Since the insurance industry, agents, and regulators may have to function within an antitrust environment even more in the future, a basic understanding of the antitrust laws is essential to understanding the regulation of insurance.

The legislative framework of federal antitrust law consists of four statutes, the Sherman, Clayton, Robinson-Pateman, and Federal Trade Commis-sion Acts. However, since the legal standards contained in these laws are couched in very broad language, judicial interpretation in the context of a multitude of fact situations give antitrust its real substance and content.

The Clayton Act prohibits certain types of conduct such as tying, exclusive dealing arrangements, interlocking directorates, and mergers which may substantially lessen competition or tend to create a monopoly. The Robinson-Pateman Act, an amendment to the Clayton Act, focuses on unfair price discrimination. Since these two acts, to a significant extent, relate to commodities, much contained therein may not be directly applicable to insurance. However, those provisions relating to acquisitions and mergers and interlocking boards are quite relevant.

The Federal Trade Commission Act prohibits unfair methods of competition and unfair or deceptive practices. The Supreme Court has made clear that those activities which violate the Sherman and/or Clayton Acts also violate the Federal Trade Commission Act. Consequently, this Act is both an unfair trade practice and an antitrust law. Further, it establishes the Federal Trade Commission as a major antitrust enforcement agency along with the Department of Justice.

The Sherman Act is the oldest of the federal antitrust acts and is the heart of the antitrust law. Sec. 1 provides that "[e]very contract, combination . . . or conspiracy, in restraint of trade . . . is . . . illegal." There are two major elements in a Sec. 1 offense. First, there must be either explicit or implicit action in concert. Unilateral action is not proscribed. Second, the challenged conduct must be a "restraint of trade." However, the Supreme Court has ruled that only "unreasonable" restraints violate Sec. 1.

The Supreme Court has adopted two alternative approaches in determining whether certain activity constitutes an unreasonable restraint of trade. Pursuant to the rule of reason approach, the Court closely looks at the impact of the challenged conduct to determine whether it promotes or suppresses competition. If the latter, the conduct constitutes an unreasonable restraint of trade violating Sec. 1. The rule of reason approach involves four steps: identifying the challenged conduct, ascertaining its underlying purpose, evaluating its probable effects and, on balance, determining whether the restriction substantially lessens competition.

Alternatively, when confronted with certain types of restraints which are plainly anticompetitive and lacking any redeeming virtues, the Court will find that such restraints are per se unreasonable. That is, the Court presumes such conduct to be an illegal unreasonable restraint without undertaking the time-consuming and expensive rule of reason analysis. In the past, types of conduct giving rise to per se treatment have included price fixing, division of markets, some boycotts, and some tying arrangements.

In short, a Sec. 1 violation of the Sherman Act requires action in concert (unilateral action will not suffice) which is an unreasonable restraint of trade with the reasonableness of the restraint determined under either the rule of reason or the per se approach.

In the context of the insurance business, less attention has been focused upon Sec. 2 of the Sherman Act, which treats various types of activity relating to monopolization. Monopoly power has been defined as "the power to control market prices or exclude competition." Under antitrust, the meaning of monopoly has not been confined to the pure (one firm seller) monopoly, but rather embraces those firms which are dominant in the market—that is, possessing a high degree of monopoly power. Monopoly is defined in terms of a product market and a geographic market. If the court finds that the relevant market in a given insurance situation is a line of insurance in a given state (a not unlikely result), there may be several markets around the country which are highly concentrated (that is, a few sellers writing a high percentage of the business). Such circumstances give rise to potential antitrust offenses or at least allegations of monopolization. Thus Sec. 2 assume a potentially greater role in the insurance arena than some might realize.

Sec. 2 specifically prohibits monopolization, an attempt to monopolize, and a conspiracy to monopolize. A violation can arise from a unilateral act as well as from actions in concert. The offense of monopolization requires the presence of two elements: (1) the possession of monopoly power in the relevant market and (2) a requisite intent, or the willful acquisition or maintenance of monopoly power as distinguished from growth or development resulting from superior product, business acumen, or historic accident. The combination of monopoly power and predatory pricing (that is, prices set below costs to drive competitors out of the market) provides a likely candidate as a Sec. 2 offense.

An attempt to monopolize requires (1) a specific intent to monopolize, control prices or destroy competition, (2) predatory or anticompetitive conduct directed at achieving the unlawful purpose, and (3) a dangerous probability of success.

A conspiracy to monopolize requires (1) a specific intent to monopolize, (2) concerted action with the intent to achieve a monopoly, and (3) a commission of at least one overt act in the furtherance of the conspiracy.

Those violating the antitrust laws may be subject to criminal or civil actions brought by either the Department of Justice or the FTC as well as damage actions brought by private parties. The responsibility for enforcing the antitrust laws is allocated between the Department of Justice, the Federal Trade Commission, and private litigants. The nature of enforcement can be classified into three general areas: (1) criminal cases, (2) mergers, and (3) all else. Criminal enforcement has traditionally been reserved to the Department of Justice. Both the Department of Justice and the FTC share enforcement responsibilities with respect to mergers. Antitrust merger enforcement consumes the major portion of the FTC antitrust resources. Furthermore, since the Department of Justice utilizes roughly 75 percent of its antitrust resources for criminal and merger actions, it has been necessary for both the Department and the Commission to apply the remainder of their resources to the "all else" noncriminal, nonmerger antitrust situations. In addition, there are private parties who bring civil antitrust actions which further augment antitrust enforcement activity.

The government may bring civil action for injunctive relief to prevent and restrain violations of both the Sherman and the Clayton Acts. The FTC possesses exclusive authority to enforce Sec. 5 of the FTC Act. The FTC functions through administrative hearings and, if it finds a violation, it can issue cease and desist orders. It can also seek injunctive relief and civil penalties for violating cease and desist orders.

In addition, conduct violating the Sherman Act can be subject to criminal actions. In cases involving corporate defendants, violations are punishable by fines, whereas individuals, including corporate officers, can be fined and/or imprisoned.

Private parties can bring actions under the Sherman and Clayton Acts, but not under the FTC Act. A private party may recover treble damages if "injured in his business or property by reason of anything forbidden in the antitrust laws. . ." The potential for very costly treble damage recoveries, especially in class action litigation, affords a major deterrent against conduct violating the antitrust laws.

In the context of insurance, the state action doctrine might provide antitrust immunity in addition to whatever immunity is available under the McCarran Act. Or if the McCarran antitrust exemption were repealed, the state action doctrine might provide a degree of protection in lieu thereof.

The state action doctrine was first announced in 1943 by the United States Supreme Court in Parker v. Brown. The Court presumed that in our dual federal-state system of government, Congress did not intend the Sherman Act to nullify a state’s control over its officials. However, the Sherman Act prohibits private action, not state action. The state action doctrine simply states that "state action" is not subject to the Sherman Act.

The crucial issue is what constitutes state action and, more specifically, to what extent does action of private parties, such as insurers or agents, taken within the framework of state legislative policy and regulatory enforcement thereof constitute state action? In 1980, in California Retail Liquor Dealer’s Association v. Midcal Aluminum Co., the Court adopted a two-prong test in determining whether challenged activity of a private party constitutes state action so as to be exempt from the federal antitrust laws.

The first prong is that the challenged conduct must be a restraint on competition which is "clearly articulated and affirmatively expressed as state policy." A state policy that permits, even though it does not compel, anticompetitive conduct can qualify as state action so long as the state clearly articulates its intent to adopt a permissive policy. The state policy has to be an expression of the legislature or supreme court, not simply that of an agency or municipality acting on its own. State intent to displace competition can be inferred from the relevant legislation or regulatory structure.

The second prong of the state action test is whether the articulated state policy to displace competition is actively supervised by the state. For example, simply authorizing private parties to collectively make rates will not give rise to state action if the state fails to actively regulate such conduct. In the recent case of Federal Trade Commission v. Ticor, the Supreme Court made clear that passive acceptance of private action is not enough.

The Ticor case involved alleged horizontal price fixing among title insurers through a state-licensed rating bureau establishing fees for title searches and examinations. Although not directly related to underwriting risks, the rates had to be filed with the insurance commissioner and would become effective unless disapproved. Since the FTC had ruled that the activities in question did not constitute the doing of the business of insurance, the McCarran Act defense was unavailable. Thus the title insurers defended against the FTC ruling that such practice constituted an unfair method of competition under the FTC Act on the basis of the state action doctrine. Under the Midcal two part test, the FTC conceded that the state had articulated a clear and affirmative policy to allow the anticompetitive conduct, but challenged whether the state met the second test requiring active state supervision of such conduct.

In finding that the state action doctrine did not apply, the Supreme Court said that

The state must play "a substantial role in determining the specifics of the economic policy." That is,

Determination of whether the state did so is a factual question. (In this case the regulator failed to fully examine the filed rates and did not follow up in a timely way.) Whereas as lower courts had defined "active supervision" in terms of whether the state established, staffed, funded, and empowered a regulatory program, the Supreme Court may now be saying that it will evaluate the effectiveness of the state regulatory scheme in applying the state action doctrine. Certainly the mere pretext of state supervision is not enough.

While Ticor is an antitrust decision involving the state action doctrine, will it also herald a tightening of the "regulated by state law" standard under the McCarran Act?

Although the state action and the McCarran Act antitrust immunities overlap, they are not the same. The formulations of the basic principles governing the scope of the two exemptions (articulated state policy vis-à-vis what constitutes doing the business of insurance) and the regulation requirement (active supervision vis-à-vis regulated by State law) are different. The application of different principles to the same fact situations often yield different results. Thus the availability of the McCarran Act exemption might afford antitrust immunity in situations where the state action doctrine would not and vice versa. The availability of both maximizes the protection available.

However, there is a significant body of advocates of total or partial repeal of the McCarran antitrust exemption. This, they argue, would compel insurers to fully compete. At the same time, state regulation can continue to regulate where appropriate under the state action doctrine. But reliance on the state action doctrine raises more questions.

In the context of insurance regulation, if antitrust immunity depended solely upon the state action doctrine, very troublesome problems would be posed for state insurance regulation. Essentially, the doctrine requires that regulation must displace competition, that state policy to displace competition must be clearly articulated, and there must be ongoing active supervision. If states must meet these strictures in order to achieve insurance regulatory objectives, they are limited to anticompetitive approaches in doing so.

For example, commencing in the late 1960s, both the NAIC and many states moved toward open competition rating laws for property and liability insurance to foster a more price competitive marketplace while preserving some beneficial elements of collective activity. In the absence of the McCarran antitrust exemption, the state action doctrine would appear to be inadequate. Since these states seek to foster rather than supplant competition, the articulated state policy to supplant competition test may not be met. Furthermore, since the open competition statutes rely more on competition as the prime regulator of rates, there is also question as to whether the active state supervision test would be met. Consequently and ironically, application of antitrust might compel the states to forego efforts to enhance competition to preserve their ability to regulate and achieve other regulatory objectives.

This example illustrates the inadequacy of state action as a substitute for the McCarran Act protection. The removal of the antitrust exemption and forced reliance on the state action doctrine could very well lead to less rather than more competition. Furthermore, the effect of substituting the state action doctrine in lieu of the McCarran Act would be to substitute regulation by litigation for an already existing body of state insurance law and regulation.