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Antitrust in Insurer- Repairer Business Relations

‘Antitrust’ is spoken of frequently in the collision repair industry but is still often
misunderstood. Here’s a clear definition of what it is and how it relates to insurer- repairer business relations.

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Writer E. L. Eversman is the General Counsel for Vehicle Information Services, Inc., award-winning author of the AutoMuse® blog and a frequent speaker and author on automotive consumer and legal issues.

The collision repair industry is rife with comments about antitrust activities and what constitutes antitrust behaviors. Body shop owners receive notices from insurers constantly that assert that discussing prices with competitors is a violation of the antitrust laws and may render them liable for violations of those laws.

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This is true in the cliché antitrust scenario in which a group of body shop owners meet in a dark room and secretly agree that each will charge $70 per hour for body labor and none will ever charge less than that amount. Shops, however, are often unnecessarily concerned that ordinary conversation with others in the industry can expose them to antitrust liability. Yet, as long as shops steer clear of agreeing to set uniform rates or limitations on productivity or provide “courtesy estimates,” they should feel comfortable attending trade association meetings and enjoying discussing the rigors of their industry with other participants.

Sources of Antitrust Liability
There are three primary acts(1) passed by Congress to preserve competition and protect consumers that affect collision repairers: the Sherman Antitrust Act(2) (Sherman Act), the Clayton Act(3)and the Federal Trade Commission Act(4) (FTC Act). Only the Sherman Act carries criminal penalties; the other two sets of laws provide civil penalties for violations. States have also enacted their own laws which largely mirror the federal statutes but are designed to prohibit the same activities within the state, rather than between the states.

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Sherman Act: The Sherman Act outlaws all contracts, combinations and conspiracies that unreasonably restrain interstate trade. The types of activities it prohibits include competitors fixing prices, dividing markets, limiting production and bid-rigging.

Clayton Act: The Clayton Act prohibits mergers and acquisitions that limit competition and prohibit “tying arrangements” by which the provision of goods or services is conditioned upon the purchase of other goods or services.

FTC Act: The FTC Act prohibits unfair methods of competition which are labeled as “unfair trade practices.” Many of the actions and notices collision repairers must give customers derive from states’ FTC Act-based consumer protection laws. For example, the requirement that repairers give consumers an estimate and obtain the customer’s express approval prior to any repair work is performed typically stems from states’ consumer protection laws, which define the failure to do so as an unfair trade practice.

Collision repairers are primarily affected by the Sherman Act and the FTC Act, as well as their states’
anti-trust and unfair trade practice laws.

The Clayton Act’s application to the collision repair industry largely pertains to tying arrangements and the mergers and acquisitions of its suppliers. The merger aspect of the Clayton Act has little significance for shop owners as a means of unfairly exercising power in the current market, but as the size and influence of consolidators grows, it may become an issue in the future.

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Additionally, when we think of “antitrust,” we tend to focus on the Sherman Act prohibitions rather than the unfair trade practices overseen by the FTC. The Sherman Act issues typically involve conduct by two or more parties which impacts competition, competitors and consumers, whereas the unfair trade practice issues often involve only one business in an industry and typically focus on the limitations of consumers to protect themselves.(5) That’s not always true, however, and it’s a mistake to discount the power of the FTC to regulate or prohibit collective activities.

Per Se and Rule of Reason
Every agreement has some effect that restrains trade. As a result, the Sherman Act prohibits only “unreasonable restraints of trade.”(6)

There are two different standards that can be applied when considering whether an agreement or conduct is anticompetitive. The stricter of the two is the per se violation standard. It applies when the conduct so clearly restrains trade that no alleged reason could justify the conduct. The U.S. Supreme Court has determined that there are certain activities that so inherently and obviously harm competition that a thorough analysis of the arrangement is unnecessary, and those activities are automatic violations of the antitrust laws. These categories include: 1) price-fixing; 2) division of markets; 3) group boycotts; and 4) tying arrangements.(7)
The second standard is called the “rule of reason,” andpit’s the standard applied to most claims of business combination antitrust activities. In this analysis, a court looks at the specific facts involved with the arrangement, conduct and justifications to determine whether they create inappropriate economic harm. Under the rule of reason, a restraint will be held illegal only if it unreasonably harms competition.(8)
The positions of the parties to the arrangement can be a factor when determining which standard will be used to examine the alleged anticompetitive conduct. Courts are far more skeptical of arrangements among direct competitors than they are of arrangements between suppliers and the users of their products or services.

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Horizontal, Vertical
Agreements

Horizontal agreements are those that are made among direct competitors in the marketplace. In the collision repair industry, a horizontal agreement would be one made by collision repair facilities that vie with one another for a repair job. So, if the shops in Lincoln, Neb., got together and agreed each would charge $70 per labor hour, those shops would be participating in a horizontal agreement to fix the prices of
collision repair in Lincoln, Neb.

Vertical agreements are those arrangements made by parties that aren’t all on the same level of the product chain. These can include agreements between manufacturers and distributors, jobbers and shops or any combination of parties involving different levels of the market structure. Automakers, for example, cannot set a minimum price and require their dealerships to sell new cars at or above that price because that would constitute a vertical price-fixing contract. They are, however, entitled to “suggest” a minimum price, and that’s why we often see information about the “manufacturer’s suggested retail price” or MSRP. Nonetheless, the manufacturer is not permitted to enforce sales at its suggested price by refusing to deliver cars to those dealerships that sell cars below
the MSRP.

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Boycotts
Boycotts are refusals to deal with a person or company for the purpose of obtaining concessions or to exact punishment in business dealings. Boycotts can be horizontal, vertical or a combination of the two.

For example, paint suppliers could agree not to sell product to any body shops that also purchase paint from one of their (non-agreeing) competitors. Parts distributors could agree with an estimating company not to sell parts to any body shop that failed to use the designated company’s estimating data and software. Some types of boycotts are per se illegal. Others are analyzed under the rule of reason.(9)

Tying Arrangements
Tying arrangements are arrangements by which the provision of goods or services is conditioned upon the purchase of other goods or services.(10) A classic tying arrangement occurs, for example, when a distributor of gasoline conditions the sale to a service station upon the station’s agreement to purchase tires from that distributor as well. Forcing the station to purchase something it doesn’t wish to buy (the tires) to be entitled to purchase something it does wish to buy (the gasoline) is an improper tying arrangement.

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Tying arrangements can also occur in vertical agreements and are sometimes less obvious as a result. One company’s provision of goods or services conditioned upon the use of another company’s goods or services can be found to violate the antitrust laws. As insurance companies’ “direct repair program” arrangements have become more dictatorial by designating the repair network’s use of specific suppliers or estimating companies as a condition of participation, they may well have created tying arrangements that violate the antitrust laws.

Special Circumstances
There are some collective action and exclusionary conduct situations that are permissible and don’t violate the antitrust laws.(11) A state statute requiring all body shops to be licensed by the state and to conform to the prerequisites for licensing, while effectively restraining some new shops from entering the market, is not a violation of the antitrust laws.

There are also exclusionary arrangements involving trade associations that aren’t prohibited as a per se violation of the antitrust laws. These arrangements often designate a threshold of minimum standards for association members and are often related to ensuring safety. Sporting associations, like the Professional Golfers Association of America or the National Conference of Athletic Associations, have exclusionary rules to ensure participants’ safety, the fairness of their events and the quality of
the entertainment.

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Likewise, rules established by associations in industries that necessarily require some independence and cooperation and that exercise a significant level of self-regulation are given wider latitude by the courts.(12) Even though their rules may clearly create exclusions from the marketplace, there may be legitimate and justifiable reasons that are analyzed under the less restrictive “rule of reason” standard rather than the per se standard.(13)

Finally, the Noerr-Pennington doctrine “[h]olds that concerted action by trade associations for the purpose of influencing or promoting legislative, judicial or administrative action is exempt from antitrust liability because it is necessary to safeguard these groups’ First Amendment rights of association and to petition the government. The doctrine applies even if the ultimate governmental action sought would limit economic competition in the industry.”(14)


How it Applies to Body Shops

So what does this mean for the daily business activities of body shops?

It means that shop owners in a particular market cannot agree to set minimum prices for repair work. It does not mean, however, that shop owners must operate in a vacuum without information as to what their competitors charge. The collision repair industry is unusual in that state consumer protection laws require shops to post their hourly labor rates – if they invoice by hourly charges – so customers know what type of charges to expect. Anyone, including competitors, can walk into body shops in a given area and see exactly what they charge.

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Although discussion of prices by competitors creates an indication of possible antitrust activities, sometimes it’s necessary to protect your own business interests. When insurers attempt to drive your prices down by claiming you’re the only collision repair facility in the area that charges for a particular operation, how are you to refute that claim unless you know whether your competitors charge for the operation? This is a situation in which a trade association can be helpful by surveying members and tracking changes or innovations in the industry that affect pricing. That way, competitors aren’t discussing prices and charges directly with each other.

Furthermore, safety-related issues pertaining to a repair are important to discuss with other repairers. For instance, let’s say an insurer decides to stop paying repairers to aim a vehicle’s headlights. Discovering that this is the insurer’s widespread or national practice is vital for repairers to take immediate action and rectify this safety hazard before it becomes commonplace and is eventually tagged as an “industry standard.” Otherwise, some repairers will simply not perform this necessary safety procedure because they’re not paid to do so. This would then harm consumers because they wouldn’t be receiving appropriate and safe repairs. It would also harm other shops by lowering quality standards. Likewise, some repairers’ willingness to install used suspension parts on consumers’ vehicles simply because an insurer has located a salvage yard suspension and desires to save money by refusing to pay for a new one harms consumers and other repairers too. In this case, the repairers’ agreement to do this suggestd that it actually may be proper to install such potentially hazardous parts.

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Collision repairers need to establish genuine safety standards for procedures in collision repair that are reflective of manufacturers’ recommendations, engineering principles and repairers’ experience. Many find it perplexing that our society has no such collision repair standards and that the manner in which a consumer’s vehicle may ultimately be repaired can be fiddled with or dictated by estimating companies or insurers that don’t bear liability for the
actual repairs.

The significant issue facing collision repairers is that the economics of insurer involvement with collision repairs has driven the “competitive price” down so low that consumers may not be receiving repairs of appropriate quality or safety. Additionally, independent repairers are being forced to close their doors because insurers use the rates and discounts they’ve negotiated with their DRP shops (in exchange for volume and referrals) as the defined “prevailing competitive price” to be applied to independent repair facilities that don’t receive the benefit of that volume. Lastly, there’s the issue of whether insurers are actually paying their DRP network repair shops more than they pay independent shops by allowing payment for procedures they deny to independent shops. Or, by deliberately driving up independents’ cost of doing business by delaying inspections or failing to authorize supplements in a timely manner. Getting consumers to move their vehicles from one repairer to another on the basis that the second repair shop has agreed to “perform the repair for the insurer’s estimate,” yet is paid more than that estimate, is also a source
of trouble.

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What’s Actionable
In relation to the antitrust laws, collision repairers need to remember that they have an obligation to avoid artificially inflating the price of repair costs. On the other hand, business costs and inflation continue to rise, and repairers need to be able to charge a price that enables them to meet costs and make a profit. Unreasonable interference with those prices that drives collision repairers to substantially lower the quality of repairs provided and harm consumer safety, or which are designed to deliberately drive competitors from the marketplace, may well be actionable under the antitrust laws.

E. L. Eversman is the chief counsel for Vehicle Information Services, Inc., and the author of the Forbes.com “Best of the Web” award-winning blog, AutoMuse. She has served as the chair of the Cleveland Bar Association’s Unauthorized Practice of Law Committee, vice chair of that association’s International Law Section and is listed in the National Registry of Who’s Who. Eversman is a frequent speaker and author on automotive legal topics and has been quoted in such publications as The Wall Street Journal Online, USA Today, Kiplinger’s Personal Finance, Cars.com, Yahoo! News and numerous trade magazines. She was also honored as the 2006 All Auto Appraisal Industry Conference hall of fame inductee. She is recognized nationally as an authority on diminished value and collision repair issues, and she served as an industry resource for the National Conference of Commissioners on Uniform State Laws’ Uniform Certificate of Title Act drafting committee. Prior to launching the AutoMuse blog addressing automotive legal and consumer issues, Eversman wrote the legal column for the web directory, AutoGuide.net.

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Endnotes

  1. The U.S. Department of Justice has created a consumer-friendly description of
    the antitrust laws and the enforcement of those laws which can be accessed at http://www.pueblo.gsa.gov/cic_text/misc/antitrust/antitrus.htm.

  2. 15 U.S.C. §§ 1 et seq.

  3. 15 U.S.C. § 14.

  4. 15 U.S.C. §§ 41 et seq.

  5. In the State of Ohio, for example, it is an unfair trade practice under the consumer protection laws for any collision repair facility to operate without being registered with the Ohio Motor Vehicle Collision Repair Registration Board. Ohio Revised Code § 4775.02(B), O.R.C. § 1345.02. One collision repair facility with a tiny share of the repair market can be held responsible for violating the unfair trade practice laws even if it performs quality repairs at the lowest market price.

  6. National Collegiate Athletic Assoc. v. Bd. of Regents, 468 U.S. 85, 104 S. Ct. 2948, 2959, 82 L. Ed. 2d 70 (1984).

  7. Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5, 78 S. Ct. 514, 518, 2 L. Ed. 2d 545 (1958).

  8. United States v. Topco Associates, Inc., 405 U.S. 596, 606-07, 92 S. Ct. 1126, 1133, 31 L. Ed. 2d 515 (1972).

  9. “In McQuade, the Fifth Circuit set forth three categories of cases where collective refusals to deal have been held to be per se illegal: first, horizontal combinations among traders at one level of distribution, whose purpose is to exclude direct competitors from the market; second, vertical combinations among traders at different marketing levels, designed to exclude from the market direct competitors of some members of the combination; and third, combinations designed to influence coercively the trade practices of boycott victims, rather than to eliminate them as competitors. 467 F.2d at 186-87. The court felt that the rule of reason should be applied to other types of collective refusals to deal, if no elements of exclusionary or coercive conduct are present. Id. at 187. But see Construction Aggregate, 710 F.2d at 777-78 (current touchstone of per se illegality is market impact of the restrictions, rather than the presence of exclusionary conduct).” Cha-Car, Inc. v. Calder Race Course, Inc., 752 F.2d 609, 613 (11th Cir. 1985).

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  • International Salt Co., Inc. v. United States, 332 U.S. 392, 68 S. Ct. 12, 92 L. Ed. 20 (1947) (company leasing patented machines using salt products violated tying prohibitions of Clayton Act by requiring lessees to also purchase salt products
    from lessor).

  • Cooney v. American Horse Show Assoc., 495 F. Supp. 424 (S.D. N.Y. 1980)

  • See Neeld v. National Hockey League, 594 F.2d 1297, 1300 (9th Cir. 1979)

  • “[C]ertain forms of self-regulation by cooperative organizations such as trade associations and sports organizations will be found exempt from per se analysis. II Kintner, Federal Antitrust Law, § 10.34; see e.g., NCAA, 104 S. Ct. at 2961; see generally, M & H Tire, 733 F.2d at 980-984 (discussion of antitrust law relating to sports regulation).” Cha-Car, Inc. v. Calder Race Course, Inc., 752 F.2d 609, 614 (11th Cir. 1985).

  • Horsemen’s Benevolent & Protective Assoc. v. Pennsylvania Horse Racing Com., 530 F. Supp. 1098, 1109 (D. Pa. 1982), citing, Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 81 S. Ct. 523, 5 L. Ed. 2d 464 (1961); United Mine Workers v. Pennington, 381 U.S. 657, 85 S. Ct. 1585, 14 L. Ed. 2d 626 (1965); California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 92 S. Ct. 609, 30 L. Ed. 2d 642 (1972).


    Who Do the Antitrust Laws Protect?
    One of the most difficult antitrust concepts for businesspeople to understand is that the antitrust laws protect competition, not competitors. They protect the people who buy products and their ability to do so at a reasonable price, not the businesses that sell them. The antitrust laws are designed to ensure that there’s a healthy rivalry in a given marketplace, one that tends to cause suppliers of goods and services to keep their prices low, thereby attracting purchasers and business. Boiled down to its essentials, the antitrust laws have been put in place to protect consumers and to keep the costs of goods and services low.

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