"Preserving" Civil RICO: how the model Unfair Trade Practices Act affects RICO's private right of action under the McCarran-Ferguson Act.

• Author: Snyder, G. Ryan

INTRODUCTION

In August 2007, a confidential report surfaced exposing widespread fraud in the insurance industry. (1) Written by the influential consulting firm McKinsey & Company, (2) the report explained how insurance companies could fraudulently increase profits by decreasing payments to customers. (3) When a policyholder filed a claim, the report said, the insurer should begin by offering them a lower settlement than their policy promised. (4) If someone refused to accept this lower offer, McKinsey recommended the company fight back against the customer, and delay making required payments as long as possible. (5) In so doing, the insurer could pressure policyholders to drop existing challenges, discourage others from even filing claims in the first place, or--at the very least--earn extra interest on its investments. (6) Following McKinsey's "slow-pay, low-pay, no-pay" (7) tactics, the industry earned record profits. (8)

The Racketeer Influenced and Corrupt Organizations Act (RICO) (9) might seem to grant claimants a private right of action in insurance fraud cases like these. (10) But currently, both the Sixth and Eighth Circuits refuse to allow plaintiffs access to this remedy. Relying on a broad interpretation of the McCarran-Ferguson Act, (11) these courts have held the damages available under civil RICO would impermissibly "invalidate, impair, or supersede" state insurance laws, which provide only for administrative remedies. For example, in Riverview Health Institute LLC v. Medical Mutual of Ohio, (12) a plaintiff filed a civil RICO suit alleging the defendant had engaged in a "slow-pay, low-pay, no-pay" scheme. (13) But because civil RICO provided a different remedy than the administrative one included in Ohio's insurance code, the court granted a motion for summary judgment on the grounds that civil RICO's use would violate the McCarran-Ferguson Act. (14) On appeal, the Sixth Circuit Court of Appeals affirmed. (15)

This Note examines whether the McCarran-Ferguson Act--properly interpreted--actually bars civil RICO suits against insurance companies. Part I begins by describing the background of the McCarran-Ferguson Act and the state insurance codes, which are derived from the model Unfair Trade Practices Act (UTPA). (16) Then, it details the history of this statutory framework's application to civil RICO. This history proceeds in three stages: (1) the original split in the circuits that appeared in the 1990s, (2) the Supreme Court's attempt to resolve the issue in Humana Inc. v. Forsyth, (17) and (3) the split in the circuits that subsequently reappeared after Humana. Part II argues that civil RICO does not "invalidate, impair, or supersede" the state insurance codes under the McCarran-Ferguson Act. After examining both the original meaning of the Act and the Supreme Court's holding in Humana, it concludes--contrary to the Sixth and Eighth Circuits--that a federal law only impairs a state law when: (1) the two directly conflict, or (2) when it hinders the successful execution of a state policy. Then, it applies this test and shows civil RICO and the state UTPA provisions can coexist. Both the UTPA's history and its remedy preservation clauses--provisions explicitly preserving a plaintiffs other legal remedies--demonstrate civil RICO neither conflicts with state law, nor hinders a state legislative policy. Finally, Part III analyzes the different post-Humana approaches, and explains why no persuasive justification for the current split in the circuits exists.

1. BACKGROUND

   A. The Statutory Insurance Framework

   1. Adoption of the McCarran-Ferguson Act

      The McCarran-Ferguson Act emerged out of a long-running dispute over government regulation of the fire insurance market. (18) Beginning in the early nineteenth century, the industry repeatedly found itself on the brink of insolvency. (19) This cycle generally proceeded as follows: In years with few fires, insurance companies earned large profits. (20) These profits, in turn, lured new firms into the marketplace, increased competition, and decreased prices. (21) Faced with the prospect of lower revenue, many insurance companies responded by cutting their reserve funds. (22) Although often successful in the short-run, (23) this strategy would collapse when a large fire eventually occurred. Then, without sufficient reserves to reimburse their customers, firms would either use legal technicalities to avoid making payments, (24) or would simply shut down altogether. (25)

      Over a period of several decades, the industry clashed with state governments about the proper way to address this insolvency epidemic. The insurance companies quickly concluded that adequate reserves required higher rates, and that higher rates required less competition. (26) The industry, therefore, favored collective rate-making to achieve these goals. (27) State governments, however, preferred other forms of regulation, such as reserve requirements, agent licensure, and financial disclosure. (28) At first, both sides fiercely opposed the other's approach: insurance companies responded to regulation by threatening to leave the state (29) and filing legal challenges, (30) while state governments responded to collusion with anticompact laws. (31) But eventually, dispute faded into agreement. The states began permitting collective rate-making, but controlled it by requiring state approval of rates, or by setting rates directly. (32)

      But the Supreme Court brought an end to this arrangement in United States v. South-Eastern Underwriters Ass'n. (33) Previously, the states and industry's collusive compromise had survived only because of an implicit exemption from federal antitrust laws, created by the Supreme Court's repeated holding that insurance transactions did not constitute commerce. (34) Thanks to this antitrust exemption, the insurance industry had largely remained immune from federal regulation. (35) But in light of its rapidly expanding view of interstate commerce (36) the Court used South-Eastern Underwriters as the occasion to overturn this long-standing precedent. (37) After distinguishing its previous decisions, (38) the Court concluded an insurance company's transactions across state lines do constitute interstate commerce (39) and, therefore, that federal antitrust laws applied to the industry. (40)

      Predictably, the insurance industry reacted negatively. (41) Most immediately, the decision exposed insurance companies to criminal liability for conduct state law had not previously sanctioned. (42) In addition to these short-term fears, providers feared application of federal antitrust law would preempt state rate-making laws, bringing back the unfettered competition that had driven them toward insolvency. (43) Likewise, state governments feared federal law would preempt their regulations, and that taxes on out-of-state companies would violate the Dormant Commerce Clause. (44)

      Congress wasted little time in addressing these concerns. (45) After a hastily drafted proposal supported by the fire insurance companies died in the Senate, (46) Senator Patrick McCarran and Senator Homer Ferguson jointly introduced a bill. (47) Following debate, (48) the McCarran-Ferguson Act passed both the House (49) and the Senate, (50) and became law on March 9, 1945, (51) less than one year after the Court decided South-Eastern Underwriters. (52)

      In drafting their bill, Senator McCarran and Senator Ferguson relied heavily on a legislative proposal and explanatory memorandum the National Association of Insurance Commissioners (NAIC) (53) had distributed to Congress in the wake of South-Eastern Underwriters. (54) The NAIC firmly believed the states could regulate the insurance business more effectively than the federal government. (55) Accordingly, its proposal sought to: (1) remove any barriers the Dormant Commerce Clause might pose to state law, (56) (2) minimize potential conflict between state and federal laws under the Supremacy Clause, (57) (3) preclude application of the Federal Trade Commission Act (58) (FTCA) and the Robinson-Patman Act (59) to insurers, (60) and (4) limit the reach of the Sherman Act (61) and the Clayton Act (62) into the insurance industry. (63)

      Although Congress made several changes, (64) the final McCarran-Ferguson Act bore a strong resemblance to the NAIC's proposal. (65) Section 1 asserted that continued state regulation and taxation of the insurance industry would best serve the public interest. (66) Section 2 (a) took steps to disarm the Dormant Commerce Clause by declaring that state laws regarding regulation and taxation would continue to apply. (67) Section 2 (b) minimized conflict under the Supremacy Clause by precluding application of any federal law that "invalidates, impairs, or supersedes" state insurance law. (68) And, although the Act exempted the Federal Trade Commission Act and the Robinson-Patman Act from this reverse preemption clause, it allowed the states to develop their own regulatory codes that, once enacted, would take precedence over them. (69) Section 3 contained a moratorium on several federal antitrust laws (70) to allow states time to develop these codes. (71) In sum, Congress followed the NAIC's lead by "removing obstructions which might be thought to flow from its own power, whether dormant or exercised, except as otherwise expressly provided in the Act itself or in future legislation." (72)

   2. Adoption of the Model Unfair Trade Practices Act

      After successfully shepherding its legislation through Congress, the NAIC began developing a model act the states could adopt to avoid losing their regulatory authority to the Federal Trade Commission. (73) By 1947, the NAIC had completed its work, resulting in the Unfair Trade Practices Act (UTPA). (74) States quickly adopted the UTPA. (75) By 1950, twenty-six states had enacted versions of the Model Act, (76) and by 1960, the rest had followed suit. (77)

      The language of the UTPA essentially...