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United Farmers v. Farmers Insurance, 95-50559 (1996)

Court: Court of Appeals for the Fifth Circuit Number: 95-50559 Visitors: 8
Filed: Jul. 25, 1996
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals, Fifth Circuit. No. 95-50559. UNITED FARMERS AGENTS ASSOCIATION, INC.; Thomas J. Vinson; Robert D. Moon, Plaintiffs-Appellants, v. FARMERS INSURANCE EXCHANGE, a California Reciprocal or Inter- Insurance Exchange; Fire Insurance Exchange, a California Reciprocal or Inter-Insurance Exchange; Truck Insurance Exchange, a California Reciprocal or Inter-Insurance Exchange; Mid-Century Insurance Company; Farmers New World Life Insurance Company, Defendants-Appellees. July
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                 United States Court of Appeals,

                          Fifth Circuit.

                          No. 95-50559.

   UNITED FARMERS AGENTS ASSOCIATION, INC.;    Thomas J. Vinson;
Robert D. Moon, Plaintiffs-Appellants,

                                v.

  FARMERS INSURANCE EXCHANGE, a California Reciprocal or Inter-
Insurance Exchange;      Fire Insurance Exchange, a California
Reciprocal or Inter-Insurance Exchange; Truck Insurance Exchange,
a California Reciprocal or Inter-Insurance Exchange; Mid-Century
Insurance Company;    Farmers New World Life Insurance Company,
Defendants-Appellees.

                          July 25, 1996.

Appeal from the United States District Court for the Western
District of Texas.

Before GARWOOD, DAVIS and DeMOSS, Circuit Judges.

     W. EUGENE DAVIS, Circuit Judge.

     The United Farmers Agents Association (UFAA) and Farmers

insurance agents Thomas J. Vinson and Robert D. Moon appeal the

district court's order granting Farmers Insurance summary judgment

and dismissing their antitrust class action.    We AFFIRM.

                                I.

     Farmers Insurance is a group of five insurance companies with

approximately 14,000 independent contractor agents in 29 states.

Under the contract between Farmers and its agents, Farmers is

obligated to provide policyholder information to the agents.       It

has always provided this information through manual records in

paper and book form.   In 1981, Farmers set up a computer system,

the Farmers Agency Network System (FANS), to allow agents on-line

access to this information in addition to the traditional manual

                                1
access.     Agents   who   wished   to   gain   electronic     access   to

policyholder information through FANS were required to purchase a

specially configured IBM computer from Farmers or to use another

agent's IBM computer purchased from Farmers.

     The written agreement between Farmers and agents who purchased

computers and gained access to FANS specifically stated that,

absent written agreement from Farmers, only computers purchased

through Farmers would be allowed to access FANS.        Farmers' policy

was to never grant a written waiver of this provision.        This policy

continued until 1993 when Farmers began allowing agents to use

personal computers and computers purchased from third-party vendors

to access FANS.

     UFAA, Vinson and Moon (plaintiffs) filed this action as an

antitrust class action on behalf of all Farmers agents alleging

that Farmers illegally tied electronic access to policy information

to the purchase of computers from Farmers.          The district court

certified the class for liability purposes under Federal Rule of

Civil Procedure 23(b)(1) but deferred a ruling on certification of

a damages class pending the outcome on liability.            The district

court   referred   discovery   motions   and    other   dispositive     and

non-dispositive motions to a magistrate judge who recommended that

the district court grant summary judgment in favor of Farmers.           On

April 19, 1995, the district court adopted the magistrate's Report

and Recommendation in full and dismissed the plaintiffs' suit.           On

appeal, plaintiffs argue that the district court erred by granting




                                    2
Farmers' motion for summary judgment.1

                                  II.

                                   A.

         Plaintiffs argue that Farmers' policies regarding electronic

access to FANS constitute a per se illegal tying arrangement2 and

     1
      Plaintiffs also assert that the district court erred by
failing to review the summary judgment record de novo before
adopting the magistrate judge's recommendation, using an improper
standard in deciding whether summary judgment was appropriate and
failing to certify plaintiffs as a damages class under Federal
Rule of Civil Procedure 23(b)(3). Our de novo review of the
record and use of the proper standard for granting summary
judgment cure the first two of these asserted errors. Our
affirmance of the district court's decision to grant summary
judgment makes it unnecessary for us to consider the third.
     2
      Tying exists when "a seller refuses to sell one product,
which a buyer desires, unless the buyer also agrees to purchase a
second product, which is not otherwise desired from this seller
on the offered terms.... The desired product is called the
"tying' product; the other is the "tied' product." 9 Phillip E.
Areeda, Antitrust Law, ¶ 1700a (Little, Brown & Co., 1991). See
also Eastman Kodak Co. v. Image Technical Services, 
504 U.S. 451
,
461-62, 
112 S. Ct. 2072
, 2079-80, 
119 L. Ed. 2d 265
(1992).

          A tying arrangement is per se illegal when it has the
     following characteristics: (1) Two separate products (as
     opposed to components of a single product), (2) The two
     products are tied together or customers are coerced, (3) The
     supplier possesses substantial economic power over the tying
     product, (4) The tie has an anticompetitive effect on the
     tied market, and (5) The tie affects a not insubstantial
     volume of commerce. 9 Areeda, Areeda at ¶ 1702. See also
     
Kodak, 504 U.S. at 461-62
, 112 S.Ct. at 2079-80; Jefferson
     Parish Hospital Dist. No. 2 v. Hyde, 
466 U.S. 2
, 11-28, 
104 S. Ct. 1551
, 1558-66, 
80 L. Ed. 2d 2
(1984).

          Tying arrangements and other restraints of trade that
     do not fit the criteria for per se illegality are evaluated
     under the Rule of Reason. Jefferson Parish Hospital 
Dist., 466 U.S. at 29
, 104 S.Ct. at 1567 (1984). Under the Rule of
     Reason, the plaintiff has the burden of proving that the
     tying arrangement "unreasonably restrained competition."
     
Id. This burden
requires an inquiry into the actual effect
     of the tying arrangement on competition in the tied market.
     
Id. 3 allege
that the relevant market3 in which Farmers is illegally

exercising market power is the market for electronic access to

Farmers policy information.        Farmers responds by arguing that the

relevant market should be insurance sales and even if the court

accepts the plaintiffs' argument that a separate market exists for

electronic access to Farmers policy information, Farmers' has no

power in     the   market   for   electronic       access    to     Farmers    policy

information because of intense competition in the insurance sales

market.    We find that Farmers has no market power in the relevant

market    (insurance    sales)    and       no   market     power    even     in   the

plaintiffs' alleged relevant market (electronic access to policy

information).      Market power is a necessary prerequisite to an

illegal tie so we need not make any further inquiry into whether

Farmers' policies constitute an illegal tie.

     Under the undisputed facts of this case, we agree with Farmers

that the relevant market is the market for insurance sales.                        The

only product that Farmers markets to consumers is insurance.                        We

agree with the magistrate that the summary judgment record is

"replete with evidence that Farmers Insurance sells insurance, not

electronic    access,   not   computers."           (emphasis       in   original).

     3
      The relevant market in an antitrust inquiry is defined by
the cross-elasticity of demand between a given product and its
substitutes. 2 Phillip E. Areeda & Donald F. Turner, Antitrust
at ¶ 519a. The cross-elasticity of demand for substitutes
measures consumers' propensity to switch from one product to
another, similar product when relative prices change. See
William J. Baumol & Alan S. Blinder, Economics: Principles and
Policy at 343 (Harcourt Brace Jovanovich, Inc., 1979). Products
similar enough that a small relative price change causes
consumers to substitute one for another are in the same market.
2 Areeda & Turner, Antitrust at ¶ 525a.

                                        4
Plaintiffs' alleged market consists of a single brand (Farmers) and

a tying product (electronic access to policy information) that has

never been available to anyone other than Farmers agents.                    The

information that the alleged tying product allows agents to access

has   always   been    available   to   agents    in   book   form   for   free.

Additionally, plaintiffs' own attorney could offer no justification

at oral argument for choosing electronic access to Farmers policy

information as the relevant market other than that he was trying to

define the market as narrowly as possible (in order to make it look

as if Farmers had market power).            Plaintiffs have not alleged that

Farmers has a superior or unique insurance product that allows it

to charge consumers more for policies or pay agents less for

selling them and they have shown no evidence that new Farmers

agents would face significant information or switching costs4 in

deciding whether to sell Farmers insurance or the insurance of

another company.      The agents have failed to give us any reason to

view the market for electronic access to Farmers policy information

as the relevant market.

      This suit is essentially an intracompany dispute over how to

run a computer system, not a valid claim under antitrust laws.

Economic   power      derived   from    contractual     agreements    such    as

franchises or in this case, the agents' contract with Farmers, "has

      4
      Information costs in this case are the costs incurred by
new agents in finding out how much Farmers will charge for
electronic access to policy information and other services after
they begin selling Farmers policies. Switching costs are the
costs incurred in switching from selling Farmers insurance to
selling the policies of another company. Compare 
Kodak, 504 U.S. at 473-77
, 112 S.Ct. at 2083-88.

                                        5
nothing to do with market power, ultimate consumers' welfare, or

antitrust."   Benjamin Klein & Lester F. Saft, The Law and Economics

of Franchise Tying Contracts, 28 J.Law & Econ. 345, 356 (1985).                We

agree with    the   magistrate    judge      and   the   district    court    that

plaintiffs fail to raise a question of material fact as to whether

electronic access to Farmers policy information is the relevant

market for our inquiry.

     The relevant market for an inquiry into market power in this

case is the market for insurance sales and the agents do not

contend that Farmers could exercise (or has exercised) market power

in that market.      The agents' claim is not, therefore, cognizable

under antitrust laws and the magistrate judge and the district

court correctly determined that Farmers was entitled to summary

judgment.

                                        B.

      Even    if    we   accept   the    plaintiffs'     alleged     market   for

electronic access to policy information as the relevant market, the

plaintiffs have failed to prove that Farmers had or exercised

market power.      Farmers has 100% of the market share in the tying

product (electronic access to policy information).                 However, this

does not mean that Farmers has market power in the tying market.

In fact, undisputed evidence showing that the markets for insurance

sales and agents are highly competitive makes plaintiffs' argument

that Farmers has market power in the market for its policy holder

information     highly    unlikely      in   the   absence    of    prohibitive




                                        6
information costs or the ability to price discriminate5 between

agents with high switching costs and those with low or no switching

costs. See Eastman Kodak Co. v. Image Technical Services, 
504 U.S. 451
,       475,    
112 S. Ct. 2072
,   2086-87,     
119 L. Ed. 2d 265
  (1992).

Plaintiffs have cited no evidence that information or switching

costs were high for most agents and offer no evidence that Farmers

attempted to engage in price discrimination.

       The plaintiffs argue that Kodak compels us to deny Farmers

motion for summary judgment.              However, their reliance on Kodak is

misplaced.          The Supreme Court's decision in Kodak was a rejection

of Kodak's assertion that market power could never exist over

repair parts in any case where the defendant did not have market

power over the earlier-purchased machines needing those parts.

Critically, the plaintiffs in Kodak produced evidence that Kodak

was charging above market prices for its service and was engaged in

price discrimination in favor of the knowledgeable customers who

could most easily obtain information or switch companies.                        
Kodak, 504 U.S. at 465
, 
476, 112 S. Ct. at 2081
, 2087.                    By contrast, the

plaintiffs         in    this   case   have   failed   to    proffer    any    specific

evidence          that   the    computers     sold   by   Farmers      were    sold   at

       5
      Price discrimination is charging different buyers different
prices for the same item. A price-discriminating monopolist
charges each consumer as much as the consumer is willing to pay
for an item. Consumers who desperately need a particular product
are charged a high price for it while those who do not really
need the product and will refuse to buy it rather than pay a high
price are charged a relatively low price. A price-discriminating
monopolist makes as much money as possible on its product because
it charges high prices to the people who are willing to pay high
prices without losing sales to people willing to pay only a low
price. See 2 Areeda & Turner Antitrust, ¶ 514a.

                                              7
above-market prices or that other equipment of comparable quality

was available    for      less.     The    only   summary   judgment   evidence

plaintiffs submitted was general testimony that third party vendors

of used IBM system 36 computers were selling them for less than

Farmers and in larger quantities. They offer no evidence regarding

price, quality, reliability or the expense necessary to configure

these   computers    to     FANS.     Except      for   general   disclaimers,

plaintiffs offered no assurance that these used computers would

maintain the security of Farmer's policy information and would not

introduce viruses into the system.            Additionally, plaintiffs offer

no evidence of an appropriate market price for electronic access to

policy information and have failed to even allege that the tied

bundle of electronic access and computers cost more than the sum of

their market prices.        See Will v. Comprehensive Accounting Corp.,

776 F.2d 665
, 672-73 (7th Cir.1985) cert. denied 
475 U.S. 1129
, 
106 S. Ct. 1659
, 
90 L. Ed. 2d 201
(1986) ("unless plaintiff shows that the

package price was elevated, the suit must be dismissed without

further ado");      Kypta v. McDonald's Corp., 
671 F.2d 1282
(11th

Cir.) cert. denied, 
459 U.S. 857
, 
103 S. Ct. 127
, 
74 L. Ed. 2d 109
(1982) (same).      In sharp contrast to Kodak where the plaintiffs

supported their claims of market power with evidence that Kodak

charged above-market prices and engaged in price discrimination,

the plaintiffs here simply allege that Farmers charged prices above

the market price for computers without offering any evidence of

what the market price for reliable computers was or alleging that

the bundle of products, taken together, was sold at an above-market


                                          8
price.

     The plaintiffs have failed to raise a question of material

fact as to whether Farmers has sufficient market power in the

market for electronic access to Farmers policy information to force

agents to buy computers at higher than market prices.               The fact

that Farmers required agents to purchase a computer from it in

order to obtain electronic access to policy information does not

prove that Farmers had market power.        See Breaux Bros. Farms, Inc.

v. Teche Sugar Co., 
21 F.3d 83
, 86-87 (5th Cir.) cert. denied ---

U.S. ----, 
115 S. Ct. 425
, 
130 L. Ed. 2d 339
(1994).          As noted above,

the summary judgment record contains no evidence that the computers

were sold at a premium price or that acceptable alternatives were

available   for   less.     It   also    contains   no   evidence   of   what

electronic access to policy information should cost.          In fact, the

summary judgment record strongly supports Farmers' argument that it

had no power in the electronic-access-to-policy-information market.

     Plaintiffs do not dispute that the insurance sales market is

highly competitive.       Absent high information or switching costs,

intense competition in the market for insurance agents will force

Farmers to pay competitive wages and preclude it from imposing

above-market prices on its agents for the services it provides

them.    Additionally, availability of manual access to policy

information was a good substitute for electronic access.                 This

seriously limited Farmers' ability to charge more than the market




                                     9
price for electronic access to the same information.6          The summary

judgment record here contains no evidence that information or

switching costs were high enough to produce any substantial market

power for Farmers and no evidence that manual access to policy

information   was   so   seriously    inadequate   as   a   substitute   for

electronic access as to allow Farmers to exercise market power over

electronic access.

     Information and switching costs for Farmers agents hired after

1981 when FANS was implemented were virtually nonexistent.               The

summary judgment record shows that Farmers openly required agents

wishing to access FANS to do so only with computers purchased from

Farmers.   Any agent hired would have known of the two ways to

obtain policy information and could have easily inquired about the

cost of electronic access.           The computer installment contract

clearly states that no non-Farmers computer will be allowed to

access FANS without the written consent of Farmers.               Division

manager Bob Akers testified that he regularly told his agents that

Farmers' policy was to not allow any computers purchased from

third-party vendors to access FANS.       Internal correspondence shows

that a corporate officer who led an agent to believe that he could

hook up his computer to FANS even though it was purchased from a


     6
      Substitutes limit market power by giving consumers an
alternative to paying an above-market price for a product. The
existence of a good substitute at a competitive price (in this
case manual access to policy information for free) prevents a
producer from selling its product at an above-market price. An
attempt to raise price of the product above a competitive level
will be met with a shift in demand from the product to its
substitute. See 2 Areeda & Turner, Antitrust at ¶ 525a.

                                     10
third party was quickly reprimanded and informed that Farmers

policy was to not allow FANS access to any computers purchased from

third parties.   The plaintiffs produce no evidence that suggests

that this information was difficult to obtain.        Agents would

clearly have become aware of Farmers' policy long before they faced

significant switching costs.

     If an agent, unhappy with Farmer's computer policy, wished to

move to a new company, he was free to do so.   Switching costs for

most agents were very low.   The only switching cost evident in the

summary judgment record is the inability to continue earning

commission from Farmers policies which agents have already sold.

New agents have virtually no switching costs because they have sold

no policies or only a few.     These agents can switch to selling

insurance for another insurance company without incurring any

significant cost.   The only group of agents that faced switching

costs of any significance were Farmers agents hired before 1981

when FANS was implemented.   Switching costs for these agents could

have been high because the agents could not take their customers

with them if they left. Policyholders are Farmers' customers under

the terms of the agency agreement and departing agents would be

forced to give up the income from the numerous policies they had

sold in previous years.7

     7
      It is important to note that even agents who faced high
switching costs in the decision to switch insurance companies
could easily have continued selling policies with the manual
system. Farmers clearly did not require agents to use FANS and
continued to supply its agents with manual policy information for
free. Even, if manual access to policy information was inferior
to electronic access, it was a reasonably good substitute that

                                 11
     The absence of significant information costs to the agents and

the existence of switching costs for some agents but not for others

means that in order for Farmers to have exercised market power in

the markets for electronic access and computers, it must have

engaged in price discrimination.       Farmers could exercise market

power and sell electronic access or computers at above-market

prices only to those agents with high switching costs.   Agents with

low switching costs would refuse to pay an above-market price for

the bundled electronic access and computers.      Rather than pay a

premium, these agents could simply leave Farmers and move to

another insurance company.

     Plaintiffs submit no evidence that Farmers charged agents with

many policies in force more than it charged new agents or those

with few policies in force.    They do not even allege that Farmers

attempted to engage in price discrimination. Without an allegation

that price discrimination occurred or evidence that Farmers agents

faced prohibitive costs in discovering Farmers' computer policy,

the plaintiffs cannot seriously argue that Farmers had or exploited

any market power.   Plaintiffs fail to raise a question of material

fact as to whether Farmers had market power in the market for

electronic access to policy information.

                              Conclusion

     We agree with the district court and the magistrate judge that

electronic access to policy information is merely a component of


would have seriously limited Farmers' ability to charge
above-market prices for electronic access and computers even to
those agents with many policies in force.

                                  12
Farmers' insurance product and that the relevant market for an

antitrust inquiry is the insurance sales market. Farmers exercised

no market power in this highly competitive market and plaintiffs'

antitrust action fails for this reason alone.   Additionally, even

if we accept plaintiffs' alleged markets as the relevant markets

for our inquiry, plaintiffs still fail to raise a question of

material fact on the issue of whether Farmers has market power.

Plaintiffs fail to offer any evidence of above-market computer

prices or high switching or information costs.    They present no

evidence that Farmers engaged in price discrimination and they

offer no plausible economic argument that would support market

power.   For all of these reasons, we find that plaintiffs have

failed to raise a question of material fact as to whether Farmers

violated antitrust laws.   The judgment of the district court is,

therefore, AFFIRMED.

     AFFIRMED.




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