Brokers, Insurers Did Not Constitute Hub-and-Spoke RICO Enterprises

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

Purchasers of commercial and employee-benefit insurance policies failed to sufficiently allege a series of “hub-and-spoke” RICO enterprises comprising brokers and insurers that allegedly conspired to participate in unlawful and deceptive “allocation” schemes to steer unwitting purchasers from the brokers to their insurance company partners, and thereby deny the purchasers the benefits of a competitive market, the U.S. Court of Appeals in Philadelphia has ruled.

The brokers and insurers allegedly used the federal mails and wires to knowingly and intentionally misrepresent that they would:

(1) Act in the best interest of their clients in providing unbiased advice and assistance in the selection of appropriate insurance products and services and

(2) Act as fiduciaries in placing insurance on the best possible terms and at the best available price, the court noted. According to the purchasers, the defendants acted to further their own financial interests at the expense of their clients.

Broker-Centered Enterprises

Although the plaintiffs adequately alleged bilateral agreements (regarding the steering of business and the payment of contingent commissions) between the brokers and each of their insurance company partners, they failed—with one exception—to adequately plead “broker-centered” hub-and-spoke enterprises that included a broker hub and all of the broker’s strategic insurance partners, the court concluded.

Because the plaintiffs failed to plead facts that plausibly suggested collaboration (rather than mere parallel conduct) among the insurers, their hub-and-spoke structures lacked a unifying “rim,” the court explained, and thus failed the basic requirement that members of an enterprise function as a unit.

Put another way, the plaintiffs’ allegations could not support the inference that the insurers had associated together for the common purpose of engaging in a course of conduct.

Bid-Rigging Allegations

Allegations of bid rigging by one of the brokers, however, sufficiently provided the missing “rim” for that broker’s hub-and-spoke configuration. The plaintiffs identified a hierarchical structure through which the broker, in accordance with its “broking plan,” decided which insurer would be asked to submit a sham bid.

The common purpose of this broker-centered enterprise was “to increase profits by deceiving insurance purchasers about the circumstances surrounding their purchase.” The allegations of bid rigging thus indicated that there was a relationship among the insurers in the enterprise. If proved, the bid rigging activities would plausibly show that the insurers had joined together in pursuit of a common purpose, according to the court.

Although the district court believed that the insurers’ participation in the alleged bid rigging transactions was done in an ad hoc manner, the appellate court disagreed. Even if the transactions were carried out ad hoc, a RICO enterprise did not require a systematic plan that “ordain[ed] in advance” who would provide a sham bid for a particular transaction, the court instructed.

Decisions could be made on an ad hoc basis—by any number of methods—without destroying the broker-centered enterprise. Members were not required to have to have fixed roles and participants did not have to maintain non-interchangeable and non-substitutable functions.

The district court also “appeared to believe” that the purchasers’ bid-rigging allegations did not go beyond the bilateral relationships that were established between the broker and the individual insurers. According to the district court, interrelationships among the insurers were not adequately pled. In the appellate court’s view, however, allegations that the insurers had agreed to provide the broker with sham bids “plausibly suggested” a broker-mediated interrelationship among the insurers.

Through this interrelationship, the insurers were allegedly able to advance their common interest in higher profits to a greater extent than would have been possible on the strength of the bilateral relationships alone.

Conducting the Enterprise’s Affairs

The district court expressed doubt that the defendants had conducted the affairs of this broker-centered enterprise and not simply their own affairs. The appellate court observed, however, that the interests of an enterprise would often coincide with those of its members. If defendants banded together to commit violations that they could not accomplish alone, then they were “cumulatively … conducting” the affairs of the association-in-fact enterprise.

In this case, allegations that the broker solicited rigged bids from its insurance partners and directed the placement of insurance contracts plausibly implied that the broker had participated in the operation or management of the enterprise, the court determined. In addition, allegations that the insurers had furnished sham bids to the broker sufficiently indicated the insurers’ involvement in the enterprise’s operation.

The Third Circuit’s August 16 opinion in Insurance Brokerage Antitrust Litigation will be reported at CCH RICO Business Disputes Guide ¶11,896.

Late Opt-Outs Permitted in Antitrust Class Action Against Insurers, Brokers

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

In an antitrust class action against insurance companies and brokers, a federal district court did not abuse its discretion when it extended the “opt-out” deadline and modified the settlement class so that late-filing opt-outs could elect to be excluded from the class settlement, the U.S. Court of Appeals in Philadelphia has ruled in a not-for-publication opinion.

Accordingly, settling defendants were not entitled to a permanent injunction blocking the late-filing opt-outs from pursuing state court antitrust litigation.
Several class action suits were filed in 2004 against insurance brokers and insurers for their participation in an alleged bid rigging conspiracy.

In February 2009, a final judgment and order, approving a class-wide settlement, was filed. Pursuant to the order, all members of the class released any and all claims against the settling defendants that could have been raised in the class action suit.

The settling defendants filed motions to enjoin two companies from pursuing state court actions because the companies failed to opt out in a timely fashion.

In response, the companies filed motions in the district court to extend the “opt-out” deadline and to modify the settlement class so that each could elect to be excluded from the class settlement.

The district court exercised reasonable discretion in granting the motion to extend the deadline after concluding that the late-filers' failure to meet the “opt-out” deadline was “excusable neglect,” the appellate court ruled.

In light of the deadline extension, and the subsequent removal of the late-filing opt-outs from the settlement class, the district court correctly denied the defendants' motion for a permanent injunction barring the late-filing opt-outs' state court litigation.

The March 9 decision, In re: Insurance Brokerage Antitrust Litigation, appears at 2010-1 Trade Cases ¶76,923.

Settlements, Fees Upheld in Antitrust Class Action Against Insurers

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

In a class action alleging a bid rigging and market allocation conspiracy between insurance brokers and insurance carriers, the U.S. Court of Appeals in Philadelphia has upheld final approval of a $121 million settlement with insurer Zurich Financial Services and a $28 million settlement with insurance broker Arthur J. Gallagher & Co.

An award of $29.95 million for attorney fees and expenses in conjunction with the Zurich settlement was also affirmed.

Class certification requirements of Federal Rule of Civil Procedure 23(a) and (b) were satisfied with respect to both settlement classes, and both settlements were fair under Rule 23(e). Thus, objections to the settlement agreements and attorney fees award from dissatisfied class members were properly rejected.

Private Civil Actions, State Investigations

The settlements at issue followed the consolidation of a number of private civil actions. At about the same time, insurance industry investigations were being conducted by various state attorneys general and state departments of insurance.

Under the Zurich settlement, the insurer agreed to establish a $100 million settlement fund. In addition, Zurich entered into settlements with the states, requiring monetary payments. As a result, Zurich agreed to pay $121.8 million to settlement class members.

The Gallagher settlement provided for the payment of $28 million to settlement class members and included an agreement to implement various business reforms. Gallagher agreed to pay up to $8.885 million for class counsel’s attorney fees, litigation expenses, and incentive awards, but no party objected.

Certification of Settlement Class

Objecting class members challenged certification of the settlement class, arguing that there was a predominance of individual issues as opposed to common ones. However, common questions of law and fact existed with respect to each of the elements of the Sherman Act claim, the appellate court held.

For purposes of the Zurich settlement, common questions included whether Zurich conspired with any defending insurance brokers. There were also common questions with respect to the resulting anticompetitive effects of the alleged conspiracy. Moreover, whether class members were proximately injured by Zurich’s conduct was capable of proof on a class-wide basis, even if the amount of damage that each plaintiff suffered could not be established by common proof, the appellate court noted.

Refusal to Certify Subclasses

The district court did not abuse its discretion in refusing to certify separate subclasses, despite the variety of policyholders. Objectors argued that the court should have utilized subclasses or required separate representation for complaining insurance policyholders who purchased a primary insurance policy from or through one of the defendants and policyholders who purchased additional insurance policies in excess of their primary insurance coverage from or through one of the defendants.

The decision did not render the plan of allocation unfair, according to the appellate court. Divergent interests did not exist between the allocation groups to necessitate subclasses. All of the class members shared a unified interest in establishing Zurich’s liability for engaging in anticompetitive conduct, which increased the cost of premiums for all policyholders.

Moreover, the allocation plan was carefully devised to ensure a fair distribution of the settlement fund to the various types of claimants. Policyholders who likely incurred the most damage were entitled to a larger proportion of the recovery than those whose injuries were less severe.

An objector’s “nearly identical challenges” to the Gallagher settlement were also rejected. The essential elements of the antitrust claims involved common questions of law and fact that predominated over individual issues.

Attorney Fees

An award of $29.95 million for attorney fees, expense reimbursements, and incentive awards in the Zurich settlement was upheld by the appellate court. The district court properly concluded that class counsel’s efforts produced at least $100 million for the settlement class, plus $29.95 million separately designated for their fees.

The reasonableness of the fee award was properly evaluated under a percentage of recovery method, even though the settlement was not a typical common fund. Thus, the fee award was 23% of the minimum recovery attributable to class counsel’s efforts or, alternatively, 19.9% of the minimum recovery if expenses and incentive awards were subtracted from the total award. A lodestar cross-check also supported the award, according to the appellate court.

The September 8 decision is In re Insurance Brokerage Antitrust Litigation, 2009-2 Trade Cases ¶76,733. Text of the decision appears here.