The Society of Actuaries and Antitrust
Compliance
by Alan E. Lazarescu, General Counsel, Society of Actuaries, and Clay H. Phillips, Partner,
Peterson & ROSS,Chicago, Illinois
This brief overview of the ways in which the antitrust laws may apply to Society of Actuaries
and member activities is designed to help Society members recognize potential problem
areas. Please remember, if you are in doubt about the antitrust or other legal implications of
your Society activities, contact Society staff. They can help you obtain the advice needed to
assurelegal compliance.
1.
Overview of the Antitrust Laws
Purpose
The United States generally is committed to a free market economy. It is assumedthat
efficiency will be enhancedand consumer welfare maximized if willing sellers are free to sell
whatever lawful goods and services they wish to willing buyers on whatever terms the parties
agree upon. In theory, the free market competitive process will produce goods and services
at appropriate prices with little need for direct govemmental regulation. The antitrust laws
are designed to prevent persons and private cartels from interfering with the competitive
process. The antitrust laws do not prevent the govemment from replacing competition with
regulation if it choosesto do so. Therefore state departments of insurance may, for example,
replace price competition with price regulation without violating the antitrust laws.
The Sherman Act, Section 1
Section 1 of the Sherman Antitrust Act, 15 U.S.C. $1, prohibits every “. . . contract,
combination . . . or conspiracy in restraint of trade or commerce . . . .” Section 1 focuses
on concerted activity between more than one person, not individual conduct, and thus a
violation requires some form of agreement. There are two forms of analysis used under this
statute.
@
The :Per Se Rule
Somc: “hard core” conduct that the courts have repeatedly found to be unlawful over the
years, such as agreementsbetween sellers on the prices of their goods or services, are
considered to be unlawful “per se,” or automatically. If the conduct is proven, it
automatically will be considered unlawful, and the defendantswill not be able to justify the
conduct by arguing that the agreed upon price was reasonableor merely designed to prevent
1
excessiveor “cut-throat” competition. Price fixing, bid-rigging and other blatant forms of
collusion among competitors designed to influente prices are the forms of conduct most
likely to be found unlawful “per se.” These are the types of conduct most likely to send the
participants to prison and to involve substantial fines and adversepublicity.
The Rule of Reason
For conduct that is not obviously anticompetitive, the “rule of reason” analysis is applied.
The court must consider all of the facts about the restraint, including expert economic
testimony, in order to determine whether, on balance, the challenged conduct is efficiency
enhancing and procompetitive, or whether it has the anticompetitive effect of restricting
output and thereby increasing prices to consumers. Rule of reason casesare more difficult
for either the govemment or private plaintiffs to prove, but even the successfuldefenseof a
rule of reason case can be very expensivebecauseof the need to analyze and present
complicated proofs.
A good example of a rule of reason case is a situation where a manufacturer, without any
agreement with its competing manufacturers, assignsits retail dealers exclusive geographical
territories. The court must determine whether the manufacturer has a legitimate interest in
giving its dealers the incentive to sell within a specific region and whether the existence of
competition from other manufacturers’ dealers will counterbalanceany potential loss of
competition among the dealers of a single manufacturer. See, e.g., Continental T. V., Inc. v.
GTE S’yZvania,Inc., 433 U.S. 36 (1977). The outcome of such a case is not obvious; it will
tum upon the precise facts before the court.
It also is important to remember that the “rule of reason” involves a balancing of
procompetitive and anticompetitive factors and not a judgment of whether the restraint can be
justified as “reasonable” becauseit is socially desirable. See, e.g., Nutional Society of
Professional Engineers v. United States, 435 U.S. 679 (1978) (Supreme Court rejected
engineering society’s defense that its ban on competitive bidding was “reasonable” as a way
to avoid unsafe structures resulting from comer-cutting) and Wilk v. Ameritan Medical
Association, 789 F.2d 207 (7th Cir. 1983) (medical association could not justify a boycott of
chiropractors on grounds that the public will be spared treatment by quacks; it is up to states
to decide which health practitioners may offer their services to the public).
The Sherman Act Section 2 -- Monopolies OPAttempts to Monopolize
Section 2 of the Sherman Act, 15 U.S.C. 42, unlike Section 1, can reach the conduct of a
single person or firm, since it basically prohibits attempts to monopolize. Attempts to
monopolize can be illegal, but only if the firm attempting to obtain a monopoly is
dangerously close to achieving monopoly power. Successfulmonopoly actions are relatively
rare since, as a practical matter, it ordinarily is difficult for a single firm to so dominate a
market that it can control output and prices. A notable exception was the federal
government’s breakup of the Bel1 Telephone System through a consent decree after years of
litigation. In the case of the Bel1 System, earlier govemment regulation initially had created
the monopoly.
3
The Federal Trade Cornmission Act, Section 5
Section 5 of the FTC Act, 15 U.S.C. g45, while not technically an antitrust statute,
empowers a federal administrative agency to prevent “unfair or deceptive acts or practices.”
In operation, the FTC may prevent as “unfair” actions under theories similar to those
employed under the antitrust statutes. In recent years the ETC has been active in the area of
associations, especially in the health care field, but the FTC has very limited authority with
respect to the businessof insurance.
State Laws
Most stateshave an antitrust statute that may be enforced either by the state attomey general
or private parties. Common remedies include injunctions, fines, jail terms and civil liability.
Generally, the state statutesare similar to the federal statutesbut permit actions against local
or intrastate violations that might not have an interstate impact as is required for violations of
federal law .
Penalties
The penalties for antitrust violations can be severe. For “hard core” violations such as
blatant price-fixing or bid-rigging, prison sentencesof up to 3 years are available for
persons, and corporations can be fined as much as $10 million. While prison terms were at
one time the exception rather than the rule for persons without previous criminal records, the
United States sentencing guidelines now generally require a prison sentenceunless the Judge
finds that there is good cause for not imposing a jail term.
Civil. Litigation
Section 4 of the Clayton Act, 15 U.S.C. 515, enables anyone injured in their “business or
property by reason of anything forbidden in the antitrust laws” to sue and’recover three times
their actual damages (treble damages),plus attomey’s fees. The lure of treble damagescan
be a powerful incentive to the bringing of private antitrust cases, especially since the losing
defendant must pay the plaintiff’s attomey’s fees, whereas a losing plaintiff normally is not
required to pay the defendant’s fees.
Cease and Desist Orders
The IFederalTrade Commission has the authority to order Arms to ceaseand desist from
violations of 55 of the FTC Act. ‘If a party violates a ceaseand desist order, it can be found
in contempt by a federal court and face civil penalties or even imprisonment.
II.
The McCarran-Fereuson
Act and Its Limited ExceDtion for the Business
of Insurance
a
The McCarran-Ferguson Act, 15 U.S.C. 51011 et seo., exempts from the antitrust laws the
“business of insurance” to the extent that statesregulate those activities. Notably, the
exemption covers only “the businessof insurance,” and not any activities of insurance
companies. The “business of insurance” is limited to the spreading of insurance risk and
insurance companies’ relationship with their policyholders. Indeed, in Ticor Title Zns. Co.,
CCH: Trade Reg. Rep. 122, 744 (1989), afld. in part, sub nom Ticor Title Ins. Co. v. FTC,
1991-1 Trude Cas. 1 69,293 (3d. Cir. 1991), the FTC held that title insurance is more in the
3
nature of a warranty of good title, wiihout any signifícant spreading of insurance risks, and
thus is not protected by the insurance exemption. (In some statesthe conduct was protected
by state-imposedregulation.) The McCarran-Ferguson exemption was intended primarily to
preserve the state regulation of insurance and to help smaller insurance companies compete
by virtue of the sharing of underwriting data.
Acts of “boycott, coercion or intimidation” are beyond the exemption. In Burry v. St. Paul
Fire and Marine Ins. Co., 438 U.S. 531 (1978), the Supreme Court held that an allegation
that medical malpractice carriers agreed among themselvesto offer only “claims-made”
coverage to physicians (and not “occurrence” coverage) stated a claim for a “boycott” of
policyholders that would not be exempt under the McCarran-Ferguson Act. The Court
reasonedthat the competing companies were boycotting their own policyholders by agreeing
among themselvesto deal with the policyholders only on certain terms instead of letting
competition determine those terms.
More recently, in In re: hurance Antitrust Litigation, 1991-1 Trade Cas. Q 69,460 (9th
Cir. 1991), the United States Court of Appeals for the Ninth Circuit held that allegations that
the Insurance Service Organization (ISO) helped organize a collective effort of insurers to
withdraw certain forms of policies from the marketplace also fell outside the exemption as a
form of boycott. As a consequence,whether or not the partial antitrust exemption contained
in the McCarran-Ferguson Act is repealed or limited (and bills are introduced annually in
Congress to do just that) the reality is that in the future, insurance companies will face an
increasing number ?f antitrust actions that will be more difficult and costly to defend.
Some states, most notably California and Texas, have eliminated the insurance exemption
from their state antitrust statutes. Therefore, conduct that might be protected from federal
antitrust actions may be challenged under state antitrust acts. Also, as a practical matter, it
is now more difficult to rely upon the McCarran-Ferguson Act exemption.
III.
The Most Common Forms of Antitrust Violations
While many types of conduct can result in violations of the antitrust laws, some of the most
common and hazardousactivities are summarized below.
Price Fiiing
Price fíxing includes any understanding among competitors to fix the price of goods or
services, including agreementsto directly or individually raise prices, stabilize prices or even
lower prices. In general, what each company charges for its goods or services must be its
own decision. Obviously insurance companies must avoid agreeing upon premiums.
Actuar-ial consulting firms also must not agree with their competitors about prices for their
services.
It is critical to remember that the prohibition of setting prices in agreement with competitors
is broad and even applies to the setting of maximum prices, seeArizona v. Maricopa County
MedicaESociety, 457 U.S. 332 (1982) (even a well meaning effort by a group of competing
physicians to agree upon maximum fees is unlawful) and agreementsto stabilize prices
4
by agreeing to purchase excesssupplies to avoid a drop in prices, see SoconyVacuum Oil Co. v. United States, 310 U.S. 150 (1940). Agreements to forego advertising in
arder to avoid price wars also have been deemed unlawful as indirect forms of price fixing.
See United States v. Gasoline Retailers Association, 285 F.2d 688 (7th Cir. 1961). Thus in
al1 respects, competing companies must set their own prices in light of market conditions,
and decisions that could be construed as any price understanding with competitors must be
avoided.
indirectly
Territorial, Customer or Product Divisions
Competing companies may not reduce the leve1of competition by agreeing among themselves
to divide territories, customers or products and thereby avoid competing with one another in
certain respects. See United States v. Topco Associates, 405 U.S. 596 (1972). Accordingly,
insurance companies or actuarial consulting firms may not agree among themselves to divide
territories, customers or product lines. Each company, acting alone, is of course free to
decide with whom it will deal. See United Stutes v. Colgate & Co., 250 U.S. 300 (1919).
Problems arise when firms or persons agree with their direct competitors to forego
competition. Different issues are presented when sellers assign their own distributors
territories, customers or products.
Group Boycotts (Joint Refusals to Deal)
Competing companies may not collectively punish disfavored competitors or customers (or
those who provide them with necessarysupplies or services) by agreeing to refuse to deal
with them. Each company must malceits own decisions about whom it will do business
with. Examples of group boycotts include, as noted above, agreementsamong competing
insurance companies to offer only certain types of policies (e.g., “claims-made” instead of
“occurrence”) or agreementsamong competing insurance companies to punish insurance
agencies who se11a disfavored competitor’s policies by refusing to permit the agency to offer
the c:onspirators’policies. Of course, any company acting alone has a right to determine
what products to se11and with whom it will deal; it is the agreement with competitors that
creates antitrust diffículties in this area.
IV.
Possible Areas of Concern in Connection with SOA Activities
One of the very useful functions the Society of Actuaries performs is bringing together
actuaries in order to enhancetheir skills and advanceactuarial knowledge generally. In
theory, to the extent that individual actuaries are made more skillful, the insurance markets
will operate more efficiently and competition will be enhanced. Thus, on the whole, Society
activ.itiespromote competition and are entirely consistent with the antitrust laws.
However, Society activities also bring together representativesof competing insurance
companies and competing actuarial consulting firms. Accordingly, there is a potential for
those competitors to enter into inappropriate agreementsor understandingsin the course of
Society meetings.
5
As a general common senseguide, if there are matters about which one might expect
companies to compete as rivals, and not to agree upon, then Society meetings must not be
used as a forum for agreements, expressedor implied.
The most hazardous areas follow from the previously identified common violations and
include the following:
Price Fixmg
Any understanding whatsoever about the prices to be charged for specific products or
services is unlawful. Common sensesuggeststhat each company, whether it is an actuarial
consulting firm or an insurance company, must determine unilaterally the prices it will
charge customers. Not only must competing companies not agree with competitors about
insurance premiums or actuarial consulting fees, they must not enter into agreementsthat
could have an indirect impact on prices, unless the agreement is in the context of specific
state regulation. Society meetings may help actuaries leam to accurately measure cost
factors, but must not in any way suggestthe precise manner in which companies price their
products.
Agreements About Products to Be Offered
Any understanding whatsoever about whether particular products should be marketed or the
terms on which those products should be offered to the public generally is unlawful. Once
again, companies must make those decisions on their own. To do otherwise is to risk being
charged with a boycott. It is very hazardousto agree, for example, that only “claims-made”
coverage shall be offered or that other types of coverage will be unavailable or that certain
exclusions must be acceptedby insureds.
Territorial or Customer Divisions
Any understanding among competing companies to divide territories or customers and hence
to avoid competing to that extent is extremely dangerous. Companies must decide
unilaterally which customers, territories or fields to compete over. Any division of
territories among competitors probably will be found to be unlawful per se.
In addition to the above activities that are clearly hazardous, there also are “gray areas.”
These types of activities, if done appropriately, are legitimate vehicles for advancing
actuarial knowledge and helping companiespredict their costs and revenuesaccurately. If
done improperly, they could result in accusationsof antitrust improprieties. These include:
a.
Exchanges of past loss data and joint “trending.” The exchangeof past loss data
generally is permissible, but an effort by more than one company to collectively
“trend” those losses into the future with respect to specific types of policies may lead
to difficulties. The California Attomey General has taken a public position that he
regards joint “trending” as unlawful. While such a position could be regarded as
excessive, it is clear that joint trending could result in costly litigation, and it should
be avoided in Society meetings, formal or informal. Of course, actuaries within a
single company are free to predict trends for their employer. Consulting actuaries
who perform this service for more than one client must exercise caution that they not
be perceived as a linchpin to permit their clients to agree among themselves.
6
b.
Díscussion and evaluating the factors that go into computing prices. In the abstract,
this is permissible, but íf the discussionfocuseson concreteprices for specific
products, the undertaking becomes more hazardous. Socíety discussíonsshould
remain generalized.
C.
Díscussíonsabout whether particular forms of polícíes or types of products are
feasibleare perqissible. Also, a discussionof how to evaluatethe possiblecost
ramificationsof particular productsor featuresis acceptable,but it must be clear that
ultímately each company makes its own decision about which products to offer to the
publíc ín líght of íts own perception of the marketplace. Under no círcumstances
should the Socíety permít its meetíngs to be used as a forum to arbitrate what type of
policíes the Ameritan public “ought to” receive.
V.
Conclusion
The Socíety of Actuaries ís committed to antitrust compliance. Use of the guidelínes ín this
artícle and common sensecan help Society members from inadvertently strayíng into
unlawful. areas. If you are ever unsure about whether an area is permíssible or not, feel free
to consult wíth Society staff who may refer you to Society legal counsel.
7