explicitly holding that the insurance industry and its various activities were conducted in interstate commerce and therefore affirmatively subject to the prohibitions of federal antitrust law.5 Thus, the McCarran-Ferguson constitutes an important alteration of the shape of American antitrust law, which has been identified as the “Magna Carta of free enterprise”6 and dedicated to protecting competition and the competitive process over the individual competitors.

American antitrust analysis has evolved since the McCarran exemption was thought to be necessaryto protect the insurance industryand permit it to serve its customers without fear of overzealous antitrust enforcement. By the time McCarran was adopted in 1945, the Supreme Court had created per se rules against horizontal price fixing, market allocation, boycotts, vertical resale price maintenance, and tying arrangements. Interference with market prices was a particular concern and “price fixing” was defined broadly to include uniform prices, maximum or minimum prices, and market manipulation. “Prices are fixed because they are agreed upon,” said the Supreme Court in the Socony-Vacuum case, and a conspiracy “formedfor the purpose ... of raising, depressing, fixing, pegging, or stabilizing the price ... is illegal per se.”7

Agreements among competitors to merely exchange information were also risky, depending on the kind of information, the participants and the use of the data. Sharing information may literally constitute price fixing, it may facilitate price fixing, or it may be necessary to create a new product and satisfy consumer demand. The important issue in each situation is whether there was an agreement, express or implied, to restrain trade. Direct exchanges of current or future prices between competitors themselves is most competitively risky, especially in concentrated industries, and Supreme Court opinions suggested that such exchanges could be per se illegal. Since the insurance sector relies on data collection and dissemination, standard setting and other joint activities, potential antitrust challenges were perceived as a threat to the industry.

The shock to the insurance industry finding itself subject to these rigid antitrust standards by the operation of Constitutional jurisprudence must have been extreme. As discussed above, the business of insurance had a long relationship with state regulatory systems and a felt need to share statistics and data as part of standard business practice. This customary business practice was abruptly called into question by the South-Eastern Underwriters case, and the obvious solution would have been to return to prior practice by granting an antitrust exemption and leaving State regulation in place.

Modern antitrust analysis has developed since the original enunciation of strict per se rules in cases involving horizontal agreements. This evolution began when the Supreme Court refused to per se condemn a technical horizontal price fixing agreement that efficiently created a new product demanded by consumers.8 While per se condemnation remains appropriate for naked cartel behavior, the modern analysis is based more on actual competitive effects of an agreement than rigid categories. This standard was perhaps best expressed by Justice Breyer, concurring in the California Dental case, as follows: “(1) What is the specific restraint at issue? (2) What are its likely anticompetitive effects? (3) Are there offsetting procompetitive justifications? (4) Do the parties have sufficient market power to make a difference?”9

Modern understandingof the risks and benefits of data dissemination has also evolved since the early cases. Specific facts about the particular information and circumstances of the exchange are highly relevant: it is less competitively sensitive if a third party collects and disseminates the data, it contains historical rather than current or future prices, it is aggregated rather than identified by firm, and there is a legitimate procompetitive purpose for the exchange.10 Modern antitrust interpretation is clear: the exchange of information is not a per se violation of the antitrust laws in itself and all of the facts should be evaluated under the rule of reason.11

At the end of the day, then, modern antitrust analysis has largely evolved to the point where most of the procompetitive data collection and standard-setting of the business of insurance would be justified under the modern rule of reason. Effective State regulation that mandated and actively supervised other, potentially problematic behavior, would be protected by the State Action doctrine. The issue for legislators and interest groups is whether or not a special exemption for the business of insurance remains necessary.

Antitrust and economic commentators have largely concluded that market competition tends to produce better economic and social outcomes than regulation by any level of government. Congress has the raw power to limit the federal antitrust laws by adopting exemptions and granting immunity in particular cases, to particular industries, or based on general principles. However, since immunities and antitrust exemptions permit firms to conspire unchecked by antitrust enforcement and in the face of ineffective regulation, they should be adopted only when necessary. Congress should examine the evidence proving that an exemption is necessary and then determine whether, on balance, the exemption will protect consumer welfare and threaten less harm than competition and antitrust enforcement against illegal activities. If Congress concludes that a particular industry or market is not amenable to competition, then the traditional solution is regulation. When regulation is necessary to deal with market failures or natural monopolies, it should be efficient, effective, and carried out by the appropriate level of government.

The views of State antitrust enforcers, consumer protection groups, insurer representatives, the American Bar Association and the Antitrust Modernization Commission (AMC) on the continued need for the McCarran-Ferguson exemption appear to diverge. The States and consumer groups support repeal of the exemption, the ABA recommends a new federal law protecting safe harbors, and the AMC generally disapproves of industry-specific exemptions. However,all of their policy positions converge on key points:

* competition in the form of effective antitrust enforcement has been critical to the success of the American market economy;

* Congress may displace market competition by creating antitrust exemptions and immunities but should do so only when convinced that the market cannot not work and regulation is the best ways to achieve consumer welfare goals, but regulation is a second best solution;

* Congress has the authority under the Commerce Clause to preempt State regulation and should exercise that power after consideration of issues of federalism;

* special antitrust exemptions for specific industries are disfavored and should only be granted when necessary, should be limited, and should interfere with competition as little as possible;

* sharing of certain data, standard setting and development of standard forms, forming joint
underwriting associations and other cooperative behavior may be important for the business of insurance and in the public interest. It is subject to the antitrust rule or reason;

* antitrust analysis should consider the likely procompetitive benefits and anticompetitive risks in appraising cooperative behavior in the insurance industry, and predictability and certainty are a relevant considerations.

Federal Legislative Developments

Although antitrust exemptions have generally been criticized, there has been no consensus strong enough to repeal or significantly modify the McCarran-Ferguson Act in the 63 years since its adoption. Efforts to clarify the scope of the immunity began in the 1990s, and ultimately involved multilateral negotiations including some segments of the insurance industry and national consumer protection groups. The goal was modest, neither total repeal nor strengthening of the immunity provisions. The draft legislation that emerged from the multi-party negotiations, H.R. 9, would have substituted a list of safe harbors for the poorly defined McCarran-Ferguson exemption. It was opposed by other segments of the insurance industry, notably small firms, that were concerned that the safe harbors were insufficient protection and put small firms at a disadvantage compared to large companies. The House Judiciary Committee passed and favorably reported the bill, but no further action was taken and the bill failed to pass.12

More than a decade later, safe harbor bills modeled after H.R. 9 and a variety of other approaches to deal with competitive problems in the insurance industryhave been introduced in the House and Senate. Several of these recent initiatives have been broader, proposing respectively, complete repeal of the antitrust exemption or repeal and substitution of federal regulation. The antitrust repealer is found in a pair of bills introduced in 2007 and sent to the Senate and House Judiciary Committees for consideration. Senate Bill 681 and H.R. 1081 would completely repeal the antitrust exemption but retain the reverse preemption language of Congressional deference to State laws that regulate the business of insurance. These bills would leave the insurance industry in the same position as other American industries withrespect to antitrust enforcement: the antitrust laws do not preempt state law. States may protect private firms from antitrust liability under the State Action Doctrine if the State affirmatively expresses the will to do so and actively supervises the activity.

Senate bill S. 1525, provides limited immunity for medical malpractice insurance but not if the firms engaged in bid rigging, price fixing or market allocation, which are among the most serious kinds of anticompetitive conspiracies.13 Another modified repeal bill, the Insurance Competitive Pricing Act of 2005, H.R. 2401, would maintain an exemption from the federal antitrust laws for activities in the business of insurance regulated by State law except for price fixing, market allocation, tying arrangements, or monopolization. These new exclusions from the exemption are much broader than the current McCarran exclusion for boycott, coercion and intimidation, which remains in the proposed bills. The list of non-exempt activities nearly swallows the exemption, apparently covering every antitrust violation except, possibly, non-price vertical restraints and mergers, so the bill amounts to a repeal or the exemption. Senate bill 2401 additionally carves out three safe harbors; areas in which covered insurers may engage in collective action and be exempt from antitrust enforcement. The safe harbors resemble the ABA list of recommended information sharing practices: collecting and distributing historical loss data, making loss development factors based on historical data, performing actuarial services that do not restrain trade. Agreement on trend factors is specifically excluded from otherwise permitted information exchange and data manipulation.14

Finally, S. 2509 is makes the most radical and far-reaching changes to the current regulatory situation. This approach would take back insurance regulation from the States, offer an optional national regulatory system, and eliminate federal antitrust immunity.15 This approach is premised on the view that the modern insurance industry is truly interstate (if not global) in nature and therefore continued State regulation is inefficient and ineffective. The co-sponsors, writing in the Wall Street Journal on Sept. 23, 2008, warned that “[l]etting this 19th-century regulatory model govern a 21st-century global marketplace” is dangerously fragmented and risky for insurance consumers, shareholders and the financial system itself. Citing the recent failure of AIG, the Senators and Representatives who co-sponsored S. 2509 and a companion House bill, warn that individual State regulators cannot competently oversee firms that cross State and national borders. For example, AIG had 209 subsidiaries, but only12 were within the jurisdiction of New York state regulators. New York’s power was too weak to reach the entire company, it failed, and the failure of AIG resulted in an $85 billion federal bailout.16 The bills would permit, but not require, insurers to vacate their State charters and be re-chartered as a National Insurer, National Agency or “federally licensed insurance producer.” These new national entities would be subject to uniform federal regulation in the form of a Commission of National Insurance, more completely defined in the proposed legislation. All State regulation, including “licensing, examination, reporting, regulation, or other supervision relating to the sale, solicitation, or negotiation of insurance, to the underwriting of insurance, or to any other insurance operations” would be eliminated. As a consequence of ending State oversight, the national entities would lose their antitrust exemption under the McCarran Ferguson Act except for an important safe harbor. The new exemption would protect:

the development, dissemination, or use of standard insurance policy forms (including standard endorsements, addendums, and policy language), or to activities incidental thereto, by National Insurers, National Agencies, and federally licensed insurance producers.17
The Senate Judiciary Committee held a hearing on S. 2401 and the more limited S. 1525, and heard testimony from half a dozen representatives from a variety of interest groups. Not surprisingly, representatives from American Insurance Association, Insurance Services Office, and National Association of Insurance Commissioners opposed repeal of the McCarran-Ferguson immunity and described the necessity for legal certainty, benefits of information exchange and value of state regulation. A representative of the American Bar Association recommended repeal of the exemption and substitution of a set of safe harbors in accord with the longstanding ABA policy. Finally, a representative of a State antitrust enforcement bureau, the New York Attorney General’s Office, and the insurance specialist of the Consumer Federation of America recommended complete repeal of the McCarran-Ferguson Act and reliance, if necessary, on the state action doctrine to protect legitimate activities in the insurance industry.18

Efforts to repeal or modifythe McCarran-Ferguson antitrust exemption have been sporadic and ineffective in the 63 years since its adoption. However, the modest flurry of recent activity, including Committee hearings, suggests that federal legislation may again move to the fore. The fear of expansive antitrust interpretation that motivated the original exemption should be lessened by three developments. First, modern antitrust law treats most information exchanges and procompetitive horizontal agreements under the rule of reason so it should not chill necessary coordinated activity; second, private acts done pursuant to an affirmatively expressed and actively supervised State program of regulation is protected bythe State Action doctrine ; and third, the Noerr Pennington doctrine exempts acts of government petitioning. Finally, the ongoing financial crisis may encourage Congress to review the balance of federal and state authority in the business of insurance. Congress may, under the Commerce Clause, choose to preempt any State activity in a field and the evolution of the business of insurance from a local to an international industry may persuade Congress that the balance should be realigned in the federal favor.

Judicial Developments

The text of the McCarran-Ferguson Act establishes two different exemptions from federal regulation: section 2(a) and the first clause of section 2(b) deals with both classic and reverse preemption, while the second clause of 2(b), following “Provided,” is a classic preemption provision dealing only with antitrust law. This latter provision is the antitrust immunity provision. These sections are related and use common terms and concepts (“business of insurance, “regulated by the State”) but arise in different legal contexts. The first, or classic and reverse preemption, issue is the subject of the vast majority of modern cases, while the antitrust immunity provision arises relatively less frequently. To the extent that American courts disagree as to the proper interpretation of the common concepts, the result will be confusion in the meaning of both.

Under the Supremacy Clause of Article VI of the Constitution, Congress has the power to enact federal laws that override and preempt State statutes. Such preemption may be express, by explicit language in a federal statute, or implied, where the State and federal statutory schemes conflict irreconcilably.19 In addition, Congress may create a comprehensive system of federal regulation that completely occupies the field and ousts State law and regulation. These comprehensive federal regulatory schemes preempt the States from legislating in the field, even if particular State laws do not conflict with federal law or policy.20 It has long been recognized, however, that federal antitrust laws were not intended to preempt State antitrust laws, nor does federal antitrust regulation pervasively occupy the field and exclude State antitrust activity.21 Indeed, several State antitrust laws preceded the federal legislation, and members of the 1890 Congress that passed the Sherman Act envisioned the federal antitrust law as a supplement to State antitrust enforcement.

The McCarran-Ferguson Act first declares a “reverse preemption” rule, providing that States have the power to legislate and regulate in the field of insurance and, that, as a general matter, federal statutes will not preempt State laws that regulate the “business of insurance.” However, reaffirming classic preemption standards, the McCarran Act then provides that a federal statute which “specifically relates to the business of insurance” does preempt the State law on the same subject. The overall effect of this section grants States wide discretion to regulate the insurance sector unless specifically trumped by federal law concerning the sector. Congress chose not to legislate to the full extent of its commerce power over the business of insurance, but rather to defer to States in their regulatory role, with the option of preemption by specificf ederal statute in the insurance field. This section of the McCarran Act does not address the applicability of federal antitrust law to the insurance industry. First, the Sherman, Clayton and Federal Trade Commission Acts do not “specifically” relate to insurance or any other industry. Moreover, the Supreme Court has long held that the federal antitrust laws were not intended to, and do not, preempt state law.

Recent cases on the McCarran-Ferguson Act fall into two categories: first, as introduced by Prof. Bauer, many claim immunity from the federal antitrust laws under section 2(b) of the McCarran Act. Second, the majority of recent cases involve claims of “reverse preemption,” in which parties attempt to use the McCarran Act to have other, non-antitrust federal law claims dismissed in favor of State law.

The antitrust immunity found in the second clause of section 2(b), which effectively operates as preemption and a clawback provision: the federal antitrust laws are applicable to the business of insurance only to the extent that the business of insurance is not regulated by the states. Thus, Congress may specifically regulate insurance, and preempt state laws governing the insurance sector. If, however, the States are regulating the business of insurance, the federal antitrust laws are reverse preempted by State regulation. The antitrust exemption legislates in the negative, providing that the insurance sector is subject to federal antitrust law only if the State has chosen not to regulate. This exemption also contains a savings clause: though the Act grants an antitrust exemption, that exemption does not cover substantive antitrust violations of boycott, coercion or intimidation.

In short, Congress may choose to federalize the field and regulate the insurance industry in whole or in part. If Congress acts in such a manner, it must do so “specifically.” Congressional power to do so is clear: Congress has the authority under the Commerce Clause to legislate. Interpretation of the Commerce Clause has evolved significantly during the 20th century and that realignment of federal and State power led directly to enactment of the McCarran-Ferguson Act. Originally construed narrowly by the Supreme Court, even insurance was held not to constitute commerce, therefore States were free to legislate on the business of insurance unhampered by federal preemption.22 By the time of the South-Eastern Underwriters case in 1944, the definition of “commerce” was expanding, and it finally reached its apex in cases finding the Civil Rights Act of 1964 constitutional as a proper exercise of Congressional power under the Commerce Clause,23 before being restricted again in the 1990s.24 Even modern Constitutional jurisprudence would, however, recognize that the business of insurance is an activity in commerce and subject to federal regulation.

The McCarran-Ferguson Act anticipated this development and reserved for the federal government the power to oust state regulation of insurance entirely. If Congress did so, State regulation would be preempted and the antitrust exemption would evaporate (the business of insurance is exempt from the antitrust laws only “to the extent that such business is ... regulated by State law.”

The Act is not a model of clarity and uses the term of art “the business of insurance” three times and “such business” twice in section 2, and refers to State “regulation” twice, but fails to define these crucial terms. Therefore, it is left to the courts to define, explain the reach and limits of a convoluted statute, and seek to follow the Congressional will in allocating state and federal power.

The “business of insurance” has been litigated both in reverse preemption and the antitrust immunity contexts. In the antitrust immunity context, the term is interpreted broadly. Courts continue to employ the three-part Royal Drugand Pireno tests to define“business of insurance,” but recent cases have not added additional analytic content to the statement of the factors.25 Therefore, lower courts must determine, on a case-by-case basis, whether or not challenged activity constitutes the business of insurance, considering whether (1) the activity involves underwriting or spreading of risk, (2) it involved a relationship between the insurer and policy holder, and (3) the activity involves entities within the insurance industry. (3) whether the conduct is limited to activities between entities within the insurance industry. Writing standard form contracts and agreements, as well as refusals to deal except on those contracts is “the business of insurance.” Dealings with joint underwriting organizations, whether referral or concerted refusals not serve outside the JUA, constitute the business of insurance. Workers’ compensation rating organizations, health maintenance organizations and health-maintenance look-alike programs are all entities in the business of insurance. On the other hand, arranging third party services has been held not to be the business of insurance. Federal courts have held that the “business of insurance” includes rate setting, marketing and pricing, but not steering, bid rigging or bank-issued debt cancellation contracts.

The extent of the “business of insurance” also arises in non-antitrust reverse preemption cases. In this context, the defendants typicallyargue that the federal regulation does not relate to the business of insurance, so should be preempted in favor of state law. State anti-arbitral provisions have been used to reverse preempt a federal arbitration act in one federal court but an international arbitration treaty did not in others.26 Continued confusion or conflict among the courts in defining the “business of insurance” reduces certainty and predictability, and could adversely affect procompetitive information sharing and other joint activities in the insurance sector.

Federal laws may regulate the business of insurance unless they “invalidate, impair, or supersede” State laws in the sector. If the federal law has that prohibited effect, then the state laws regulating the business of insurance reverse preempt federal non-antitrust law. The United States Supreme Court recently defined the standard for “interference” with a two-part test: (1) there must be a direct conflict between federal and State law and (2) the federal law must frustrate or interfere with the State policy or administration.27 The Supreme Court permitted RICO claims against insurance companies because there is no direct conflict and the federal remedy does not impair the State remedial scheme.28 Lower federal courts have held applied this standard to hold that a federal prosecution of an insurance executive for health care fraud was not reverse preempted by Oklahoma’s insurance regulations because there were no direct conflicts between State and federal criminal laws, and federal banking laws permitted banks to sell insurance though State laws prohibited such sales29 The Humana standard gives Congress more power to interfere with State insurance regulation and limits the reverse preemption effect. This relatively robust standard could bleed into the antitrust immunity section of McCarran and require State regulation to be active and substantive in order to protect the insurance sector from federal antitrust liability.

Comparative Competition Law: the Status of Specific Immunity for the Insurance Sector

The European Union, now comprising 27 Member States, was founded as a European Community, creating a common market, by the Treaty of Rome in 1957. Competition policy was recognized in the founding documents as central to the success of the European project and the antitrust provisions, Articles 81 and 82, have been interpreted generally consistently with the American antitrust laws. Although some commentators dispute whether it is a true federal system, the EU maintains similar allocation of power between the central and national state governments, each with respective areas of competence. Competition law enforcement had originally been the province of the Commission, which had exclusive authority to investigate and enforce the competition articles of the Treaty, promote liberalization of regulated industries and enforce the Treaty articles limiting State Aid. The Directorate General for Competition of the European Commission (DG Comp) reformed its enforcement system in 2003, and now authorizes national enforcement agencies to enforce, and national courts to apply, the EU competition articles as well as national antitrust laws.30 DG Comp is also responsible for investigating economic sectors to determine their competitive strength and granting block exemptions under the competition statutes. The structure of Article 81, concerning agreements, resembles an American rule of reason analysis (with some important European characteristics). First, the Commission must determine under Article 81(1) whether the agreement is “caught” or covered by the prohibitions of the statute, and then whether the agreement is exempt under Article 81(3) because the competitive benefits outweigh the threatened harms.

There was never any serious question whether the European competition laws apply fully to the business of insurance. The Commission stated in its Second Report on Competition Policy, 1972, that the insurance sector was covered by the full range of EU antitrust laws and rejected objections that the industry was not suited to competition and would devolve into destructive competition leading to failures and insolvency. The critical prerequisite for application of Article 81 is that the agreement affect trade between EU member states, so European courts never considered whether “the business of insurance” operates “in commerce” or whether the Commission had competence to enforce in the sector. The answer is clearly in the affirmative.

However, as discussed above, the business of insurance has certain characteristics that require special consideration in antitrust analysis. Recognizing these special needs, the Commission granted two individual exemptions in 1990, to permit insurance industry cooperation and then granted a block exemption for the entire industry in 1992. That exemption expired in 2003, and was replaced with another block exemption that will expire in 2010, ifnot renewed. The McCarran-Ferguson Act, by comparison, does not have an expiration date and was adopted by the national legislature rather than the federal antitrust enforcement agencies, the Department of Justice and Federal Trade Commission.

The current block exemption for insurance (BER) followed a Commission determination that cooperation among insurers is necessary to share data, calculate costs, agree on coverage and standardize forms, and that these agreements are likely to benefit consumers and competition. In contrast to the general grant of immunity under the McCarran Act, the European BER protects six specific kinds of agreements. These protected agreements include joint calculation of average costs for specific risks, cooperation in studying the potential impact of external conditions on future claims, joint creation of optional standardized of policy forms, joint data collection and distribution of profitability models, voluntary insurance and reinsurance groups, and various technical specifications.31 The BER specifies detailed conditions that must be met for firms to be protected under the exemption and explicitly excludes other categories of agreements from the exemption.

As part of the BER sunset provision, the Commission is required to report by March 2009, to the European Parliament and Council on the operation of the block exemption and make recommendations for future re-enactment, amendment or elimination. The Commission has opened an official consultation process, soliciting views and recommendations of interest groups most likely to be affected, including consumer organizations, national antitrust agencies, stakeholders and industry representatives. In announcing the consultative process, the Commission warned that “Sector specific block exemption regulations [such as the BER for the insurance sector] are exceptionally used legal instruments and the question arises as to whether there remain sufficient grounds to justify block exempting certain types of agreements in the insurance sector.”32 DG Comp Commissioner Neelie Kroes affirmed that “If there are to be special rules for a particular sector, I need to be convinced that they are justified in terms of bringing real benefits to competition and to consumers.”33

The block exemption consultation process is ongoing. The Commission is also charged with the duty to investigate underperforming economic sectors to determine whether antitrust violations are occurring. As part of that process, the Commission opened a wide-ranging investigation into the business insurance sector, issued an interim report in January 2007, and a final report in September 2007. The Commission recognized that the industry, including primary and reinsurers, is critical to EU businesses and accounts for some 375 billion Euros in premiums annually. Among the areas of concern were the co-insurance and reinsurance sectors generally. In addition, “best terms and conditions” clauses were flagged as a potential issue because such clauses and practices could tend to raise and stabilize premium prices. The final report criticizes a variety of practices but does not identify any as specifically illegal under EU competition law. Instead, the report concludes by warning members of the insurance sector that it will continue to monitor competition and invites firms to consult further about the value of the practices.34 Notably, however, the Sector Report highlights the sector block exemption and warns that “Insurers should be prepared ... for the possibility that the BER might not be renewed.”

Even without the block exemption, concerted industry practices, data exchanges, production of optional standardized forms, and other agreements among insurers would not necessarily violate the European antitrust laws. In this respect, the European law is comparable to the American law: agreements that are procompetitive and appropriately limited would likely be legal under modern rule of reason analysis even if they are not protected by broad antitrust immunity. The Commission underlined the risk of leaving an unnecessary and overbroad exemption in place: “There is a risk that the BER inadvertently exempts some restrictive conduct. For example, this may be the case in certain markets for security devices, which are artificially closed to competition by collective non recognition of these devices by insurers. .... Common standards aid switching between insurers, but at the same time there is a potential for abuse. This is the problem with form-based exemptions such as the BER, and explains why there should be as much scope as possible for an effects-based approach consistent with the need for leg certainty.”35

The European approach to a broad, sector-specific exemption from the antitrust laws is consistent with the modern approach and benchmarks of international organizations. The International Competition Network is a virtual organization of the more than 90 national competition authorities and enforcement agencies worldwide. This organization is a forum for competition advocacy, organizes training programs for new agencies, and works to promulgate consensus on substantive and procedural antitrust issues. The ICN is less than a decade old and has focused its early work on antitrust issues that are most important and likely to gain broad agreement. However, the interface between competition and regulation was addressed at the third annual meeting, held in Seoul in 2004, and the ICN Regulated Sectors Working Group produced reports on competition in a variety of regulated sectors. The Working Group acknowledged the potentially productive role of regulated industries in market economies, but recommended that regulation be limited to situations of market failure because “regulation and antitrust enforcement pursue different aims and affect different aspects of business conduct.” In addition, the Report points out that “the solution to ‘exempt’ regulated sectors from the application of antitrust rules has been progressively abandoned in most countries as a result of technical progress allowing competition in natural monopoly environments.”36 The business of insurance is probably not such a “natural monopoly.” Technical progress in evaluating data should make the sector function more efficiently, to the benefit of consumers, but it has not yet created new products or business forms to compete in the sector. Therefore, regulation and some form of antitrust immunity to make the regulation work in these sectors is more justifiable. The ICN generally favors effective antitrust enforcement to increase consumer welfare, supplemented by regulation as appropriate to deal with market failure.

The Organization for Economic Cooperation and Development (OECD) has provides sophisticated analysis and recommendations on competition laws of individual states and on broad policy issues. A 1998 Policy Roundtable on competition and the insurance industry surveyed the state of law and regulatory issues in OECD countries and made some relevant recommendations for more effective competition policies. The majority of countries reported that their antitrust laws applied without exemption to the insurance sector, but that special characteristics and requirements of the insurance industryware considered in evaluating particular cases. Overall, experts concluded, any restrictive industry practices must improve the market and benefit consumers. In particular, information sharing and agreements on co-insurance and reinsurance were generally considered efficient and legitimate, depending on the circumstances of each agreement.

The OECD found that the majority of jurisdictions with “modern antitrust laws” analyzed agreements in the insurance sector on a case-by-case basis under the rule of reason. The Report noted that “Countries with older competition laws tend to have older, overly-broad legislative exemptions for the insurance sector. Reform in such countries will involve replacing these broad exemptions with targeted, case-by-case approach on the same basis as occurs in other industries.”37


The most serious issue surrounding McCarran and other legislative grants of antitrust immunity is that such laws may act as a “one way rachet,” in the Supreme Court’s colorful phrase, expanding but not limiting the scope of the exemption.38 McCarran has been criticized from all sides since its adoption more than 60 years ago. Consumer agencies and State Attorneys General argue for total repeal, the Antitrust Modernization Commission deplores antitrust exemptions generally and recommends limited use, the American Bar Association urges replacement with amore limited exemption tailored to modern antitrust learning. Representatives of the insurance argue the necessity for various some joint activities and a broad immunity protecting their collective action. There is real force to these claims, but McCarran’s generous immunitymaybe overbroad and not necessary to achieve those pro-competitive benefits. Nevertheless, once embedded in the law, exemptions are difficult to remove despite criticism of the immunity, confusion among the courts, and proffers of compromise. Congress has not demonstrated serious commitment to McCarran reform and only gave limited attention to the issue until a recent flurry of proposed legislation. The draft legislation varies widely and includes efforts to narrow the immunity, to repeal it altogether and, in one creative new approach to preempt State authority over the industry and impose optional federal regulation. It is too soon to predict whether any of these proposals for reform will be adopted, but the testimony of various stakeholders at the single hearing was sharply divided despite important developments in antitrust analysis that protect core cooperative activity under the rule of reason.

Legal, financial, economic and social issues invariably interrelate, as Mr. Cuneo points out. The business of insurance is not alone in facing economic challenges, but it has been particularly affected. This crisis was anticipated by and motivated Senator Sununu to propose legislation that would both repeal the McCarran antitrust exemption and affirmatively preempt State regulation of the business of insurance for those global firms that choose a national regulatory system. Such a dramatic change to the current legal and regulatory landscape is a provocative response and deserves serious discussion. It should not be underestimated as merely changing the scope of antitrust law or tinkering with exemptions. Preemption of a historic State-regulated field, even if partial, would alter longstanding pattern of State regulation over an important economic sector and would challenge the allocation of power and deference between the States and federal roles. American stakeholders (the ABA, State Attorneys General, consumer groups, insurance organizations and firms) and international organizations have made important contributions to the McCarran antitrust immunity discussion. At the end of the day, however, some consensus can be found: antitrust laws are a consumer welfare prescription; antitrust exemptions should be narrowly construed and adopted when necessary to remedy market failures; and data dissemination and other agreements in the business of insurance are likely pro-competitive when analyzed under the rule of reason. The future of an insurance block exemption in Europe is uncertain, but in the absence of more consensus on a particular option, the one way rachet describes the status of antitrust immunity in American antitrust law - once an exemption has been granted and embedded in the law, it is likely to remain.


1.J.D. Vanderbilt University School of Law, B.A. Wellesley College. I am grateful to Taylor Nuttal for excellent research assistance on this project.
2.Report and Recommendations of the Antitrust Modernization Commission, Chapter IVB at 336 (2007) quoting the National Commission for the Review of Antitrust Laws and Procedures, Report to the President and the Attorney General, at 177 (1979).
3.The official policy positions of the American Bar Association and national Association of Attorneys General, and the recommendations of the Antitrust Modernization Commission, are included as a separate attachment.
4.15 U.S.C. §1011-1015. The Act provides:
§2(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance; Provided, That after June 30, 1948, .... the Sherman Act, ... the Clayton Act, and ... the Federal Trade Commission Act, ... shall be applicable to the business of insurance to the extent that such business is not regulated by State law.
§3(b) Nothing contained in this Act shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.
5.United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944).
6.United States v. Topco Assoc., 405 U.S. 596, 610 (1972).
7.United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).
8.Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1 (1979).
9.California Dental Ass’n v. FTC, 526 U.S. 756 (1999) (Justice Breyer, concurring in part and dissenting in part).
10.See generally, United States v. United States Gypsum Co., 438 U.S. 422 (1978); United States v. Container Corp., 393 U.S. 333 (1969); Maple Flooring Ass’n v. United States, 268 U.S. 563 (1925).
11.See, United States v. Citizens & Southern Nat’l Bank, 422 U.S. 86 (1975).
12.Craig A. Barrington, Congress, Once Again, Debates Insurers’ Antitrust Exemption Under McCarran-Ferguson Act, Washington Legal Foundation (May 25, 2007).
13.Medical Malpractice Insurance Antitrust Act of 2005, S. 1525 (Sens. Patrick Leahy, Barbara Boxer, Richard Durbin, Russell Feingold, Edward Kennedy, Barbara Mikulski, Barack Obama, John Rockefeller, Ken Salazar, sponsors).
14.H.R. 2401, 109th Cong., 1st Sess. (2005). 15.S. 2509, 110th Cong. (2006).
16.John Sununu, Tim Johnson, Melissa Bean, Ed Royce, Insurance Companies Need a Federal Regulator, Wall St. Journal Sept. 23, 2008 (Opinion, on line edition).
17.S. 2509 § 1702, Application of the Federal Antitrust Laws to National Insurers, National Agencies, and Federally Licensed Insurance Producers, 110th Cong. (2006).
18.The McCarran-Ferguson Act: Implications of Repealing the Insurer’s Antitrust Exemption on S 1525 and S. 2509 before the Senate Judiciary Committee, 109th Cong., 2nd Sess. (2006).
19.Shaw v. Delta Airlines, 463 U.S. 85 (1983) (express preemption); McDermott v. Wisconsin, 228 U.S. 115 (1915) (implied preemption).
20.Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947).
21.Rice v. Norman Williams Co., 458 U.S. 654 (1982).
22.Paul v. Virginia, 175 U.S. 168 (1868).
23.Heart of Atlanta Motel v. United States, 379 U.S. 241 (1964); Katzenbach v. McClung, 379 U.S. 294 (1964).
24.United States v. Lopez, 514 U.S. 549 (1995).
25.Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205 (1979); Union Labor Life Ins. Co. v. Pireno, 458 U.. 119 (1982).
26.Goshawk Dedicated v. Portsmouth Settlement Co I, 466 F. Supp.2d 1293 (N.D. Ga. 2006); but see, Safety Nat’l Casualty Corp. v. Certain Underwriters at Lloyd’s, London, No. 06-30262 (5th Cir. Sept. 29, 2008); Certain Underwriters at Lloyd’s London v. Simon, 2007 WL 3047128 (S.D. Ind. 2007).
27.Humana, Inc. v. Forsyth, 525 U.S. 299 (2007).
28.Humana Inc. V. Forsyth, 525 U.S. 299 (2007)(civil RICO claims). 29.United States v. Redcorn, 528 F.3d 727 (10th Cir. 1008).
30.Regulation 1/2003, O.J. 2003 L 1/1 (effective May 1, 2004).
31.Commission Regulation (EC) No 358/2003 (Feb. 27, 2003).
32.Financial Services - Insurance overview,
33.Antitrust: Commission examines use of Insurance Block Exemption Regulation, IP/08/596 (April 17, 2008). The specific issues of interest to the Commission include: 1) whether and in what circumstances the block exemption is used, 2) whether there are industry-specific conditions in the insurance industry that make it different from other sectors that do not have individual block exemptions, 3) whether the block exemption creates any anticompetitive effects, and 4) whether eliminating the block exemption would make the industry more difficult to supervise or impose a burden on antitrust enforcers.
34.Competition: Final Report of the Sector Inquiry, Memo/07/382 (Sept. 25, 2007); IP/07/1390 (Sept. 25, 2007).
35.Competition: Final Report of the Sector Inquiry, Memo/07/382 (Sept. 25, 2007).
36.ICN, Antitrust Enforcement in Regulated ectors Working Group, Report to the Third ICN Annual Conference, Seoul at 3 (April 2004).
37.Organization for Economic Cooperation and Development; Directorate for Financial, Fiscal and Enterprise Affairs; Committee on Competition and Policy, Competition and Related Regulation Issues in the Insurance Industry 10-11 (Dec. 14, 1998).
38.This term comes from Katzenbach v. Morgan, 384 U.S. 641 (1966), a Voting Rights Act case holding that Congress had the power under §5 of the 14th Amendment to halt New York City’s use of a state literacy test. The Court stated that Congress had wide discretion to carry out the rights guaranteed by the Amendment. Footnote 10 clarified the reach of Congressional authority, stating that Congress had the power to expand rights but not decrease them, the so-called “one way rachet.”

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