07/29/96 UNITED FARMERS AGENTS AS v. FARMERS
INSURANCE EXCHANGE
[Editor's note: footnotes (if any) trail the opinion]
[1] United States Court of Appeals,
[2] Fifth Circuit.
[3] No. 95-50559.
[4] UNITED FARMERS AGENTS ASSOCIATION, INC.; Thomas J. Vinson; Robert D. Moon,
[5] Plaintiffs-Appellants,
v.
[6] 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,
[7] Defendants-Appellees.
[8] July 25, 1996.
[9] Appeal from the United States District Court for the Western District of Texas.
[10] Before GARWOOD, DAVIS and DeMOSS, Circuit Judges.
[11] W. EUGENE DAVIS, Circuit Judge.
[12] 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.
[13] 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 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.
[14] 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.
[15] 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 Farmers' motion for
summary judgment. *fn1
II.
A.
[16] Plaintiffs argue that Farmers' policies regarding electronic access to FANS
constitute a per se illegal tying arrangement *fn2 and allege that the relevant market
*fn3 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.
[17] 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). 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 costs *fn4 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.
[18] 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 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.
[19] 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.
[20] 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 information costs or the ability to price discriminate *fn5
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.
[21] 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 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 price.
[22] 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.
[23] 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 price for
electronic access to the same information. *fn6 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.
[24] 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 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.
[25] 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. *fn7
[26] 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.
[27] 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
[28] We agree with the district court and the magistrate judge that electronic access
to policy information is merely a component of 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.
[29] AFFIRMED.
***** BEGIN FOOTNOTE(S) HERE *****
[30] *fn1 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.
[31] *fn2 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, Para(s) 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).
[32] 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 Para(s) 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).
[33] 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.
[34] *fn3 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 Para(s) 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 Para(s) 525a.
[35] *fn4 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.
[36] *fn5 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, Para(s)
514a.
[37] *fn6 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 Para(s) 525a.
[38] *fn7 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 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.
***** END FOOTNOTE(S) HERE ***** |