On Dec. 10, 1993, a group of eight citizens made a trip to the Antitrust Division of the U.S. Department of Justice (DOJ) because they believed the DOJ would move on the information they brought regarding the auto insurance business and its claims settlement practices.
But today it’s as if the group never made the trip. In fact, despite the pilgrimage being only a few short years ago, most in the collision repair business don’t know anything about it.
And neither does the Justice Department, it seems.
The delegation was armed to the teeth. They had reams of documentation, a Ph.D. in economics in tow and a copy of the 1963 Consent Decree. Once inside the H Street office in Washington, D.C., they dropped a boat-load of allegations along with a 3-inch pile of evidentiary documents in the government’s lap. It included direct-repair program (DRP) agreements, along with letters of testimony from consumers and lawmakers (each piece establishing a foundation for their complaints).
Representing the Antitrust Division of the U.S. Justice Department was Joseph Melillo and a staff of four lawyers. They met with the ’93 Eight for almost three hours, during which each member of the delegation had an opportunity to present their case. While the U.S. officials were patient through the first half of the three-hour conference, Melillo turned chilly when he dismissed the group. As they left, he explained the protocol for these sorts of things. Basically, “Thanks for coming, now run along.”
So the group of eight left Washington, went back to their businesses and waited … waited … and waited some more.
It soon became clear in the following months that the insurance industry had dodged the ’63 bullet. But a few questions remain: What happened to the documents left with Melillo? What was the disposition of the case? How long did it take the government to dismiss the allegations and possibly throw the entire notebook into the archives? Melillo was left with so much material that an investigation into them would have taken his entire staff months.
To get the official account of how the Justice Department proceeded after the ’93 meeting, I contacted Melillo for this story. Four weeks later he responded, stating information specific to that meeting wouldn’t be available without going through the Freedom of Information Act.
Any number of Justice Department persons may also maintain files on the collision repair business. For example, Karen Sampson Jones, in the DOJ Atlanta office, is reported to have accumulated entire filing cabinets of documents related to the collision repair industry in what appears to be an on-going case, assuming, of course, one exists. When contacted to confirm this, Jones declined comment for this story and referred all inquiries to public affairs.
But many in the collision industry aren’t yet willing to give up their goal of getting the Decree enforced.
The 1963 Consent Decree was a landmark for the post-war collision repair business. Since its signing, however, little has changed in terms of the insurance industry’s attempts to dominate the repair market. In 1993 – as well as today – body shop owners have attempted to draw attention to the document. But considering the DOJ’s apathetic response – complete silence – regarding repairers’ concerns, will present-day Consent Decree supporters be able to overcome obstacles any better than their ’93 counterparts?
A Cross-Country Trip Made in Vain?
The shop owner who came the farthest for the 1993 Washington meeting was Bob Amy, owner of Auto Body Specialists in Portland, Ore. Amy was prepared with reports of substantial market- and claims-related difficulties in Oregon. Despite recent reform measures signed into law for the purpose of regulating the business, Amy told the Justice Department they were being flaunted by the insurance companies. And he had with him an official letter from his State Senator to back it up.
“We spent the money to go to Washington, and we asked the Justice Department to please put it in writing if they weren’t able to do anything on this matter – to give us an answer,” says Amy. “But we never got one letter. They showed us no respect whatsoever.
“I brought a letter from [Oregon] State Senator Kennemer to the meeting, and they didn’t even bother to respond to the Senator’s letter. No one got anything out of the Justice Department on this issue. Of course, they did patronize us and tell us to come back.”
In the letter, Senator Kennemer expressed grave concerns regarding the states’ regulative bodies and their ability to enforce their state laws. He cited Oregon’s own bill, SB 718, which was passed and signed into law.
Senator Kennemer’s letter read: “The directing of business is the major concern. In the legislative record, [my fellow] Senator Groener made the intent clear: What starts out sounding like a terrific consumer convenience actually turns into an anti-competitive, predatory arrangement, carefully organized to deny the consumer what he actually paid for.”
Kennemer went on to cite Amy’s unsuccessful attempts to seek a review of the matter on the state level and begged the Federal government’s assistance. But he didn’t get it. He didn’t even get a response.
Fred Jennings, the Massachusetts economist involved in the ’93 meeting, is now doing analysis and expert work for law firms involved in complex litigation. His take on the DOJ’s lack of action? “Officials have official duties, and it’s their responsibility to ultimately draw some conclusions. They can’t arbitrarily not look at your request.”
But is that what happened? Jennings suspects, as do the others who brought documents to Washington in 1993, that the DOJ didn’t even read Jennings’ study. To simply ignore evidence is unconscionable but, considering the DOJ’s lack of action, very possible.
“We had a whole notebook of documents,” says Jennings, “part of which included a lengthy study on antitrust I had completed on the matter. It’s sufficiently in the record.”
And despite the lack of action in ’93, Jennings’ material being in the record could serve as a lever for present-day 1963 Consent Decree activists – who, as of press time, numbered in the hundreds. Yes, hundreds.
I’d imagine the present group could and probably will at some point raise this issue by saying something like, “You’ve known all along the laws as well as the Consent Decree are being flaunted. Will we be given lip service, or will one of the government attorneys actually look into this and state for the record that there’s no crime?”
Somebody Call a Cop
How does something this large fall through the cracks? The fact is, it’s left to the discretion the Antitrust Division of the DOJ to exercise its administrative actions (the last word in law enforcement).
If an affected party alleges a violation of any of the provisions contained in court orders (such as the one in 1963), an appeal may be taken to the federal courts, where such authority can set aside administrative oversights or abuse. In the matter of the ’93 Eight’s visit, discretion seems to be the decisive factor in the results, or lack thereof.
After the DOJ’s investigation of the collision repair industry was zipped up, it was within the DOJ’s power to summarily dismiss the ’93 Eight. End of story. Of course, anything the DOJ does is ultimately subject to judicial review by the U.S. Supreme Court. It ends there. (Although, given the quick settlement in 1963, it’s doubtful this case would go that far, let alone see a courtroom. The defendants could simply sign another consent decree.)
Federal prosecutors are frequently faced with criminal conduct committed by or on behalf of corporations. On the heels of the recent Firestone/Ford fiasco, the House passed a measure in October to bring criminal prosecution to executives who wantonly create policy resulting in injury or death. While the ’63 insurance case wasn’t specifically about public safety, it is as serious, compounded by the fact that we’re not talking about one corporation. It was then, and is now, what many consider an orchestrated set of acts by a group.
Constitutional government demands that state and federal officials aren’t to be manipulated or influenced. The separations between the judicial, executive and legislative branches of government are clear. And the popular notion that public officials must be accountable (be they elected or not) is a matter of constitutional law.
The Watergate crisis of the early 1970s led to reform measures including the Ethics in Government Act of 1978. From the Reagan years up until today, the American public has witnessed a series of highly publicized scandals involving Congress, the White House and the Justice Department. It’s easy to see why the entire government gets broad-brushed as corrupt. Unfortunately, the ’93 trip – and the resulting indifference on the DOJ’s part – only reinforces this label.
“They shoved it under the table from influence by GEICO insurance,” says Florida shop owner Jerry White, one of the ’93 Eight. “Because of that, I have a very low regard for the Justice Department. I walked away knowing they were giving us lip service, and I didn’t anticipate anything coming from the meeting. It was water off the duck’s back in 1993.”
So is there hope for reviving the ’63 Consent Decree? White is understandably pessimistic. “[Present-day Consent Decree supporters] are beating a dead horse. If they want to change the status quo, the thing that would stop it all would be filing charges of extortion under the Hobbs Act.”
Is that a Gorilla I See? Reviving the ’63 Decree
The insurance industry and its regulation is the province of the states, so there’s not an office in Washington where matters of claims, rates and practices can be discussed. And that, according to many, is how the insurance industry likes it
In September of this year, Michael J. Snead, chairman of Admiral Insurance Company, spoke at a meeting of Chartered Property and Casualty Underwriters Society. “Do you want to be governed by 50 monkeys or one big gorilla?” he asked. “With all its perils, I’d rather deal one-on-one with the local regulator.” Snead went on to say the insurance lobby has effectively “weakened state regulations” in recent years.
Unbeknownst to Snead, there could be a very large primate lurking in his future, since the 1963 Consent Decree is once again getting shaken from its nap. But this time, there are many more than eight of them poking the beast. In fact, their numbers are in the hundreds, all of whom have been writing letters, networking and contributing to the effort. Who are these people? They’ve become known as the Consent Decree Community and would be best described as a loosely organized, but restricted, group of shop owners, activists and lawyers who’ve converged on the Web site (www.consentdecree.com). But unlike so many past collision repair industry initiatives, this group is playing it tight to the vest. Though their lawyers declined to be interviewed for this article, word has it that the folks in Washington are about to get very busy.
“It’s my opinion that what they’re doing today is a lot better than what we did years ago,” says Cindy Denya, one of the ’93 Eight. “No. 1, they have financial backing, they’re getting organized and they’re getting specific paperwork. I don’t think we accomplished that much in 1993. I think we let them know there was a problem.”
And, according to the Consent Decree Community, there’s still a problem. But will the DOJ do anything about it this time around?
Stay tuned for Part 3 – the conclusion to the saga of the 1963 Consent Decree.
Writer Charlie Barone has been working in and around the body shop business for the last 27 years, having owned and managed several collision repair shops. He’s an ASE Master Certified technician, a licensed damage appraiser and has been writing technical, management and opinion pieces since 1993. Barone can be reached via e-mail at ([email protected]).
Special thanks to FindLaw.com, the Wall St. Journal, CRASH Network, the Philadelphia Inquirer and the Washington Post.
Are DRPs Illegal?
At the heart of the antitrust laws is restraint of trade. The U.S. economic system is predicated on unfettered commerce among willing participants. Anything that would serve to suppress or otherwise manipulate prices – government intervention excepted – is expressly outlawed.
In “Kaye, Scholer’s Antitrust Deskbook” (2nd edition, 1995) Richard M. Steuer, a lawyer specializing in antitrust law, writes in his Antitrust Laws, An Executive Summary, “The Sherman Act, by its terms, prohibits every agreement that results in a restraint of trade. Some types of restraints, however, have such predictable and pernicious anti-competitive effect and such limited potential for pro-competitive benefit that they are deemed unlawful per se.
“The scope of federal antitrust regulation is all-pervasive, with virtually every business of significance falling within its reach … The relevant statutory provisions are deceptively simple. Each can be set forth on one page, and all are expressed in straightforward language which, at face value, is readily comprehensible even to the uninitiated.
“Horizontal restraints of trade – that is, concerted actions among entities in actual or potential competition with one another – have traditionally been considered the most serious of antitrust infractions and constitute that category of violations most susceptible to criminal penalties. The antitrust laws postulate a competitive marketplace in which rival firms compete with respect to prices, products and services. Any arrangement that runs counter to this axiomatic conduct among competitive entities is accordingly suspect.
“Antitrust’s capital crime is horizontal price fixing. Agreements among competitors with respect to prices for products or services are illegal per se. The prohibition is all-embracing, [with application to] whoever may be involved and whatever the circumstances … Competitors may not agree on a price range within which they will compete, on a common list or book price from which discounts are free to vary or on the discounts themselves.”
Closer to home, DRPs could appear as a form of horizontal restraint. While the participants don’t collude with one another, one could say the effect of agreements with insurers makes it so. That is, horizontal restraint is established when network body shops are given preferential treatment by an insurance company payer in exchange for adherence to labor guides, rates and incidental charges. Steering work as a means of excluding competitors is referred to as a per se boycott or per se unlawful activity, in that its effect on the market mimics the statutory prohibitions.
The Sherman Act prohibits agreements by two or more persons not to buy from an individual, a firm or a group. Preferential treatment given to a group of body shops where policyholders may spend their insurance checks would clearly run afoul of this principle. The fact that they typically don’t have their checks in hand is irrelevant. However, statements made to collision repair consumers that have the effect of telling them to “buy here” or “don’t buy there” could be construed as a refusal to deal, which is, in its essence, a boycott.
The reality that most preferred shop programs exclude willing providers opens them to charges of horizontal restraint of trade. Typically the DRP customer never has the opportunity to elicit bids from non-network shops and is thus deprived of potentially better service, price or terms. As such, the inside track to customers promised by DRP agreements undermines a free market for collision repair.
“As Soon As the Fee Is Paid, You’ll Lock Out Your Competition”
DRP agreements can be couched in a number of ways. DRP steering is often presented with the positive connotation of marketing (something no more offensive than your average dinner-time call from a telemarketer). What’s been described as an exclusionary and predatory arrangement by some is cast in the light of sales incentives and CSI indexing.
Deep in the 1993 package left with Melillo was an advertisement for CEI, a well-established body shop referral network based in Southampton, Pa. The ad referred to their network members being granted a “protected territory” in which their participating insurers will refer work to paid participants. It promised “control of your own strictly protected territory.”
At the bottom of the CEI ad it read, “As soon as the fee is paid, you’ll effectively lock out your competition, since only one Certified Member is accepted for a given area of population.”
The ’93 Eight expected this sentence to set off the sprinklers at the Justice Department. Yet, this exclusionary marketing exists as a business model for settling millions of physical damage claims. Today CEI boasts 225 people working in 11 offices. Their CEO, Wayne G. Smolda, stated that CEI is a marketing network and nothing more.
Still, it would be hard to misconstrue the phrase, “lock out competition.”
How would a third-party claims administrator such as CEI funnel work to its subscribers without a soft boycott against non-network shops? How could CEI deliver on its promises without at least committing a per se antitrust offense? Evidently, they’ve done that and more, as Smolda puts his expected 2000 revenues at $60 million (although, he did say that they’ve backed off to some extent in their marketing of DRPs to collision repairers and that CEI is more of a claims management and fleets administrator).
Dot-coms like CEI have sprung up like mushrooms, all staking out the electronic-referral domains. EAutoclaims, ProcessClaims, Ensera and ClaimsSpace all operate pay-for-referral networks.
“Our company is a claims management outsourcing company that becomes a facilitator in the industry,” says Smolda. “We facilitate [shops] in getting incremental business in a way that doesn’t cost unless they get the transaction. They pay a fee that’s very affordable.
“The dot-coms are all using new Internet break-away technologies. The question for us is, will the insurance companies integrate their legacy-based systems into the networks? If that were to happen and the insurers’ in-house programs processed claims automatically, networks like CEI could see volume trip their meters like slot machines.”
Smolda says his company gets an average of 13 percent commission on the fleet side and between 6 percent and 8 percent on insurance claims processed through CEI (that’s collision repair jobs delivered to his network subscribers’ desktops). He described the process like this: “We direct them to one of our networks shops. But we always give them a selection among our network shops. We offer them this option if its been established that they don’t have a choice [of shop]. One-third will take the option, one-third already know where they’re going, and one-third are undecided.
“I say that we’re not influencing anyone to do anything. We’re providing options for them. As long as the options and the rights of the vehicle owner are maintained, there’s not even a hint of [violating] a regulation.”
Smolda had no knowledge that his 1993 ad was submitted to the DOJ. And why would he? He was never approached by the feds.