Filed: Aug. 22, 2007
Latest Update: Feb. 21, 2020
Summary: United States Court of Appeals Fifth Circuit F I L E D REVISED August 22, 2007 August 1, 2007 UNITED STATES COURT OF APPEALS For the Fifth Circuit Charles R. Fulbruge III Clerk No. 06-10500 ALLSTATE INSURANCE COMPANY and STERLING COLLISION CENTERS, INC., Plaintiffs-Appellants/Cross-Appellees, VERSUS GREG ABBOTT, in his official capacity as Attorney General of Texas, and SUSAN COMBS, in her official capacity as Texas Comptroller of Public Accounts, Defendants-Appellees/Cross-Appellants VERSUS AUT
Summary: United States Court of Appeals Fifth Circuit F I L E D REVISED August 22, 2007 August 1, 2007 UNITED STATES COURT OF APPEALS For the Fifth Circuit Charles R. Fulbruge III Clerk No. 06-10500 ALLSTATE INSURANCE COMPANY and STERLING COLLISION CENTERS, INC., Plaintiffs-Appellants/Cross-Appellees, VERSUS GREG ABBOTT, in his official capacity as Attorney General of Texas, and SUSAN COMBS, in her official capacity as Texas Comptroller of Public Accounts, Defendants-Appellees/Cross-Appellants VERSUS AUTO..
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United States Court of Appeals
Fifth Circuit
F I L E D
REVISED August 22, 2007
August 1, 2007
UNITED STATES COURT OF APPEALS
For the Fifth Circuit Charles R. Fulbruge III
Clerk
No. 06-10500
ALLSTATE INSURANCE COMPANY and STERLING COLLISION CENTERS, INC.,
Plaintiffs-Appellants/Cross-Appellees,
VERSUS
GREG ABBOTT, in his official capacity as Attorney General of
Texas, and SUSAN COMBS, in her official capacity as Texas
Comptroller of Public Accounts,
Defendants-Appellees/Cross-Appellants
VERSUS
AUTOMOTIVE SERVICE ASSOCIATION and CONSUMER CHOICE FOR AUTOBODY
REPAIR,
Intervenors-Appellees/Cross-Appellants
Appeal from the United States District Court
For the Northern District of Texas, Dallas Division
Before KING, DAVIS, and BARKSDALE, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Allstate Insurance Co. (“Allstate”) and Sterling Collision
Centers, Inc. (“Sterling”) brought this action against Greg Abbott
and Susan Combs as Defendants in their official capacities as
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Attorney General of Texas and Texas Comptroller of Public Accounts
(collectively “State Defendants”)1 to challenge a Texas statute
known as House Bill 1131 (codified as Tex. Occ. Code § 2307.001, et
seq.). H.B. 1131 restricts the right of an auto insurer to own and
operate auto body shops in Texas. Allstate and Sterling argue the
statute violates the dormant Commerce Clause and the First
Amendment of the United States Constitution.
After a bench trial, the district court rejected Allstate’s
dormant Commerce Clause challenge but found that certain provisions
of the statute violated the First Amendment. We AFFIRM.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 2000, Allstate, a Delaware insurance company holding
approximately 15% of the automobile insurance market in Texas,
implemented a plan to enter the auto body repair business by
acquiring Sterling, a multi-state chain of repair shops. Sterling
operates approximately 60 auto body repair shops in 14 states,
including 15 shops in the state of Texas. Allstate planned to
improve existing Sterling facilities and to cultivate new ones. By
influencing its customers and other claimants to obtain repair work
from Sterling rather than from unaffiliated shops, Allstate
1
Two other parties, Automotive Service Association (a
national organization of auto body shops) and Consumer Choice in
Auto Body Repair (a group formed contemporaneously with the
effort to pass H.B. 1131), intervened and have jointly filed
briefs in support of the State Defendants. Because the State
Defendants and the Intervenors advance identical positions, we
refer to both entities interchangeably as the State Defendants.
-2-
believed it could minimize charges for unnecessary or overpriced
repairs.
At the time of its acquisition of Sterling, Allstate
maintained a relationship with several local body shops in Texas
through a program called the Priority Repair Option (“PRO”).
Allstate recommended the PRO shops to its insureds and other
claimants if the shops maintained a certain level of quality and
efficiency. If a customer chose to go to a PRO shop, Allstate
provided a guarantee for the repairs performed and became the
direct purchaser for the repair services. Allstate found that most
PRO shops had a lower average repair cost than other body shops.
However, while the PRO program led to some cost savings,
Allstate——still troubled by the prevalence of fraud and
inefficiencies in repair work (even in PRO shops) and seeking to
gain an advantage over competitors that maintained similar
programs——decided to explore auto body shop ownership as an
additional strategy for cost savings.
After its acquisition of Sterling, Allstate had its telephone
service representatives use a script in speaking with policyholders
and other claimants. Representatives would first offer the
services of the Sterling shops to policyholders, without offering
a referral to PRO shops as had been done previously. Allstate
followed this approach to boost business at Sterling shops which
had lost their pre-existing referral relationships with other
insurers after Allstate’s acquisition. Under the new practice,
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Allstate referred policyholders to PRO shops only when asked.2
In addition to using this sales pitch from the script,
Allstate sought to boost Sterling’s market share by eliminating its
PRO relationship with shops that were near a Sterling shop, thus
funneling repair opportunities to Sterling.
In 2003, the Texas Legislature began considering H.B. 1131, a
bill which would bar insurers from acquiring an interest in auto
body shops. The parties dispute the precise motivation for the
bill’s introduction and passage. Allstate claims that the bill was
part of a coordinated political strategy to hurt its venture with
Sterling and to maintain the dominance of local Texas body shops.
The State Defendants argue that the bill grew out of concerns for
customer welfare, particularly that Allstate’s dual role as insurer
and body shop owner would create a conflict of interest and an
2
The script read as follows:
Mr./Mrs. ______, of course you are always free to
choose any repair shop 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 Auto Body Centers, which are affiliated with
the Allstate Corporation.
Sterling Auto Body Centers are highly respected and
provide exceptional 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 paper work, keep you updated
throughout the repair process, guarantee a completion
date, and, even, professionally clean your vehicle
inside and out. They can also assist with rental
arrangements on site and will pay for additional rental
expenses if the guaranteed delivery date is missed.
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incentive to short change customers.
Transcripts of the legislative hearings on the bill reflect
both consumer protection and local industry concerns. On consumer
protection, members in the House and Senate heard testimony from
several individuals, many of them affiliated with body shop trade
groups, detailing the danger of insurance company ownership of auto
body repair shops. These witnesses all warned of the conflict of
interest inherent in such an arrangement, arguing that it raised
the risk of illegal customer steering. The witnesses also
predicted that such arrangements would encourage body shops “tied”
to insurers to cut corners in an effort to reduce repair costs.3
Legislators also heard about the adverse impact on local industry
which would result from Allstate’s entry into the auto body repair
business. For instance, the Vice President of the Automotive
Services Association warned that the rise of insurer owned repair
shops would lead to the demise of the independent repair industry,
along with billions of dollars in local economic impact and
hundreds of thousands of jobs. Another bill proponent, a body shop
3
Both customers and body shop owners testified in support of
these concerns. One customer who had been involved in an
accident with an Allstate insured told the committee that
Allstate discouraged him from taking his car to an independent
shop by asserting that the shop kept cars longer than necessary,
a claim the witness said was untrue. He further stated that
Allstate did not give the shop adequate time to complete repairs.
Another witness, a body shop owner, testified that Allstate's
management had refused to agree with its own on-site adjuster's
assessment that a car was a total loss and instead insisted that
the car be repaired.
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owner, told the House Committee about how his shop had been forced
from Allstate’s PRO referral program after a Sterling shop opened
down the street. Several representatives for Allstate also spoke
at the hearings. These individuals attempted to assuage fears
about illegal steering and to frame the bill as an obstacle to
consumer choice.
It is difficult to say from the legislative history what
primary factor motivated passage of the legislation. We have the
not unusual situation where both sides find passages from the
legislative history supporting their view of the predominant reason
for the legislation.4
4
For instance, Representative Flores’s explanation of the
bill prominently highlighted local industry concerns:
REP. FLORES: What this seeks is to remedy a situation
that is occurring in a lot of the major metropolitan
areas, which is – and it’s spreading, and it’s 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.
Hearing on Tex. H.B. 1131 Before the House Comm. on Licensing &
Admin. Procedures, 78th Leg., R.S. [hereinafter “H.B. 1131 House
Hearing”] 2 (March 6, 2003) (emphasis added). Similarly,
Representative Homer at the same hearing and then Senator Carona
in a subsequent Senate hearing commented on the issue of
competition with local industry:
REP. HOMER: Because I’m a small businessman . . .,
there’s nothing that angers me more than when the big
guy comes in and just . . . run[s] you out of town . .
. . It’s kind of the Wal*Mart scenario.
H.B. 1131 House Hearing, pg. 92.
SEN. CARONA: I think the most significant thing we’ve
tried to do here is . . . just make sure that – in the
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H.B. 1131 was passed on May 27, 2003, and took effect on
September 1, 2003. As enacted, it accomplished two broad reforms.
First, the new law generally prohibits an insurer from owning or
acquiring an interest in an auto repair facility.5 However,
facilities already open for business at the time of the bill’s
passage are exempted.6 Second, the statute establishes a set of
rules to govern these existing shops. Most notably, it requires an
insurer to offer the same referral arrangement it has with its tied
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.
Hearing on Tex. H.B. 1131 Before the Senate Comm. on Bus. &
Commerce, 78th Leg., R.S., 11 (May 20, 2003).
On the other hand, several comments and questions by various
members focused on consumer protection:
REP. WISE: [D]id you say that some employees at
Sterling have anonymously told you that their customers
are being steered to them by their adjustors?
REP. DELWIN: [To Allstate lobbyist] I’d like to hear
how would you address some of the allegations that
you’ve heard about Allstate adjustors basically forcing
people into Sterling . . . .
REP. DRIVER: But the concept and what the concern is
here is how many of those Sterling clients are Allstate
clients? How many of them are being directed that way?
H.B. 1131 House Hearing, pg. 14, 41, 73.
5
Tex. Occ. Code § 2307.002.
6
Id.
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body shop to at least one unaffiliated body shop.7 The law does
not require that an insurer treat all body shops the same, only
that the insurer extend an invitation into a referral program to at
least one untied shop and that the insurer treat all tied and
untied shops in that referral program the same.
H.B. 1131 carries no criminal penalties. It instead creates
a private cause of action in “any person aggrieved by a violation
of the statute.”8 Based on the seriousness of the violation, a
court may impose a civil penalty which is to be sent to the
comptroller for deposit in the state’s general revenue fund.9
Allstate and Sterling are the only entities affected by the
law because Sterling is the only body shop in Texas directly owned
by an insurer and Allstate is the only insurer in Texas which owns
a body shop.
In 2003, Allstate filed the present suit, claiming that H.B.
1131 violates the dormant Commerce Clause and the First Amendment.
Allstate argued that because H.B. 1131 forecloses Sterling, an
interstate body shop, from opening more body shops in Texas, the
purpose and effect of the law is to discriminate against interstate
commerce. The company acknowledged that while the law does not
7
Tex. Occ. Code § 2307.006(11) (“An insurer may not enter
into a favored facility agreement exclusively with its tied
repair facilities.”).
8
Tex. Occ. Code § 2307.009(a).
9
Tex. Occ. Code § 2307.009(b).
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accomplish this discrimination directly by using statutory
classifications based on domicile, the law was adopted for the
purpose, and has the effect, of advantaging local industry at the
expense of Sterling, a non-resident. Allstate also claimed that
the bill’s provisions, which make Allstate’s ability to promote
Sterling shops contingent on Allstate’s promotion of other body
shops, run afoul of the First Amendment’s protection of truthful
and non-deceptive commercial speech.
A bench trial was completed in October 2004. At the
conclusion of the trial, the district court upheld the bill’s
restrictions on the acquisition of auto body repair shops. The
district court found that the bill was not intended to, nor did it
have the effect of, discriminating against interstate commerce.
Rather, the district court explained, H.B. 1131 created different
treatment of two business forms, independent (or “mom and pop”)
operations on the one hand versus auto body repair shops owned by
insurance companies on the other hand——a permissive basis for
discrimination. However, the district court concluded that the
bill’s speech provisions violated the First Amendment. The court
explained that H.B. 1131's provisions were not sufficiently narrow
and instead served to deprive consumers of information which may be
beneficial. The judge observed that the need for the speech
provisions was questionable since Texas consumers already enjoyed
the benefit of an anti-steering law, which prohibits insurers from
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requiring policyholders to use a certain auto body shop.10 The
court reasoned that less restrictive means existed to accomplish
the consumer welfare aims, for instance, a simple requirement that
Allstate disclose its ownership of Sterling.
Allstate appeals the dormant Commerce Clause ruling. The
State Defendants defend that portion of the judgment but find fault
with the First Amendment aspect of the trial court’s ruling.
II. JURISDICTION
This case was brought initially in Dallas county state court
pursuant to the Texas Declaratory Judgment Act.11 On September 23,
2006, the State Defendants timely removed the case to federal
district court. The parties agree that this removal accomplished
10
See Tex. Ins. Code § 5.07-1(b)(2).
11
Tex. Civ. Prac. & Rem. Code § 37.004(a) (“a person . . .
whose rights . . . are affected by a statute . . . may have
determined the question of construction or validity arising under
the . . . statute . . . and obtain a declaration of rights . . .
thereunder.”). Under the TDJA, the Attorney General is a
necessary party where the validity of a statute is at issue. See
Tex. Civ. Prac. & Rem. Code § 37.006(b). Texas courts have
recognized that the TDJA waives the state’s sovereign immunity.
See Tex. Educ. Agency v. Leeper,
893 S.W.2d 432, 446 (Tex.1994)
(“[B]y authorizing declaratory judgment actions to construe the
legislative enactments of governmental entities and authorizing
awards of attorneys fees, the [Declaratory Judgments Act]
necessarily waives governmental immunity for such awards.”); see
also Wichita Falls State Hosp. v. Taylor,
106 S.W.3d 692, 698
(Tex. 2003) (stating that if the Legislature required the State
to be joined in a lawsuit for which immunity would otherwise
attach, the Legislature intentionally waived the State's
sovereign immunity and noting that Leeper stands for the
proposition that the TDJA does waive aspects of sovereign
immunity).
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a waiver of the state’s Eleventh Amendment immunity.12
The State Defendants argue that the dispute does not satisfy
Article III’s case or controversy requirement. In order to
establish a case or controversy sufficient to give a federal court
jurisdiction over their claims, plaintiffs must satisfy three
criteria: (1) they must show that they have suffered, or are about
to suffer, an “injury in fact”; (2) “there must be a causal
connection between the injury and the conduct complained of”; and
(3) “it must be likely, as opposed to merely speculative, that the
injury will be redressed by a favorable decision.”13
While conceding that Allstate has suffered an injury, the
State Defendants cite our decision in Okpalobi v. Foster14 in
support of their argument that causation and redressability are
lacking in this case. In Okpalobi, we considered whether a
district court had properly enjoined the operation and effect of a
Louisiana state tort statute which made abortion providers liable
to patients in tort for any damage occasioned by abortions. We
concluded that because the named defendants (the Governor and the
Attorney General) had caused no injury to the plaintiffs and could
never themselves cause any injury under the private civil scheme,
12
See Lapides v. Bd. of Regents of Univ. Sys. Of Ga., 535
U.S. 613, 620 (2002).
13
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)
(citation omitted).
14
244 F.3d 405, 426-27 (5th Cir. 2001) (en banc).
-11-
the plaintiffs failed to fulfill Article III’s case and controversy
requirement.15
Okpalobi does not control this case. A case brought against
a state officer in his official capacity is essentially a suit
against the state.16 While the states are immune from suit under
the Eleventh Amendment, Ex parte Young allows a plaintiff to avoid
this bar by naming a state official for the purpose of enjoining
the enforcement of an unconstitutional state statute. In turn,
Young requires that “[i]n making an officer of the state a party
defendant in a suit to enjoin the enforcement of an act alleged to
be unconstitutional, . . . such officer must have some connection
with the enforcement of the act, or else it is merely making . . .
the state a party.”17 Because neither the authority of the
Louisiana Governor nor Attorney General extended to enforcing the
provision challenged by the Okpalobi plaintiffs, the Eleventh
Amendment remained a bar to the suit. Our standing analysis was
thus limited to an examination of whether causation and
15
Id. at 426.
16
See, e.g., Diamond v. Charles, 476 U.S. 54, 57 n.2 (1986)
(stating that “[a] suit against a state officer in his official
capacity is, of course, a suit against the State”); Kentucky v.
Graham,
473 U.S. 159, 166 (1985) (noting that suits against state
agents are just another way of pleading actions against the
state); McCartney v. May,
50 S.W.3d 599, 606 (Tex.App.–-Amarillo,
2001, no pet.) (“[a] claim against a state employee in [his]
official capacity is, in effect, a claim against the state,” and
thus, “to that extent, the state is a party.”).
17
Ex parte Young, 209 U.S. 123, 157 (1908) (emphasis added).
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redressability could be linked to the enforcement connection the
Governor and Attorney General had with the statute.18
Unlike Okpalobi, the state removed this case to federal court
and thereby waived its Eleventh Amendment immunity. Therefore,
because it is unnecessary to employ the fiction of Young to defeat
the state’s immunity, the connection between the state officer
named in the suit and the enforcement of H.B. 1131 is irrelevant to
our standing analysis. Rather, the state is the real party in
interest.
Because the state itself is a party, causation and
redressability are easily satisfied in this case. Causation is
satisfied because the state passed H.B. 1131, a law which threatens
Allstate with private civil law suits and civil penalties if it
continues with its business plan to acquire additional Sterling
body shops. A declaration of unconstitutionality directed against
the state would redress Allstate’s injury because it would allow
Allstate to avoid these penalties and lawsuits.19 Accordingly, we
are satisfied that a genuine case or controversy exists.
III. COMMERCE CLAUSE CHALLENGE
A district court’s judgment concerning a statute’s
18
See Okpalobi. at 426-27.
19
See Franklin v. Massachusetts, 505 U.S. 788, 790-91 (1992)
(finding redressability prong satisfied where actors who were not
parties to the lawsuit could be expected to amend their conduct
in response to a court's declaration).
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constitutionality is reviewed de novo.20 To the extent relevant to
the constitutional question, subsidiary facts are reviewed for
clear error.21
A statute violates the dormant Commerce Clause where it
discriminates against interstate commerce either facially, by
purpose, or by effect.22 If the statute impermissibly
discriminates, then it is valid only if the state “can demonstrate,
under rigorous scrutiny, that it has no other means to advance a
legitimate local interest.”23 If the statute does not discriminate,
then the statute is valid unless the burden imposed on interstate
commerce is “clearly excessive” in relation to the putative local
benefits.24
A.
Allstate first attacks H.B. 1131 on the ground that the
statute was passed with a discriminatory purpose. The company
relies heavily on the legislative statements cited above in
asserting that economic protectionism was the predominant
motivation for the legislation.
20
Castillo v. Cameron County, 238 F.3d 339, 347 (5th Cir.
2001).
21
Me. v. Taylor,
477 U.S. 131, 144-45 (1986).
22
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984).
23
C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S.
383, 392 (1994).
24
Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).
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The burden of establishing that a challenged statute has a
discriminatory purpose under the Commerce Clause falls on the party
challenging the provision.25
The Supreme Court has identified the following factors as
relevant in determining whether purposeful discrimination animated
a state legislature’s action: (1) whether a clear pattern of
discrimination emerges from the effect of the state action; (2) the
historical background of the decision, which may take into account
any history of discrimination by the decisionmaking body; (3) the
specific sequence of events leading up the challenged decision,
including departures from normal procedures; and (4) the
legislative or administrative history of the state action,
including contemporary statements by decisionmakers.26
Considering these factors, we conclude the district court did
not clearly err in rejecting Allstate’s contention that H.B. 1131
was purposefully discriminatory.
For one, Allstate and Sterling have failed to demonstrate a
clear and consistent pattern of discriminatory action by the Texas
Legislature. As discussed further below, while the effect of H.B.
1131 is to disadvantage Allstate, this effect derives solely from
25
See Hughes v. Oklahoma, 441 U.S. 322, 336 (1979).
26
See Village of Arlington Heights v. Metropolitan Housing
Development Corp., 429 U.S. 252, 266-268 (1977); see also Waste
Mgmt. Holdings, Inc. v. Gilmore,
252 F.3d 316, 336 (4th Cir.
2001) (applying Arlington Heights factors to dormant Commerce
Clause analysis).
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Allstate’s status as the only body shop owning insurer in Texas.
Allstate has failed to establish a history of hostility towards
Allstate singularly or towards out-of-state companies in general.
Further, while characterizing the legislative hearings on H.B.
1131 as “perfunctory,” Allstate has failed to show that the
Legislature departed from usual procedures in its consideration or
enactment of the bill. The Legislature held well attended
committee hearings in both of its chambers where proponents for and
against the measure were given comparable time to testify. In
addition, there is no dispute that key legislators met with
Allstate executives on several occasions, allowing the company to
express its concerns about the bill. Indeed, these discussions
produced a Senate amendment stripping a provision requiring
complete divesture of Allstate’s ownership interest in Sterling.
Finally, the stray protectionist remarks of certain
legislators are insufficient to condemn this statute. Our
independent review of the legislative record reveals that the
Legislature heard extensive testimony from various witnesses on the
legitimate consumer protection concerns sought to be remedied by
H.B. 1131. For instance, 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.27 They also heard that
27
H.B. 1131 House Hearing, supra note 4, pg. 5, 7.
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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.28
Further, witnesses reported specific instances demonstrating these
dangers.29 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.30
Moreover, much of Allstate’s evidence of “discrimination”
towards out-of-state companies is simply evidence of a legislative
desire to treat differently two business forms——independent auto
body shops on the one hand and insurance-company-owned auto body
shops on the other——a distinction based not on domicile but on
business form. In Ford v. Texas Department of Transportation, we
recently approved the Texas Legislature’s enactment of an analogous
statute based on this distinction.31 In Ford, we upheld, against
28
Id. at 8, 30, 100.
29
Id. at 17-28, 30-31, 102, 104.
30
See Maine, 477 U.S. at 150-51 (plaintiff's evidence,
including statements made by state administrative agency
expressing protectionist motivation for challenged legislation,
would not establish violation of dormant Commerce Clause where
evidence did not demonstrate that the state had no legitimate
interest in enacting the challenged regulation).
31
264 F.3d 493 (5th Cir. 2001).
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a dormant Commerce Clause challenge, a Texas statute which
prohibited automobile manufacturers from acting as automobile
dealers.32 The plaintiff, Ford Motor Company, alleged that the
statute violated the dormant Commerce Clause because it isolated
Texas’s retail car market and prevented the entry of out-of-state
firms. Like the present case, the legislative history of the
challenged provision in Ford revealed a legislative desire to
prevent firms with superior market position (car manufacturers)
from entering a downstream market (car dealership), a desire drawn
from concern that vertical integration of the automobile market
would be detrimental to consumers.33 We held that because the
challenged provision did not discriminate on the basis of a
company’s business contacts with the state, but rather on the basis
of its status as an automobile manufacturer, the statute did not
offend the dormant Commerce Clause.34 We find no significant
factual or legal distinction between Ford and the instant case.
Like Ford, 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
32
Ford, 264 F.3d at 502.
33
See id. at 500.
34
Id. at 502 (observing that out-of-state corporations which
were non-manufacturers had the same opportunity as in-state
corporations to operate in Texas).
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is no obstacle to such regulation.
B.
Next, Allstate and Sterling argue that H.B. 1131 has a
discriminatory effect because it favors in-state body shops and
will cause these services to shift from an out-of-state provider
(i.e., Sterling) to in-state providers. For this proposition,
Allstate relies heavily upon Exxon Corp. v. Maryland.35 In that
case, various oil companies challenged the validity of a Maryland
statute prohibiting producers and refiners of petroleum products
from operating retail service stations in Maryland. The producers
and refiners argued that the effect of the statute was to protect
in-state independent dealers from out-of-state competition. They
contended that the burden of the provision fell solely on
interstate companies since Maryland had no in-state producers or
refiners.36 The Supreme Court rejected the argument and in so
doing, explained that merely because “the burden of a state
regulation falls on some interstate companies does not, by itself,
establish a claim of discrimination against interstate commerce.”37
The Court observed that the challenged act “creat[ed] no barriers
whatsoever against interstate independent dealers, [did not]
prohibit the flow of interstate goods, place added costs upon them,
35
437 U.S. 117 (1978).
36
Id. at 125.
37
Id. at 126.
-19-
or distinguish between in-state and out-of-state companies in the
retail market.”38 The absence of these factors, the Court
continued, “distinguishe[d] th[e] case from those in which a State
ha[d] been found to have discriminated against interstate
commerce.”39 While Exxon illustrates an unsuccessful dormant
Commerce Clause challenge, Allstate relies heavily upon a footnote
in the opinion in which the Court observed that “[i]f the effect of
a state regulation is to cause local goods to constitute a larger
share, and goods with an out-of-state source to constitute a
smaller share, of the total sales in the market . . . the
regulation may have a discriminatory effect on interstate
commerce.”40 Allstate argues that H.B. 1131 results in this precise
effect.
Allstate’s argument is unpersuasive. As an initial matter,
H.B. 1131 does not require Allstate to shut any Sterling stores.
Thus it is unclear how the new regulations would affect any shift
in the current level of business presently enjoyed by out-of-state
suppliers of body shops to in-state shops. However, even if we
were to assume that H.B. 1131 would act to reduce Sterling’s
ability to attract new business, which local body shops would then
capture, this would still not establish a Commerce Clause
38
Id.
39
Id.
40
Id. at 126, n.16.
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violation. A state statute impermissibly discriminates only when
it discriminates between similarly situated in-state and out-of-
state interests.41 Under H.B. 1131, as with the provision upheld
in Exxon, 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. Further, H.B.
1131 does not “prohibit the flow of interstate [services], place
additional costs upon them, or distinguish between in-state and
out-of-state companies in the retail market.”42 As the Supreme
Court concluded under identical circumstances in Exxon, “[t]he
absence of any of these factors fully distinguishes this case from
those in which a State has been found to have discriminated against
interstate commerce.”43
The record does not support Allstate’s bare allegation that
business will shift from Sterling to in-state providers. The
district court correctly concluded that Allstate failed to
establish a dormant Commerce Clause violation where none of the
41
Id. at 126.
42
Id.
43
Id.; Ford,
264 F.3d 493 (where challenged provision did
not “rais[e] the costs of doing business in the local market,
strip[] away the economic advantages for an out-of-state
participant, or giv[e] advantages to local participants[,]” it
did not offend the dormant Commerce Clause).
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hallmarks of past violations were present. Finally, that no Texas
insurer is affected by the new regulation is of no consequence.
The Supreme Court rejected the same assertion when offered in Exxon
and this court has rejected similar arguments in the past.44
C.
The controlling question thus becomes whether, under Pike,
“the burden imposed on [interstate] commerce is clearly excessive
in relation to the putative local benefits.”45 A statute imposes
a burden when it inhibits the flow of goods interstate.46
Allstate claims that H.B. 1131 inhibits the flow of goods
interstate because it deprives Sterling of access to the Texas
collision repair services market.
Again, Allstate’s argument fails. The dormant Commerce Clause
“protects the interstate market, not particular interstate firms.”47
The Supreme Court has “rejected the ‘notion that the Commerce
Clause protects the particular structure or methods of operation in
44
Exxon, 437 U.S. at 125; Int’l Truck and Engine Corp. v.
Bray,
372 F.3d 717, 726 (5th Cir. 2004) (“That all or most
affected businesses are located out-of-state does not tend to
prove that a statute is discriminatory.”);
Ford, 264 F.3d at 502
(finding it of no relevance that Texas had no motor vehicle
manufacturers in challenge to law which limited ability of
manufacturer’s to engage in retail automobile sales).
45
Pike, 397 U.S. at 142.
46
Ford, 265 F.3d at 503.
47
Exxon, 437 U.S. at 127-28.
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a . . . market.’”48 While H.B. 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 H.B. 1131's putative local
benefits. In assessing a statute’s putative local benefits, we
cannot “second-guess the empirical judgments of lawmakers
concerning the utility of legislation.”49 Rather, we credit a
putative local benefit “so long as an examination of the evidence
before or available to the lawmaker indicates that the regulation
is not wholly irrational in light of its purposes.”50
A reasonable legislator could have believed that H.B. 1131
would further legitimate interests in protecting consumers. As
discussed above, House and Senate committees heard extensive
testimony on the dangers of insurer-owned body shops. A legislator
could reasonably have believed that a ban on the targeted business
48
CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 93-94
(1987) (quoting
Exxon, 437 U.S. at 127)).
49
CTS, 481 U.S. at 92.
50
Ford, 264 F.3d at 504 (quoting Kassel v. Consolidated
Freightways Corp.,
450 U.S. 662, 680-81 (1981)).
-23-
form would further Texas’s legitimate interests in consumer
protection. That reasonable belief is enough to confirm that H.B.
1131 has at least putative local benefits.51 Allstate has not
established that the burden on one interstate firm constitutes a
burden on interstate commerce that clearly outweighs these local
benefits.
Because we conclude H.B. 1131 does not violate the dormant
Commerce Clause, we need not consider the State Defendant’s
alternative argument that McCarran-Ferguson Act removes this
regulation from the reach of the dormant Commerce Clause.
IV. FIRST AMENDMENT CHALLENGE
Alleged violations of free speech present a mixed question of
fact and law that is reviewed de novo.52
Allstate challenged in the district court the following
provisions of H.B. 1131 as violations of the First Amendment’s
protection of truthful and non-deceptive commercial advertising:
• Tex. Occ. Code § 2306.006(3), which prohibits an
insurer from engaging in a joint marketing program
with a tied repair facility.
• Tex. Occ. Code § 2306.006(4), which prohibits an
insurer from providing to tied repair facilities a
recommendation, referral or description not
provided on identical terms to other preferred
repair facilities.
• Tex. Occ. Code § 2306.006(6), which prohibits
51
See Int’l Truck, 372 F.3d at 729.
52
LLEH, Inc. v. Wichita County, Tex., 289 F.3d 358, 364-65
(5th Cir. 2002).
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allowing a tied repair facility to use an insurer’s
name in a manner different from that allowed for
any other facility with which the insurer has a
referral arrangement.
• Tex. Occ. Code § 2306.006(9), which prohibits an
insurer from recommending that policyholders have
their vehicles repaired at tied repair facilities,
except to the same extent it recommends other
repair facilities with whom the insurer has entered
into a referral arrangement.
These regulations apply to the existing Sterling stores which are
authorized to continue operation in Texas after enactment of H.B.
1131. The district court upheld Allstate’s First Amendment
challenge.
The First Amendment, as applied to the states through the
Fourteenth Amendment, generally protects commercial speech from
unwarranted governmental regulation where the speech is not false,
deceptive, or misleading.53 In Central Hudson Gas & Electric Corp.,
v. Public Service Commission of New York,54 the Supreme Court
articulated a test for determining whether a particular commercial
speech regulation is constitutionally permissible. Under that
test, a court asks as a threshold matter whether the commercial
speech concerns unlawful activity or is misleading. If so, then
the speech is not protected by the First Amendment. If the speech
concerns lawful activity and is not misleading, however, a court
next asks whether the asserted governmental interest is
53
Zauderer v. Office of Disciplinary Council, 471 U.S. 626,
628 (1985).
54
447 U.S. 557 (1980).
-25-
substantial. If it is, then a court determines whether the
regulation directly advances the governmental interest asserted,
and, finally, whether it is not more extensive than is necessary to
serve that interest.55 Each of these latter three inquiries must
be answered in the affirmative for the regulation to be found
constitutional.56
A.
The State Defendants first attempt to defend H.B. 1131's
speech provisions under the first prong of the Central Hudson test,
i.e., they argue that the prohibited advertisements concern (1)
unlawful activity or (2) misleading speech.
1. Does H.B. 1131 prohibit advertisements about unlawful
activity?
The State Defendants claim that the speech restraints are
valid because they are merely incidental to H.B. 1131's provision
which requires insurers and their collision repair subsidiaries to
negotiate at “arm’s length.” The State Defendants attempt to
analogize this case to Ford, in which we upheld a state law
restricting car manufacturers from advertizing cars for sale on
their websites. In that case, we explained that because the
regulation was only incidental to Texas’s general prohibition
against manufacturers selling automobiles at retail, it was not
55
Thompson v. Western States Med. Ctr., 535 U.S. 357, 367
(2002).
56
Id.
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entitled to the protection of the First Amendment.57
The instant case is distinguishable from Ford, where the
challenged speech regulation sought to prevent a manufacturer from
advertising a product it was strictly prohibited by law from
selling. Unlike that case, H.B. 1131's speech provisions are not
incidental to the regulation of activity made illegal by Texas law.
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 H.B. 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.58
2. Does H.B. 1131 prohibit advertisements which would be
misleading?
The State Defendants alternatively seek to uphold H.B. 1131's
regulations to prevent false and misleading representations, such
57
Ford, 264 F.3d at 506.
58
See id. (noting that if challenged speech regulation
prohibited advertising a commercial activity lawful in Texas, the
regulation would invoke the protections of the First Amendment
and be subjected to Central Hudson).
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as the Allstate script’s recommendation of Sterling. The State
Defendants argue that the implication of the script is that
Sterling is the best available auto body repair service in terms of
services offered and quality of repair, an implication that is not
true. The State Defendants also contend that the Allstate script
is misleading because it suggests a link between Allstate and
Sterling that would give customers utilizing Sterling pricing or
other advantages that are prohibited by Texas law.
The State Defendants’ rationale for finding a script which
recommends only a tied body shop “false and misleading” is
unpersuasive. While it may be that a recommended tied body shop
does not enjoy as good a reputation for quality work as other body
shops, a recommendation to that shop does not involve an inherently
false or misleading representation. This characterization is
particularly inapt when applied to Allstate’s script, which informs
customers of the Allstate/Sterling affiliation at the outset of the
pitch, and thus gives customers the option of discounting the
recommendation and puffing. Further, the evidence revealed that
the majority of Allstate’s customers choose not to have their
vehicle repaired by Sterling. This is certainly persuasive
evidence that an exclusive recommendation does not necessarily
mislead consumers into believing that Sterling is far superior to
other facilities nor that utilization of the recommended shop is
required. Unlike the situation in the principal case relied upon
by the State Defendants, Zauderer v. Office of Disciplinary
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Council,59 the potential for customer confusion here is minimal.
We agree with the district court’s conclusion that the Allstate
script is neither false nor misleading. In light of this
conclusion, we turn to the remaining prongs of the Central Hudson
test.60
B.
Under Central Hudson, after the threshold inquiry, a court
must determine whether (1) the state has a substantial interest in
regulating the speech; (2) the restriction on speech directly
advances the state interest involved; and (3) the state’s interest
could be equally well served by a more limited restriction on
commercial speech.61
1. Is there a legitimate state interest?
The State Defendants have successfully asserted a legitimate
interest in consumer protection and the promotion of fair
competition.62
2. Does the regulation directly and materially advance the
59
471 U.S. 626 (1985) (rejecting First Amendment challenge
to the application of state rule against deceptive advertising
where attorney advertisement was likely to mislead average
customer).
60
See Ford, 264 F.3d at 506 (if a challenged speech
provision prohibits advertising a lawful commercial activity, the
regulation is subject to intermediate scrutiny outlined in
Central Hudson).
61
Central Hudson, 447 U.S. at 566.
62
See Ohralik v. Ohio State Bar Ass’n, 436 U.S. 447, 460
(1978) (state clearly has an interest in consumer protection).
-29-
State’s asserted interest of benefitting consumers and
ensuring fair competition?
As the district court persuasively explained, the State
advances no legitimate interest in preventing non-misleading and
truthful referrals to a tied body shop:
Consumers benefit from more, rather than less,
information. Attempting to control the outcome of the
consumer decisions following such communications by
restricting lawful commercial speech is not an
appropriate way to advance a state interest in
protecting consumers. Thompson v. Western States Med.
Ctr., 535 U.S. 357, 374 (2002)).
H.B. 1131's speech provisions do not require that customers be
informed of a insurer/body shop arrangement or the existence of a
law against steering, regulations which would arguably reduce the
potential for consumer confusion. Rather, the challenged
provisions only prevent an insurer from recommending its tied body
shop to customers. This would encourage business to shift away
from the tied shop but it would not protect consumers, who may or
may not choose to use a tied shop even after being informed of its
advantages, and who may have a good rather than bad experience if
they do choose to use a tied shop.63 If the work performed on
customer vehicles at a tied body shop is shoddy, aggrieved
63
See Central Hudson, 447 U.S. at 562 (“Commercial
expression not only serves the economic interest of the speaker,
but also assists consumers and furthers the societal interest in
the fullest possible dissemination of information. . . . People
will perceive their own best interests if only they are well
enough informed, and the best means to that end is to open the
channels of communication rather than to close them.”) (internal
alterations and citation omitted).
-30-
customers are free to pursue legal and administrative remedies.
Ultimately, the State Defendants have not shown that restricting
the truthful speech about the benefits of using a tied auto body
repair shop benefits customers.64 Notably, Allstate’s challenged
script gives customers notice of the affiliation between itself and
Sterling and further informs them that “[they] are always free to
choose any repair shop of [their] choice and are under no
obligation or requirement to use a shop [Allstate] recommend[s] .
. . .” These statements offer ample protection against the danger
of consumer confusion.
Moreover, on the issue of fair competition, it is not clear
how requiring the insurer to recommend at least one other body shop
in the PRO program in addition to its tied shop——but not all
shops——promotes fair competition. While this widens the circle of
advantaged shops, it does not ensure overall fair competition for
all body shops.
3. Is the restriction narrowly tailored to the state interests
advanced?
Our analysis of the first three Central Hudson prongs leads us
to conclude that H.B. 1131's commercial speech provisions are not
narrowly tailored to meet the asserted state objectives. It is
well established that the party seeking to uphold a restriction on
64
See id. at 567 (suppression of advertising reduces the
information available for consumer decisions and is contrary to
the purpose of the First Amendment).
-31-
commercial speech carries the burden of justifying it.65 The State
Defendants here fail to demonstrate why a more limited restriction,
such as a requirement that Allstate disclose its ownership of
Sterling or inform customers of Texas’s anti-steering law, would
not have adequately served the state’s interest in consumer
protection.66 Moreover, the State Defendants have not explained how
compelling Allstate to provide a referral to at least two body
shops would have a positive effect on overall competition or why
requirements similar to those we have alluded to above would be any
less effective in promoting such ends.
C.
The State Defendants finally contend that while Allstate’s
script may provide an occasion for a successful as-applied
challenge to certain provisions of H.B. 1131, the district court
erred in declaring those provisions facially invalid.
We disagree. It is not the content of the specific Allstate
script at issue which guides our analysis above, but rather the
failure of the State Defendants to suggest a single circumstance in
which these provisions, which ban non-misleading and truthful
advertising, could be constitutionally applied. The Supreme Court
has recently invalidated provisions containing similar blanket bans
65
Thompson, 535 U.S. at 373.
66
See Central Hudson, 447 U.S. at 571 (“In the absence of a
showing that more limited speech regulation would be ineffective,
we cannot approve the complete suppression of [plaintiff]’s
advertising.”).
-32-
on advertising.67
V. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court.
67
See Thompson, 535 U.S. at 371-77 (declaring invalid a
provision of the Food and Drug Administration Modernization Act
of 1997 which prohibited pharmacists from advertising certain
types of patient customized drugs where Government failed to
demonstrate that the speech restrictions were not more extensive
than necessary to serve its asserted interest in public health;
“if the Government [can] achieve its interest in a manner that
does not restrict speech, or that restricts less speech, the
Government must do so."); 44 Liquormart, Inc. v. Rhode Island,
517 U.S. 484 (1996) (striking down state ban on all
advertisements containing information about the price of alcohol;
state failed to satisfy heavy burden under Central Hudson of
justifying a complete ban all ads that contain accurate and
non-misleading information); see also Secretary of State of Md.
v. Joseph H. Munson Co., Inc.,
467 U.S. 947 (1984) (“Where . . .
a statute imposes a direct restriction on protected First
Amendment activity, and where the defect in the statute is that
the means chosen to accomplish the State's objectives are too
imprecise, so that in all its applications the statute creates an
unnecessary risk of chilling free speech, the statute is properly
subject to facial attack.”).
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