Statutory Exemptions for Regulated Industries

• Author: Christopher L. Sagers
• Pages: 275-345

275

CHAPTER XV

STATUTORY EXEMPTIONS FOR REGULATED

INDUSTRIES

There once was a time when much of the American economy was

regulated by state and federal agencies, with power to control prices,

entry, exit and other key terms of competition. Those regulatory regimes

were the products of the Progressive and New Deal eras, and reflected

widely held economic views of that time that in many industries—

especially high fixed cost sectors like the transport, communications, and

energy infrastructure, or those thought to have special economic

problems, like insurance and banking—unrestrained competition had

become “destructive” and no longer worked. Because each of those

regimes excused private firms from what would otherwise be

competition, and invited or compelled some conduct that would violate

antitrust, most of them contained explicit antitrust exemptions, some of

which were quite broad. However, as the economic consensus shifted

during the 1960s and 1970s, each of those regimes began a long process

of deregulation that is not yet complete. While none of them perhaps has

reached total freedom from economic regulation and some of them are

still fairly extensively regulated, they each have been freed to some

extent to set their prices independently. Accordingly, most of them have

been brought gradually back into exposure to antitrust.

1

Traditional regulatory regimes with some explicit antitrust

exemption remain in six industries: (a) insurance, (b) banking, (c) air

transport, (d) ocean shipping, (e) railroads, and (f) motor carriage. In

each case, the industry is still overseen by some state or federal regulator,

and at least theoretically that regulator was at one time charged with

some responsibility to protect values that otherwise might be governed

by antitrust. Nowadays, however, Congress has opted to allow at least

some of the regulation of each of these industries to be performed by

competition, as governed by antitrust.

1

. See generally Joseph D. Kearney & Thomas W. Merrill, The Gr eat

Transformation in Regulated Industries Law, 98 COLUM. L. REV. 1323

(1998); Robert L. Rabin, Federal Regulation in Histor ical P erspective,

38 STAN. L. REV. 1189 (1986).

A Handbook on the Scope of Antitrust

276

A. Insurance and the McCarran-Ferguson Act

Prior to 1944, the business of insurance was regulated neither by

antitrust nor any other federal law, because the Supreme Court

considered it beyond the reach of interstate commerce.

2

In that year, in

United States v. South-Eastern Underwriters Ass’n,

3

the Court reversed

itself and found the insurance company defendants subject to Justice

Department antitrust prosecution.

4

Congress quickly undid that result,

5

exempting the business of insurance from most federal law under the

McCarran-Ferguson Act (MFA).

6

Strictly speaking, the MFA merely

provides that where insurance conduct is regulated by a state

government, it is not also subject to federal law. Since most states fairly

actively regulated most insurance conduct for decades following 1944,

the business of insurance was broadly exempt from antitrust for many

years. And, though many states have since engaged in some deregulation

of insurance, and in particular have allowed or mandated more vigorous

competition in the setting of rates, the industry is still pervasively state

regulated. Every state maintains some regulatory agency to oversee

insurers within its borders, and maintains some statutory and regulatory

constraints on the business of insurance.

7

Most states also maintain non-

2

. New York Life Ins. Co. v. Deer Lodge Cnty., 231 U.S. 495, 510-11

(1913) (holding that interstate insurance contracts are not com merce);

Hooper v. California, 155 U.S. 648, 653 (1895) (“That the business of

insurance does not generically appertain to such commerce has been

settled.”); Paul v. Virginia, 75 U.S. 168, 183 (1868) (“Issuing a policy of

insurance is not a transaction of commerce.”).

3

. 322 U.S. 533 (1944).

4

. Id. at 535-36.

5

. Less t han three weeks after the Court d ecided South-Eastern

Underwriters, the House of Rep resentatives passed a bill that completely

exempted the insurance industry from the antitrust laws. IX EARL W.

KINTNER & JOSEPH P. BAUER, FEDERAL ANTITRUST LAW § 70.3 (2006).

That bill failed to pass in the Senate, in part because P resident Roosevelt

threatened a veto, life insurers and mutual companies were unsupportive,

and the state insurance commissioners wanted a more limited exemption.

Id. at 187 n.44. A few months later, however, on March 9, 1945,

President Roosevelt signed the McCarran-Ferguson Act into law. The

House passed the bill without debate, while the Senate passed it after two

days. Id. at 187.

6

. 15 U.S.C. §§ 1011-15.

7

. See generally ABA SECTION OF ANTITRUST LAW, INSURANCE ANTITRUST

(2d ed. 2006) (comprehensively explaining history o f MFA and history of

Regulated Industries 277

insurance laws of general applicability, like state antitrust or consumer

protection laws, that may at times be applied to insurers’ conduct. These

laws too are sometimes held to constitute “regulat[ion] by state law” for

purposes of the MFA.

8

1.

Elements of the Exemption

The MFA exempts insurers from federal law when three conditions

are met. The challenged practice must: (1) be part of the “business of

insurance;”

9

(2) be regulated by state law;

10

and (3) not amount to a

boycott, coercion, or intimidation.

11

a. The Business of Insurance

The MFA does not exempt insurance companies from the antitrust

laws.

12

Rather, it exempts only those activities that are part of the

business of insurance.

13

In Union Labor Life Insurance Co. v. Pir eno,

14

the Supreme Court articulated a three-part test to determine whether an

activity qualifies as the business of insurance:

[F]irst, whether the practice has the effect of transferring or spreading a

policyholder’s risk; second, whether the practice is an integral part of

the policy relationship between the insurer and the insured; and thir d,

whether the practice is limited to entities within the insurance

industry.

15

The following sections discuss judicial treatment of some common

practices under this test.

state insurance regulation); Chris Sagers, Much Ado About P ossibly

Pretty Little: McCar ran-Ferguson Repea l in the Health Care Reform

Effort, 28 YALE L. & POL’Y REV. 325, 331-37 (2010) (summarizing

history of state insurance regulation, and summarizing history of

cooperation and the organization of the insurance industry).

8

. See part XV.A.1.b, below.

9

. Id. § 1012(b).

10

. Id.

11

. Id. § 1013(b).

12

. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 781 (1993).

13

. Id.

14

. 458 U.S. 119 (1982).

15

. Id. at 129. The Court cautioned that no single factor is necessarily

dispositive. Id.