Gilchrist v. State Farm Mutual Automobile Insurance

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 03-10799 November 18, 2004
________________________ THOMAS K. KAHN
CLERK
D.C. Docket No. 00-00066-CV-1-MMP

LINDA GILCHRIST, on behalf of themselves
and all others similarly situated,
JOANNE ZIPPERER, JACKIE VALENTINE,
Plaintiffs-Appellees,
versus

STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY, an Illinois corporation,
ALLSTATE INSURANCE COMPANY, an
Illinois corporation,
NATIONWIDE MUTUAL FIRE INSURANCE
COMPANY, an Ohio corporation,
GOVERNMENT EMPLOYEES INSURANCE
COMPANY, a Maryland corporation,
Defendants-Appellants.
________________________

Appeals from the United States District Court
for the Northern District of Florida
_________________________

(November 18, 2004)

Before TJOFLAT and HILL, Circuit Judges, and MILLS*, District Judge.

*
Honorable Richard Mills, United States District Judge for the Central District of
Illinois, sitting by designation.
HILL, Circuit Judge:

This is an appeal under Rule 23(f), Fed. R. Civ. P., from the district court’s

order certifying a national class of approximately 70 million automobile insurance

policyholders. Plaintiffs’ complaint seeks treble damages under the federal

antitrust laws for alleged premium overcharges. For the following reasons, we

have determined that we have no jurisdiction in this matter and shall dismiss the

appeal.

I.

Linda Gilchrist, Joanne Zipperer and Jackie Valentine (referred to

collectively as “Gilchrist”) filed this action seeking to represent a group of

individual policy holders who purchased automobile insurance from various

insurance companies, including State Farm, Allstate, Nationwide, and GEICO

(“Insurers”). Gilchrist alleges that defendants conspired in violation of federal

antitrust laws to limit insurance coverage for certain external auto body repairs to

the cost of less expensive parts not made by an original equipment manufacturer

(“OEM”).

Insurers moved to dismiss the complaint on the basis that the McCarran-

Ferguson Act, 15 U.S.C. § 1012 (1999), (the “Act”) bars plaintiffs’ claim because

it concerns the “business of insurance,” which, under the Act, is not subject to the

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federal antitrust laws. In November of 2000, the district court denied the motion,

holding that the Act does not bar Gilchrist’s claim because her claim merely

challenges the way in which the Insurers perform their policies, which is not the

“business of insurance.”

Gilchrist then moved for class certification and the district court held an

evidentiary hearing. In November of 2002, the court certified a class consisting of

some 70 million of Insurers’ policyholders.1 Pursuant to Rule 23(f), Fed. R. Civ.

P., Insurers petitioned for leave to appeal this order, which we granted.

After oral argument of this appeal, we became concerned that McCarran-

Ferguson might indeed exclude Gilchrist’s claim from federal antitrust

jurisdiction. Since we are powerless to enter a judgment in a matter over which

we have no jurisdiction, University of South Alabama v. American Tobacco Co.,

168 F.3d 405, 409-10 (11th Cir. 1999), we are required, even sua sponte, to initiate

an inquiry into our subject-matter jurisdiction whenever we become concerned

that it may not exist. Arthur v. Haley, 248 F.3d 1302, 1303 n.1 (11th Cir. 2001);

Rembert v. Apfel, 213 F.3d 1331, 1333-34 (11th Cir. 2000). Accordingly, we

1
The district court certified the following class: “All persons who paid premiums
directly to State Farm Mutual Automobile Insurance Co. and affiliates (“State Farm”), Allstate
Insurance Co. and affiliates (“Allstate”), Nationwide Mutual Fire Insurance Co. and affiliates
(“Nationwide”) and Government Employees Insurance Corp. and affiliates (“GEICO), for
automobile collision, comprehensive, or property damage insurance at any time between April
18, 1996 and the present.”

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notified the parties that they could file additional authority on this issue and that

we would resolve it prior to any decision on the merits of the appeal. It is to this

issue we now turn.

II.

In 1945, Congress passed the McCarran-Ferguson Act to allow insurers to

share information relating to risk underwriting and loss experience without

exposure to federal antitrust liability and to preserve for the states the power to

regulate the insurance industry. 15 U.S.C. §§ 1012-1013(1999); Union Labor Life

Ins. Co. v. Pireno, 458 U.S. 119, 133 (1982). The Act expressly exempts insurer

activities from the reach of the Sherman Act when three elements are met: (1) the

challenged activity is part of the “business of insurance”; (2) the challenged

activity is regulated by state law; and (3) the challenged activity does not

constitute a boycott of unrelated transactions. Uniforce Temporary Personnel,

Inc. v. National Council on Compensation Ins., Inc., 87 F.3d 1296, 1299 (11th Cir.

1996).2 If the Act applies to Gilchrist’s claim, we have no jurisdiction over it.

2
The Act provides:

The business of insurance, and every person engaged therein, shall be subject to
the laws of the several States which relate to the regulation or taxation of such
business.

[T]he Sherman Act . . . shall be applicable to the business of insurance to the
extent that such business is not regulated by State law.

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A. The Business of Insurance

Gilchrist argues that the Act does not apply to her claim, relying on two

Supreme Court cases holding that, while the Act exempts the business of

insurance, it does not exempt the business of insurers. Group Life & Health Ins.

Co. v. Royal Drug Co., 440 U.S. 205 (1979); Pireno, 458 U.S. at 129. She

contends that her claim implicates the latter, rather than the former. She

characterizes her claim as an attack on Insurers’ cost-cutting arrangements with

third parties, which, she alleges, require the use of non-OEM parts in the repair of

its policyholders’ vehicles. This practice, she argues, is “a means of using cheaper

repair parts to satisfy the insurer’s existing policy obligations.” (Response to

Motion to Dismiss, p. 20). Furthermore, Gilchrist claims that Insurers created and

financed the Certified Auto Parts Association (“CAPA”) to promote inferior crash

parts as acceptable substitutes for OEM parts, thereby advancing the

anticompetitive conspiracy. Finally, she contends that Insurers have benefitted

from the conspiracy by reducing their repair costs and raising their profits above

what they would experience in a competitive market. In sum, Gilchrist contends

that she is attacking the way in which Insurers conduct their business.

15 U.S.C. § 1012 (emphases added).

5
 Insurers, on the other hand, characterize Gilchrist’s claim as an attack on

both their rate-making and the performance of their insurance contracts – activities

at the heart of the business of insurance.

III.

An activity is part of the business of insurance if it has “the effect of

transferring or spreading a policyholder’s risk,” is “an integral part of the policy

relationship between the insurer and the insured,” and is limited to entities within

the insurance industry. Pireno, 458 U.S. at 129. Under this test, the Supreme

Court has held conclusively that both rate-making and the performance of an

insurance contract – including the adjustment of claims – constitute the business

of insurance. Royal Drug, 440 U.S. at 224 (“the fixing of insurance rates is the

‘business of insurance’”); United States Dept. of Treasury v. Fabe, 508 U.S. 491,

503 (1993) (“There can be no doubt that the actual performance of an insurance

contract falls within the “business of insurance” as we understood that phrase in

Pireno and Royal Drug”) (citing Pireno, 458 U.S. at 134 n.8) .

Rate-making, of course, is the paradigmatic example of the conduct that

Congress intended to protect by the McCarran-Ferguson Act. Royal Drug, 440

U.S. at 221 (“Because of the widespread view that it is very difficult to underwrite

risks in an informed and responsible way without intra-industry cooperation, the

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primary concern of both representatives of the insurance industry and the

Congress was the cooperative ratemaking efforts be exempt from the antitrust

laws”). Similarly, the Court has rejected the argument that performance of

Insurers’ contractual duties does not constitute the business of insurance. Fabe,

508 U.S. at 503. The Court reasoned:

Without performance of the terms of the insurance policy, there is no
risk transfer at all. Moreover, performance of an insurance contract
also satisfies the remaining prongs of the Pireno test: It is central to
the policy relationship between insurer and insured and is confined
entirely to entities within the insurance industry.

Id. at 504.3

Rate-making and the performance of contractual obligations are

fundamental to the business of insurance because they focus on the relationship

between the insurance company and its policyholders. The Supreme Court has

made clear that:

[t]he relationship between insurer and insured, the type of policy
which could be issued, its reliability, interpretation, and enforcement
– these were the core of the “business of insurance.”

3
The district court appears to have concluded that Insurers’ actions regarding OEM parts
was not part of the business of insurance because these actions were not part of the decision
“whether or not to enter into contracts with the potential insured,” but rather involved “the
fulfillment of that contract once it was entered into . . . .” Fabe makes clear that this was error.
508 U.S. at 503-04. See also Blackfeet Nat’l Bank v. Nelson, 171 F.3d 1237, 1246 n.13 (11th Cir.
1999) (Congress did not intend meaning of “business of insurance” to vary within the statutory
sections).

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SEC v. National Securities, Inc., 393 U.S. 453, 460 (1969).

Thus the real question in this case is which party has more accurately

characterized Gilchrist’s claim. Are Insurers correct that the claim is clearly about

rate-making and performance of the insurance contract? Or does Gilchrist

correctly describe her claim as attacking a conspiracy, entirely outside the rate-

making process, in which Insurers agreed to avoid OEM parts and worked with

third parties to disseminate false information about such parts in order to exclude

competition from other insurers who would have provided OEM-quality repair

policies?

In order to answer this question, we must eschew the parties’

characterizations of the claim and examine the allegations of the complaint.

The Complaint makes the following allegations:

¶ 4. Defendants have conspired among themselves, and with
unnamed co-conspirators, to agree to provide their
policyholders wherever possible inferior, imitation crash
parts (which do not restore their damaged vehicles to
their original, pre-loss condition, and are not of like kind
and quality as parts originally provided by automobile
manufacturers).

¶ 5. The effect of the conspiracy has been to raise and
maintain insurance prices or premiums paid by policy
holders above competitive levels for the actual repairs
provided using inferior or imitation crash parts, and to

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 reduce the quality of repair service to the Class herein
alleged.

¶ 32. [Insurers] have agreed to provide and promote inferior,
imitation crash parts for the restoration of the
automobiles of the Plaintiffs and other member of the
Class.

¶ 33. Defendants have pursued this course of conduct despite their
contractual obligation to restore insured vehicles to their pre-
loss condition and to use parts of like kind and quality as those
originally employed by automobile manufacturers.

¶ 43. Defendants’ conspiracy to reduce their repair costs and increase
their profits by agreeing to provide inferior, imitation crash
parts to class members, and to misrepresent the quality of their
crash parts, have (sic) caused class members to pay insurance
prices or premiums above competitive levels for the actual
quality of repair provided by the Defendants using inferior
crash parts.

¶ 46. Defendants and unnamed co-conspirators have conspired and
combined with the effect of raising and maintaining prices, that
is, premiums, for automobile insurance paid by Plaintiffs and
other Class members above the competitive levels that would
have prevailed for the actual vehicle repair provided using
inferior, imitation parts.

These allegations clearly attack both Insurers’ premium-setting and the

performance of their contractual obligations to their policyholders. Gilchrist’s

claim that Insurers used “inferior, imitation crash parts” in the repair of their

policyholders’ vehicles “despite their contractual obligation to restore insured

vehicles to their pre-loss condition and to use parts of like kind and quality” is an

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attack on how Insurers perform their contractual obligations to their policyholders.

Her claim that “[t]he effect of the conspiracy has been to raise and maintain

insurance prices or premiums paid by policy holders above competitive levels for

the actual repairs provided” is an indirect allegation of price-fixing and, therefore,

a direct attack on the integrity of Insurers’ rate-making.4

We have previously rejected attempts to avoid McCarran-Ferguson by

plaintiffs who creatively disguised what was fundamentally an attack on insurance

premiums by masking it with a barrage of antitrust verbiage. Uniforce, 87 F.3d at

1300. In Uniforce, just as here, the plaintiff characterized its claim as attacking

“the manipulation of the cost of workers compensation insurance” resulting in the

imposition of unreasonable premiums. Id.5 We said there, “[s]imply put,

Uniforce’s antitrust claims center on the appellees’ rate-making activity.” Id. at

1299. Similarly, in Slagle v. ITT Hartford, 102 F.3d 494, 498 (11th Cir. 1996), we

held that allegations of premium stabilization through horizontal market allocation

of the windstorm insurance market was, in reality, an attack on insurance rate-

making. Id. In both these cases, we rejected plaintiffs’ attempts to disguise what

4
It is an attack, as well, on the state regulatory process that supervises the rate-making
process.
5
Gilchrist challenges the manipulation of the cost of automobile insurance by the use of
non-OEM parts resulting in the imposition of unreasonable premiums.

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were basically attacks on premiums and rate-making by alleging conspiracies to

stabilize or inflate profits. We do so again here.6

The heart of Gilchrist’s complaint is that Insurers have lowered the quality

and cost of repairs by specifying the use of non-OEM parts and not passing along

the savings to their policyholders through reduced premiums. Despite Gilchrist’s

protestation that this claim “does not involve the contract with the insured,” it is

precisely that contract that is at issue. Her claim goes to the heart of “the

relationship between insurer and insured” and attacks the “reliability,

interpretation, and enforcement” of the insurance policy itself. National

Securities, 393 U.S. at 460.

This focus can be illustrated by comparison to the claims in Royal Drug and

Pireno. The plaintiff in Royal Drug was not a policyholder, but a pharmacy that

challenged the cost-cutting agreements insurers had made with other pharmacists

about reimbursement for prescription drug coverage. The Supreme Court

reasoned that such side agreements with third parties are ancillary to the insurance

6
The district court distinguished both Slagle and Uniforce as cases involving the
formation of an insurance contract – the business of insurance – as opposed to the performance
of the contract – the business of insurers – as in Royal Drug and Pireno. The court concluded
that Royal Drug and Pireno stand for the proposition that the requisite transference of the risk
aspect of the contract is only present in its formation, not its performance. As we have seen
above, the Supreme Court has rejected this interpretation of Royal Drug and Pireno. Fabe, 508
U.S. at 503 (“[W]e do not read Pireno to suggest that the business of insurance is confined
entirely to the writing of insurance contracts, as opposed to their performance”).

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contract because “‘Blue Shield’s policyholders are basically unconcerned with the

contract between the insurer and the Participating Pharmacy.’” 440 U.S. at 214 n.

11 (quoting Royal Drug Co., Inc. v. Group Life & Health Ins. Co., 556 F.2d 1375,

1381 (5th Cir. 1977)). Cost-cutting side agreements do not affect the “relationship

between insurer and insured,” and, thus, are not the business of insurance.

In Pireno, plaintiffs were chiropractors who challenged a peer review

process used to decide whether chiropractic charges were necessary and

reasonable. The plaintiffs sought damages for amounts paid for chiropractic

services, not premiums charged to policy holders. As in Royal Drug, the

challenged practice was a “matter of indifference” to the policyholders. 458 U.S.

at 132.

Gilchrist attempts to bring her claim within the rule of Royal Drug and

Pireno by casting it as an attack on the cost-cutting arrangements of Insurers

regarding OEM parts. The problem with this interpretation, however, is that

Gilchrist does not specify any third party agreements, or even third parties.7 Nor is

7
Gilchrist’s allegations regarding CAPA’s activities do not assert that Insurers have
entered into ancillary cost-cutting side agreements with it that are not the business of insurance.
Rather, she alleges that Insurers and CAPA have conspired to misrepresent the quality of non-
OEM parts in order to sell policies permitting the specification of non-OEM parts. “An
insurance company’s methods of inducing people to become policyholders pertain to the
company-policyholder relationship and thus constitute an integral part of ‘the business of
insurance.’” Dexter v. Equitable Life Assur. Soc. of United States, 527 F.2d 233, 235 (2d Cir.
1975). See also Ocean State Physicians Health Plan, Inc. v. Blue Cross & Shield, 883 F.2d

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Gilchrist, herself, a third party (as were the plaintiffs in Royal Drug and Pireno)

challenging ancillary reimbursement arrangements with other third parties.

On the contrary, Gilchrist is a policyholder whose claim is that Insurers

have charged excessive premiums for inferior repair work on her automobile. She

alleges that Insurers have failed to perform their obligation under the insurance

policies to provide repair parts of a “like kind and quality.” Unlike an ancillary

cost-cutting agreement, a claim that an insurer has not performed its obligations

under its contract with an insured goes to the heart of their relationship. As the

Court observed in Royal Drug:

The fallacy of the petitioners’ position is that they confuse the
obligations of Blue Shield under its insurance policies . . . and the
agreements between Blue Shield and the participating pharmacies,
which serve only to minimize the costs Blue Shield incurs in fulfilling
its underwriting obligations. The benefit promised to Blue Shield
policyholders is that their premiums will cover the cost of
prescription drugs except for a $2 charge for each prescription. So
long as that promise is kept, policyholders are basically unconcerned
with arrangements made between Blue Shield and participating
pharmacies.

Id. at 213-14 (emphasis added).

1101, 1108 n.7 (1st Cir. 1989) (McCarran-Ferguson immunity “would be thin indeed if it were
deemed to cover the content of policies, but not the marketing . . . activities which necessarily
accompany [them]”).

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 Just as was the filling of prescriptions in Royal Drug, the repair of the

insured’s automobile, and the way in which it is repaired, are the obligation of

Insurers under their policies of insurance. Both are the business of insurance. The

benefit promised to Insurers’ policyholders is that their automobiles will be

repaired with parts of like kind and quality. So long as that insurance promise is

kept, policyholders are basically unconcerned with any business arrangements

Insurers make with third parties. Gilchrist’s complaint is that this promise has not

been kept, and this is an attack on the business of insurance.

B. Regulated by State Law

The State of Florida8 heavily regulates the insurance industry. Slagle, 102

F.3d at 497-98 (“[T]he conduct is also regulated by the State of Florida.” Fla. Stat.

§ 627.062 (1993)); Uniforce, 87 F.3d at 1299 n. 3.

Furthermore, the use of OEM parts is also regulated by the various states.9

State regulators have recognized the issues surrounding the use of non-OEM parts

and have enacted rules designed to regulate their use. Some states approve

specification of non-OEM parts with vehicle-owner consent or appropriate

8
The named plaintiffs purchased their automobile insurance policies in the State of
Florida.
9
The complaint alleges that Insurers require non-OEM parts “when possible.” This very
qualification indicates the problem with Gilchrist’s claim, because it is state regulation of the use
of these parts that requires this qualification.

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disclosure on the repair estimate. At least one jurisdiction requires insurers to

consider using non-OEM parts in specified situations. Mass Regs. Code tit. 211, §

133.04 (2003). We conclude that both the insurance industry in general and the

use of non-OEM parts in particular are regulated by the states.

Since Gilchrist’s claim is aimed at the business of insurance, and the

challenged activity is regulated by the state, it is barred by McCarran-Ferguson

unless it also constitutes an illegal boycott under the Sherman Act.

C. The Boycott Exception

The McCarran-Ferguson Act provides in pertinent part:

Nothing contained in this chapter shall render the said Sherman Act
inapplicable to any agreement to boycott, coerce, or intimidate, or act
of boycott, coercion, or intimidation.

15 U.S.C. § 1013(b). Even though Gilchrist’s claim attacks practices that are the

business of insurance and regulated by state law, if these practices constitute a

prohibited boycott, then they are not exempted from our jurisdiction. Uniforce, 87

F.3d at 1300.

For purposes of the McCarran-Ferguson Act, the Supreme Court defines a

“boycott” as the refusal to deal in a collateral transaction as a means to coerce

terms respecting a primary transaction. Hartford Fire Ins. v. California, 509 U.S.

15
764, 801-05 (1993). “It is the refusal to deal beyond the targeted transaction that

gives the great coercive force to a commercial boycott.” Id.

Gilchrist does not allege that Insurers refused to deal with her in a collateral

transaction in order to coerce the terms of her insurance contract. On the contrary,

her complaint alleges the following boycott:

¶ 53. Defendants and unnamed co-conspirators have conspired and
combined to refuse to deal with parts manufacturers selling
crash parts of like kind and quality as those originally provided
by automobile manufacturers, and capable of restoring class
members’ vehicles to pre-loss condition. . . . Defendants have
also conspired and combined to boycott Plaintiffs and Class
members by agreeing to withhold from them crash parts of like
kind and quality as originally provided by automobile
manufacturers.

The boycott she alleges concerns the primary transaction itself – the refusal

to provide OEM parts in the repair of policyholders’ vehicles. The alleged boycott

involves the very same refusal to deal – with OEM parts, either by buying them

from their manufacturers or by providing them to plaintiffs in the repair of their

vehicles. Consequently, we conclude that the allegations of the complaint are

insufficient to state a cognizable antitrust boycott claim as they do not allege a

“refusal to deal in a collateral transaction as a means to coerce terms respecting a

primary transaction. Id.

IV.

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 As Gilchrist’s claim attacks rate-making and the performance of the

insurance contract, both the business of insurance, and does not allege a

cognizable antitrust boycott, the McCarran-Ferguson Act removes her claim from

our jurisdiction. Accordingly, we shall dismiss this appeal and remand this case to

the district court with instructions to dismiss the action.

APPEAL DISMISSED, and case REMANDED to the district court with

instructions to dismiss.

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