U.S. Court of Appeals Affirms District Court Ruling in Allstate Insurance CasePosted 9/11/2007
By Robert L. Redding, Jr.
The U.S. Court of Appeals, 5th Circuit, New Orleans, has affirmed the District Court ruling in the case of Allstate Insurance Co., et al., Appellants-Appellees vs. Greg Abbott, etc., et al., vs. Automotive Service Association, et al.
The Texas legislature passed House Bill 1131, which restricted auto insurance companies from owning collision repair facilities in the state of Texas. The Automotive Service Association (ASA) supports insurer-owned shop legislation in states, including the new Texas statute.
Allstate and Sterling Collision Centers Inc. challenged the new Texas law in U.S. District Court. The District Court rejected Allstate's challenge. Allstate appealed to the 5th Circuit Court of Appeals in New Orleans.
There are some important comments of interest to collision repairers in the 32-page Court of Appeals decision. The following are key excerpts to consider. To view the entire ruling, readers should visit ASA's legislative Web site, www.TakingTheHill.com.
As background, the Court reviewed statements by key Texas legislative leaders during the legislative debate. State Rep. Ismael "Kino" Flores said, "This seeks to remedy a situation that is occurring in a lot of the major metropolitan areas, which is allowing insurance companies, which are purchasing and building body shops, to compete with those run by our local independent folks back home in our communities."
Texas state Rep. Mark Homer said, "Because I'm a small businessman ... there is nothing that angers me more than when the big guy comes in and just ... runs you out of town ... It's kind of the Wal-Mart scenario."
Finally, quoting Texas Senate bill sponsor John Carona, " I think the most significant thing we've tried to do here is ... just make sure that - in the shops that the insurance companies actually own ... we don't let those actual shops owned by the insurance companies have any kind of competitive advantage in a region."
In discussing consumer protection concerns, the Court noted, "...legislators heard from several witnesses that vertical integration in the insurance business would create an inherent conflict of interest and an irresistible opportunity for insurers to engage in predatory practices. They also heard that a system in which the insurance company and the body shop are aligned would eliminate the traditional checks and balances in the industry, meaning that the insurer's interest in keeping repair costs as low as possible would become the overriding interest. Further, witnesses reported specific instances demonstrating these dangers. This evidence provided a more than adequate and legitimate basis for the Legislature's decision to adopt the proposed regulations and undercuts Allstate's contention that the enactment of the overall statutory scheme was driven by a discriminatory purpose."
The Court continued, " ... the Legislature in this case sought to prevent firms with superior market position (insurance companies) from entering a downstream market (auto body repair) upon the belief that such entry would be harmful to consumers. The dormant Commerce Clause is no obstacle to such regulation."
In response to arguments that HB 1131 had discriminatory effects, the Court held, ... "similarly situated in-state and out-of-state companies are treated identically. Neither in-state nor out-of-state insurers may acquire a body shop and the statute raises no barriers whatsoever to out-of-state body shops entering the Texas market so long as they are not owned by insurance companies."
The Court continued, "While HB 1131 inhibits Sterling's ability to expand its auto body repair chain in Texas, the law does not prohibit other interstate repair chains or non-resident auto dealers not owned by insurance companies from operating in, or entering, the Texas market. Evidence was presented at trial showing that several interstate repair shops operate in the state. Further, even if we were to characterize Sterling's inability to expand as a burden on interstate commerce, that burden would not be clearly excessive as compared to HB 1131's putative local benefits."
In its First Amendment Challenge comments, the Court held that "Prohibiting Allstate from giving an exclusive recommendation to a Sterling body repair shop does not help ensure that the two entities are operating at arm's length. Similarly, an arm's length transaction may very well include a negotiated agreement in which an insurer agrees to recommend one body shop exclusively to its customers. Indeed, this is roughly the deal that various auto body shops enrolled in the PRO program have struck with Allstate. Because HB 1131 does not make it illegal for Allstate to have a business affiliation with Sterling, there is no legal prohibition preventing Allstate from communicating that relationship to customers."
In response to "Is there a legitimate state interest?," the Court said: "The State Defendants have successfully asserted a legitimate interest in consumer protection and the promotion of fair competition."
As with the District Court decision, the Circuit Court opinion provides several important items for repairers to consider. ASA encourages members to go to the Taking the Hill Web site (www.TakingTheHill.com) and review the entire decision.
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