Tuesday, 31 October 2006 17:00

Texas grassroots coalition files brief in support of HB 1131

In March 2006, the U.S. District Court, Northed repair shop law, HB 1131, constitutional. Allstate filed a notice of appeal with theern District of Texas, found the Texas law prohibiting insurer-own U.S. Court of Appeals, Fifth Circuit, in April 2006.

A brief responding to the Allstate appeal was recently filed by the Automotive Service Association (ASA) and the Consumer Choice in Autobody Repair Coalition - a group of independent body shops, car dealers who own body shops, and other businesses who want to maintain independent businesses that was formed to pass HB 1131 during the 2003 legislative session.

The intervenor's brief states that Allstate's appeal is based on two faulty premises:

1. HB 1131 was enacted to prohibit interstate competition in the autobody collision repair market, and

2. Sterling is the most "competitively significant" interstate collision repair chain.

The truth, as found by the decision of the district court, is that the Texas Legislature enacted HB 1131 to combat the encroachment of automobile liability insurance companies into the collision repair business, and there are significant interstate competitors already in that business. The Legislature did not want the collision repair industry to become the new HMO, with insurance companies exerting their influence over repair service providers to cut corners, exerting influence over consumers to direct business to insurer-owned or "tied" shops regardless of repair quality, and providing insurer-owned shops with confidential information obtained from non-insurer-owned competitors.

Texas-based insurers must also comply

The brief goes on to point out that Allstate's claim that HB 1131 is targeted at out-of-state entities is unfounded. Texas- based automobile liability insurance companies are equally subject to HB 1131's prohibitions. HB 1131 does not distinguish between in-state and out-of-state insurers and provides that any insurer who chooses to be licensed to sell motor vehicle insurance in Texas is prohibited from acquiring additional interests in a collision repair shop.

Furthermore, HB 1131 is directed at all automobile liability insurance companies, and not interstate competition. It addresses conflicts of interest and anti-competitive conduct. The Legislature was concerned that "consumers will suffer under the practices of insurers that operate repair facilities" similar to the way consumers have suffered due to HMOs.

Fox guards henhouse

In addition, the Legislature also wanted to eliminate an incentive for insurers to steer business. The goal of the legislation was not protectionism (as Allstate contends), but to prevent Allstate from using its influence to steer business to its tied repair shops. In other words, the legislature wanted to preserve competition in the auto repair market, free from artificial influence and steering from insurers. Senator John J. Carona, who originally sponsored HB 1131 in the Texas Senate, explained that his chief motivation was to eliminate the obvious conflict of interest that arises when an insurance company owns the repair facility.

During the trial, witnesses testified that allowing insurers to own auto repair shops was equivalent to letting HMOs own the hospital and also directly employ the doctor. Above all, there would be no checks and balances to protect consumers. The legislative history is replete with testimony regarding the harm caused by such vertically tied relationships.


No harm, no foul

The brief further states that Allstate's claim that there was no evidence of consumer harm before the Legislature holds no merit. All of the testimony cited at trial reflects the consumer harm that is caused by insurer behavior in the collision repair industry. Moreover, prior to purchasing Sterling, Allstate conducted its own consumer surveys on this issue confirming that harm. Allstate's survey received responses such as: "If Allstate owns the shops, are the workers working for me or for Allstate?" and "It's a conflict of interest. They're saving money at my expense."

Nearly half of the consumers involved in one of the surveys believed that Allstate should not own body shops because Allstate should be "sticking to insurance" and because of the potential for a "conflict of interest."

Prior to entering the collision repair market, Allstate knew that its purchase of a collision repair chain would be "a difficult practice to defend." Allstate did not disclose its survey evidence to the Legislature along with other key facts cited in the brief.

According to the brief, it is misleading to argue about an alleged absence of evidence before the Legislature of problems with the Allstate-Sterling relationship, because they did not share the data about their own performance with anyone, including the Legislature. Allstate's own evidence that was not provided to the Legislature would have bolstered concerns already raised by legislators.

Allstate-Sterling relationship proves need

The brief goes on to assert that the discussion of Sterling's drop in business demonstrates that Sterling was not "competitively significant" but was competing based on preferential treatment and anti-competitive conduct. When left to compete on its own (without Allstate's preferential treatment), Sterling performed poorly.

Prior to the enactment of HB 1131, Sterling conducted business by relying on preferential referrals, relying on Allstate to create business for Sterling and using confidential information that Allstate obtained from Sterling's competitors to give an unfair competitive advantage to Sterling. The brief concurs that the Legislature acted well within the State's authority when it enacted HB 1131 to prohibit such conduct.

Summary of the argument

The intervenors have filed this brief to encourage the Court to uphold HB 1131 in its entirety. HB 1131 does not violate the dormant Commerce Clause. It is even- handed regulation applicable to all auto liability insurance companies. Nothing in the law discriminates against interstate commerce or interstate competitors. Indeed, after HB 1131, all interstate competitors (except insurance companies) are free to compete in the Texas market for collision repair services. The district court correctly concluded that the benefits of HB 1131 (eliminating conflicts of interest and anti-competitive conduct) outweighed any incidental burden that the law places upon interstate commerce.

In the alternative, the Court should reject Allstate's dormant Commerce Clause challenge based upon Section 2(a) of the McCarran-Ferguson Act, which grants states primary authority to regulate the business of insurance.

The brief purports that the district court failed to employ the correct legal standard to analyze arguments. Employing the correct legal standard, this Court should conclude that HB 1131 is a law relating to the regulation of the business of insurance that is immune from dormant Commerce Clause challenge.

In conclusion, Intervenors-Appellees-Cross-Appellants are requesting that the Court affirm the district court's decisions finding that HB 1131 does not violate the dormant Commerce Clause, and reverse the district court's decision striking TEX. OCC. CODE §§2307.006(3), (4), (6), and (9) under the First Amendment.

To view the brief in its entirety, please click here.


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