Wednesday, 31 December 2003 17:00

Judge grants Allstate preliminary injunction in tied-shop suit

Allstate has won a round in its fight to own collision centers in Texas. In the U.S. District Court of North Texas, Dallas County, Judge Ed Kinkeade granted a motion for a preliminary injunction against enforcement of H.B. 1131 as requested by the plaintiffs in Allstate Insurance Co. and Sterling Collision Centers Inc. v. Greg Abbott, Attorney General of Texas and Carol Keton Strayhorn, Texas Comptroller of Public Accounts ("defendants"). 

The court agreed with Allstate on its points relative to First Amendment issues and existing insurer-owned repair facilities in Texas. This is not a ruling on the entire case and the court denied the plaintiff's request for an expedited trial, based on the suspension of H.B. 1131. With reversion to business practices before the passage of the bill, Judge Kinkeade felt that time was no longer of the essence and scheduled the trial for September 2004.

Factual background

The Plaintiff ("Allstate"), believing that fraud by various body shops was causing Allstate additional expense, instituted programs to combat and reduce such fraud, including an inspection system to detect shoddy or unnecessary repairs. In 2001, Allstate became a direct owner of collision repair shops when Allstate's parent company acquired Sterling Collision Centers, Inc.

Allstate's stated purpose for acquiring Sterling was to take advantage of the economies of scale available in the Sterling shops, which Allstate claims are larger than typical independently-owned autobody repair shops, with more modern equipment and specially trained technicians.

With Sterling under its wing, Allstate implemented a script to be used for policyholder calls regarding autobody repairs. The script expressed that the policyholder was always free to choose any repair shop, then went on to explain the benefits of Sterling, acknowledging that Allstate owns and has a financial interest in Sterling. (See sidebar for complete script.)

Even though they used this script to promote and encourage policyholders to take their vehicles to Sterling, the company holds less than 5% of the collision repair market in Texas.

Script used for policyholder calls regarding autobody repair

"Mr./Mrs. _______, you are always free to choose any repair shop of your choice and are under no obligation or requirement to use a shop we recommend; however, I would like to make you aware of the benefits of Sterling Autobody Centers. Additionally, you should know that The Allstate Corporation owns and has a financial interest in both Allstate Insurance Company and Sterling Autobody Centers, although each company operates independently.

"Sterling Autobody Centers are highly respected and provide excellent customer service. Sterling provides a lifetime guarantee as long as you own your vehicle on both parts and labor. In addition, they will handle all the paperwork, keep you updated throughout the repair process, guarantee a completion date, and clean your vehicle inside and out. They can also assist with rental arrangements on-site and will pay for additional rental expense if the guaranteed delivery date is missed. May I recommend a Sterling shop near your home or work?"

At issue also are the preferred provider agreements Allstate has with certain independently-owned body shops known as the PRO program. PRO shops may, but do not necessarily offer the same additional benefits as Sterling, such as guaranteed completion date, cleaning the vehicle inside and out, and paying for additional rental car expenses. Following the passage of H.B. 1131, Allstate cancelled all its PRO agreements, subsequently reinstating some shops but dropping others.

Allstate submitted that this is the genesis of H.B. 1131. Due to Allstate's increased promotion of Sterling, at the expense of its PRO shops, the owners of independent autobody shops lobbied the Texas Legislature asking it to prohibit automobile insurance companies from having an ownership interest in auto repair facilities. The bill passed, prohibiting insurers from owning body shops, excepting only those that were already operating or upon which construction had begun by April 15, 2003, although additional restrictions were placed on those excepted insurer-owned facilities (referred to as "tied repair facilities").

The challenged restrictions

Allstate and Sterling challenged four specific restrictions found in the statute on the grounds that such restrictions are unconstitutional because they unlawfully restrict the companies' First Amendment freedom of speech. Specifically, "plaintiffs challenge on First Amendment grounds the statute's prohibitions on engaging in a joint marketing program with a tied repair facility; providing tied repair facilities a recommendation, referral or description not provided on identical terms to other preferred repair facilities (here, PRO program shops); allowing a tied repair facility to use its name in a manner different from that allowed for any PRO shops; and recommending that policyholders have their vehicles repaired at a tied repair facility, except to the same extent it recommends PRO repair facilities."


Motion for preliminary injunction
In order to obtain the requested preliminary injunction, Allstate must establish that (1) they have a substantial likelihood of winning their case on the merits; that there is a substantial threat that they will suffer irreparable injury if the injunction is denied; (2) that the threatened injury outweighs any damage that the injunction might cause the defendants; and that the injunction will not disserve the public interest.
Likelihood of success on merits

The Supreme Court has stated that speech proposing a commercial transaction is entitled to protection under the First Amendment. Allstate believes that with support from various cases already decided by the Supreme Court, they are likely to succeed on the merits of their First Amendment challenge.

To the contrary, defendents and the Intervenors (ASA and Consumer Choice in Autobody Repair) argued that the statute compels rather than restricts free speech.

In addition, the Court points out that Allstate's ownership and operation of Sterling repair shops, before H.B. 1131, is not unlawful, so regulation of commercial speech is not incidental to the regulation of unlawful commercial activity.

To determine whether Allstate's case can succeed on its merits, the court must determine whether (1) the disputed speech is false and misleading; (2) whether the state has a substantial interest in regulating the speech; (3) whether the restriction on speech directly advances the state interest involved; and (4) whether the state's interest could be equally well served by a more limited restriction on commercial speech.

False or misleading?

The court felt that Allstate satisfied this first requirement in that nothing in the disputed commercial speech is false or misleading. Thus, it is incumbent upon the defendants to prove that the state has a substantial interest, that the statute directly and material advances this interest and the regulation is narrowly drawn.

Legitimacy of state interest

The defendants claimed that the state has a legitimate interest in consumer protection and the promotion of fair competition, being obligated to prevent fraud, unfair practices, discrimination, impositions and other abuses of its citizens. The court agreed that the state has a substantial interest in regulating speech.

Do regulations advance state interest?

The defendant's position is that the challenged portions of the statute accomplish the state's goals of consumer protection and promotion of fair competition. On that point, the court disagreed, doubting that the defendants will be able to carry their burden of showing that restricting truthful speech about the benefits of using a Sterling repair center will advance the cause of consumers.

The court further states that "consumers benefit from more, rather than less, information. Attempting to control the outcome of consumer decisions following such communications by restricting lawful commercial speech is not an appropriate way to advance a state interest in protecting consumers.

"Whether or not consumers make better or worse choices when provided with such truthful, non-misleading information does not justify action by the state to interfere with or deprive consumers of their lawful options." The court felt that if a consumer ended up being harmed by doing business with Sterling or Allstate, the remedy would be a lawsuit against the company(ies).

The defendants then argued that the challenged portions of H.B. 1131 do directly and materially advance the state's objective of promoting fair competition, but once again the court disagreed.


The court considered Allstate's speech promoting Sterling as simply advertising - a fundamental component of competition in most industries. It should encourage PRO and independently-owned shops to raise their standards to the level of those Sterling. "The state cannot undertake to level the playing field for the purpose of protecting local businesses from competitors who may offer different or better services, or charge a lower price, so that the local companies may maintain their profit margins," averred the court.

Furthermore, "if the state's attempt to level the playing field was proper, the challenged provisions of the statute do not level the playing field for all autobody shops as asserted by the defendants," rather it only protects the interests of Allstate's PRO shops.

Therefore the court found that the challenged portions of the statute do not materially and substantially advance the state's interests asserted by the defendants.

Is restriction narrowly tailored to advance state interests

The court did not feel that the challenged provisions are narrowly tailored to meet the defendant's objections. Banning Allstate's speech promoting Sterling inhibits the dispersal of information that may benefit consumers. In addition, forcing Allstate to promote its PRO shops on equal footing with Sterling is of no benefit to those shops not included in the PRO program. There is no assurance that the provisions of H.B. 1131 would enhance competition overall.

Finally, the anti-steering law already in place protects competition in that Texas auto policyholders are already legislatively free to choose any repair facility for their collision repairs. The court believes the state can find less restrictive means of protecting consumers and fair competition in the marketplace -- such as the already existing anti-steering law.

Allstate prevails

For these reasons, the court found that Allstate has a substantial likelihood of winning its suit on the merits.

Moreover, the court agreed that "the loss of First Amendment freedoms, even for minimal periods of time, unquestionably constitutes irreparable injury." In addition, Allstate purported that the defendants would suffer no harm because an injunction would simply restore the status quo before the passage of H.B. 1131.

The defendants disagreed, claiming that an injunction to restore the status quo would harm consumers and PRO repair shops because "the conduct that H.B. 1131 was intended to remedy would continue unabated."

The court further stated that, since Allstate had a substantial likelihood of prevailing at trial, the public would not be ill-served by an injunction preventing an unconstitutional statute to continue. Permitting the free flow of commercial information has been held to be in the interest of the public.

Injunction granted

According to the Order, "plaintiffs have successfully established the requisite elements needed for a preliminary injunction: substantial likelihood of success on the merits, a substantial threat of irreparable injury, that the threatened injury to Plaintiffs outweighs any threatened injury to defendants and that an injunction would not disserve the public interest. Accordingly, Plaintiffs' Motion for Preliminary Injunction is hereby granted."

No expedited trial

The court agreed with the Intervenors that time is required for discovery in this case and that it is unrealistic to expect the parties to be ready for trial early in 2004. Since injunctive relief has been granted to Allstate, the status quo is preserved until the final resolution of the case. For these reasons, the court denied the motion for expedited trial.

Intervenor comments

"This is the first step in the process. The Automotive Service Association (ASA) is reviewing the decision with its attorneys," said Bob Redding, ASA's Washington, D.C., representative.

ASA, working with a coalition of organizations and Texas repairers, were advocates for the legislation. ASA is listed as an Intervenor on the judge's Order.


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