United Farmers Agents Ass'n v. Farmers Insurance Exchange , 89 F.3d 233 ( 1996 )

United States Court of Appeals,
Fifth Circuit.
No. 95-50559.
UNITED FARMERS AGENTS ASSOCIATION, INC.; Thomas J. Vinson;
Robert D. Moon, Plaintiffs-Appellants,
v.
FARMERS INSURANCE EXCHANGE, a California Reciprocal or Inter-
Insurance Exchange; Fire Insurance Exchange, a California
Reciprocal or Inter-Insurance Exchange; Truck Insurance Exchange,
a California Reciprocal or Inter-Insurance Exchange; Mid-Century
Insurance Company; Farmers New World Life Insurance Company,
Defendants-Appellees.
July 25, 1996.
Appeal from the United States District Court for the Western
District of Texas.
Before GARWOOD, DAVIS and DeMOSS, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge.
The United Farmers Agents Association (UFAA) and Farmers
insurance agents Thomas J. Vinson and Robert D. Moon appeal the
district court's order granting Farmers Insurance summary judgment
and dismissing their antitrust class action. We AFFIRM.
I.
Farmers Insurance is a group of five insurance companies with
approximately 14,000 independent contractor agents in 29 states.
Under the contract between Farmers and its agents, Farmers is
obligated to provide policyholder information to the agents. It
has always provided this information through manual records in
paper and book form. In 1981, Farmers set up a computer system,
the Farmers Agency Network System (FANS), to allow agents on-line
access to this information in addition to the traditional manual
1
access. Agents who wished to gain electronic access to
policyholder information through FANS were required to purchase a
specially configured IBM computer from Farmers or to use another
agent's IBM computer purchased from Farmers.
The written agreement between Farmers and agents who purchased
computers and gained access to FANS specifically stated that,
absent written agreement from Farmers, only computers purchased
through Farmers would be allowed to access FANS. Farmers' policy
was to never grant a written waiver of this provision. This policy
continued until 1993 when Farmers began allowing agents to use
personal computers and computers purchased from third-party vendors
to access FANS.
UFAA, Vinson and Moon (plaintiffs) filed this action as an
antitrust class action on behalf of all Farmers agents alleging
that Farmers illegally tied electronic access to policy information
to the purchase of computers from Farmers. The district court
certified the class for liability purposes under Federal Rule of
Civil Procedure 23(b)(1) but deferred a ruling on certification of
a damages class pending the outcome on liability. The district
court referred discovery motions and other dispositive and
non-dispositive motions to a magistrate judge who recommended that
the district court grant summary judgment in favor of Farmers. On
April 19, 1995, the district court adopted the magistrate's Report
and Recommendation in full and dismissed the plaintiffs' suit. On
appeal, plaintiffs argue that the district court erred by granting
2
Farmers' motion for summary judgment.1
II.
A.
Plaintiffs argue that Farmers' policies regarding electronic
access to FANS constitute a per se illegal tying arrangement2 and
1
Plaintiffs also assert that the district court erred by
failing to review the summary judgment record de novo before
adopting the magistrate judge's recommendation, using an improper
standard in deciding whether summary judgment was appropriate and
failing to certify plaintiffs as a damages class under Federal
Rule of Civil Procedure 23(b)(3). Our de novo review of the
record and use of the proper standard for granting summary
judgment cure the first two of these asserted errors. Our
affirmance of the district court's decision to grant summary
judgment makes it unnecessary for us to consider the third.
2
Tying exists when "a seller refuses to sell one product,
which a buyer desires, unless the buyer also agrees to purchase a
second product, which is not otherwise desired from this seller
on the offered terms.... The desired product is called the
"tying' product; the other is the "tied' product." 9 Phillip E.
Areeda, Antitrust Law, ¶ 1700a (Little, Brown & Co., 1991). See
also Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451,
461-62, 112 S. Ct. 2072, 2079-80, 119 L. Ed. 2d 265 (1992).
A tying arrangement is per se illegal when it has the
following characteristics: (1) Two separate products (as
opposed to components of a single product), (2) The two
products are tied together or customers are coerced, (3) The
supplier possesses substantial economic power over the tying
product, (4) The tie has an anticompetitive effect on the
tied market, and (5) The tie affects a not insubstantial
volume of commerce. 9 Areeda, Areeda at ¶ 1702. See also
Kodak, 504 U.S. at 461-62, 112 S.Ct. at 2079-80; Jefferson
Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 11-28, 104
S. Ct. 1551, 1558-66, 80 L. Ed. 2d 2 (1984).
Tying arrangements and other restraints of trade that
do not fit the criteria for per se illegality are evaluated
under the Rule of Reason. Jefferson Parish Hospital Dist.,
466 U.S. at 29, 104 S.Ct. at 1567 (1984). Under the Rule of
Reason, the plaintiff has the burden of proving that the
tying arrangement "unreasonably restrained competition."
Id. This burden requires an inquiry into the actual effect
of the tying arrangement on competition in the tied market.
Id.
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allege that the relevant market3 in which Farmers is illegally
exercising market power is the market for electronic access to
Farmers policy information. Farmers responds by arguing that the
relevant market should be insurance sales and even if the court
accepts the plaintiffs' argument that a separate market exists for
electronic access to Farmers policy information, Farmers' has no
power in the market for electronic access to Farmers policy
information because of intense competition in the insurance sales
market. We find that Farmers has no market power in the relevant
market (insurance sales) and no market power even in the
plaintiffs' alleged relevant market (electronic access to policy
information). Market power is a necessary prerequisite to an
illegal tie so we need not make any further inquiry into whether
Farmers' policies constitute an illegal tie.
Under the undisputed facts of this case, we agree with Farmers
that the relevant market is the market for insurance sales. The
only product that Farmers markets to consumers is insurance. We
agree with the magistrate that the summary judgment record is
"replete with evidence that Farmers Insurance sells insurance, not
electronic access, not computers." (emphasis in original).
3
The relevant market in an antitrust inquiry is defined by
the cross-elasticity of demand between a given product and its
substitutes. 2 Phillip E. Areeda & Donald F. Turner, Antitrust
at ¶ 519a. The cross-elasticity of demand for substitutes
measures consumers' propensity to switch from one product to
another, similar product when relative prices change. See
William J. Baumol & Alan S. Blinder, Economics: Principles and
Policy at 343 (Harcourt Brace Jovanovich, Inc., 1979). Products
similar enough that a small relative price change causes
consumers to substitute one for another are in the same market.
2 Areeda & Turner, Antitrust at ¶ 525a.
4
Plaintiffs' alleged market consists of a single brand (Farmers) and
a tying product (electronic access to policy information) that has
never been available to anyone other than Farmers agents. The
information that the alleged tying product allows agents to access
has always been available to agents in book form for free.
Additionally, plaintiffs' own attorney could offer no justification
at oral argument for choosing electronic access to Farmers policy
information as the relevant market other than that he was trying to
define the market as narrowly as possible (in order to make it look
as if Farmers had market power). Plaintiffs have not alleged that
Farmers has a superior or unique insurance product that allows it
to charge consumers more for policies or pay agents less for
selling them and they have shown no evidence that new Farmers
agents would face significant information or switching costs4 in
deciding whether to sell Farmers insurance or the insurance of
another company. The agents have failed to give us any reason to
view the market for electronic access to Farmers policy information
as the relevant market.
This suit is essentially an intracompany dispute over how to
run a computer system, not a valid claim under antitrust laws.
Economic power derived from contractual agreements such as
franchises or in this case, the agents' contract with Farmers, "has
4
Information costs in this case are the costs incurred by
new agents in finding out how much Farmers will charge for
electronic access to policy information and other services after
they begin selling Farmers policies. Switching costs are the
costs incurred in switching from selling Farmers insurance to
selling the policies of another company. Compare Kodak, 504 U.S.
at 473-77, 112 S.Ct. at 2083-88.
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nothing to do with market power, ultimate consumers' welfare, or
antitrust." Benjamin Klein & Lester F. Saft, The Law and Economics
of Franchise Tying Contracts, 28 J.Law & Econ. 345, 356 (1985). We
agree with the magistrate judge and the district court that
plaintiffs fail to raise a question of material fact as to whether
electronic access to Farmers policy information is the relevant
market for our inquiry.
The relevant market for an inquiry into market power in this
case is the market for insurance sales and the agents do not
contend that Farmers could exercise (or has exercised) market power
in that market. The agents' claim is not, therefore, cognizable
under antitrust laws and the magistrate judge and the district
court correctly determined that Farmers was entitled to summary
judgment.
B.
Even if we accept the plaintiffs' alleged market for
electronic access to policy information as the relevant market, the
plaintiffs have failed to prove that Farmers had or exercised
market power. Farmers has 100% of the market share in the tying
product (electronic access to policy information). However, this
does not mean that Farmers has market power in the tying market.
In fact, undisputed evidence showing that the markets for insurance
sales and agents are highly competitive makes plaintiffs' argument
that Farmers has market power in the market for its policy holder
information highly unlikely in the absence of prohibitive
6
information costs or the ability to price discriminate5 between
agents with high switching costs and those with low or no switching
costs. See Eastman Kodak Co. v. Image Technical Services, 504 U.S.
451, 475, 112 S. Ct. 2072, 2086-87, 119 L. Ed. 2d 265 (1992).
Plaintiffs have cited no evidence that information or switching
costs were high for most agents and offer no evidence that Farmers
attempted to engage in price discrimination.
The plaintiffs argue that Kodak compels us to deny Farmers
motion for summary judgment. However, their reliance on Kodak is
misplaced. The Supreme Court's decision in Kodak was a rejection
of Kodak's assertion that market power could never exist over
repair parts in any case where the defendant did not have market
power over the earlier-purchased machines needing those parts.
Critically, the plaintiffs in Kodak produced evidence that Kodak
was charging above market prices for its service and was engaged in
price discrimination in favor of the knowledgeable customers who
could most easily obtain information or switch companies. Kodak,
504 U.S. at 465, 476, 112 S. Ct. at 2081, 2087. By contrast, the
plaintiffs in this case have failed to proffer any specific
evidence that the computers sold by Farmers were sold at
5
Price discrimination is charging different buyers different
prices for the same item. A price-discriminating monopolist
charges each consumer as much as the consumer is willing to pay
for an item. Consumers who desperately need a particular product
are charged a high price for it while those who do not really
need the product and will refuse to buy it rather than pay a high
price are charged a relatively low price. A price-discriminating
monopolist makes as much money as possible on its product because
it charges high prices to the people who are willing to pay high
prices without losing sales to people willing to pay only a low
price. See 2 Areeda & Turner Antitrust, ¶ 514a.
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above-market prices or that other equipment of comparable quality
was available for less. The only summary judgment evidence
plaintiffs submitted was general testimony that third party vendors
of used IBM system 36 computers were selling them for less than
Farmers and in larger quantities. They offer no evidence regarding
price, quality, reliability or the expense necessary to configure
these computers to FANS. Except for general disclaimers,
plaintiffs offered no assurance that these used computers would
maintain the security of Farmer's policy information and would not
introduce viruses into the system. Additionally, plaintiffs offer
no evidence of an appropriate market price for electronic access to
policy information and have failed to even allege that the tied
bundle of electronic access and computers cost more than the sum of
their market prices. See Will v. Comprehensive Accounting Corp.,
776 F.2d 665, 672-73 (7th Cir.1985) cert. denied 475 U.S. 1129, 106
S. Ct. 1659, 90 L. Ed. 2d 201 (1986) ("unless plaintiff shows that the
package price was elevated, the suit must be dismissed without
further ado"); Kypta v. McDonald's Corp., 671 F.2d 1282 (11th
Cir.) cert. denied, 459 U.S. 857, 103 S. Ct. 127, 74 L. Ed. 2d 109
(1982) (same). In sharp contrast to Kodak where the plaintiffs
supported their claims of market power with evidence that Kodak
charged above-market prices and engaged in price discrimination,
the plaintiffs here simply allege that Farmers charged prices above
the market price for computers without offering any evidence of
what the market price for reliable computers was or alleging that
the bundle of products, taken together, was sold at an above-market
8
price.
The plaintiffs have failed to raise a question of material
fact as to whether Farmers has sufficient market power in the
market for electronic access to Farmers policy information to force
agents to buy computers at higher than market prices. The fact
that Farmers required agents to purchase a computer from it in
order to obtain electronic access to policy information does not
prove that Farmers had market power. See Breaux Bros. Farms, Inc.
v. Teche Sugar Co., 21 F.3d 83, 86-87 (5th Cir.) cert. denied ---
U.S. ----, 115 S. Ct. 425, 130 L. Ed. 2d 339 (1994). As noted above,
the summary judgment record contains no evidence that the computers
were sold at a premium price or that acceptable alternatives were
available for less. It also contains no evidence of what
electronic access to policy information should cost. In fact, the
summary judgment record strongly supports Farmers' argument that it
had no power in the electronic-access-to-policy-information market.
Plaintiffs do not dispute that the insurance sales market is
highly competitive. Absent high information or switching costs,
intense competition in the market for insurance agents will force
Farmers to pay competitive wages and preclude it from imposing
above-market prices on its agents for the services it provides
them. Additionally, availability of manual access to policy
information was a good substitute for electronic access. This
seriously limited Farmers' ability to charge more than the market
9
price for electronic access to the same information.6 The summary
judgment record here contains no evidence that information or
switching costs were high enough to produce any substantial market
power for Farmers and no evidence that manual access to policy
information was so seriously inadequate as a substitute for
electronic access as to allow Farmers to exercise market power over
electronic access.
Information and switching costs for Farmers agents hired after
1981 when FANS was implemented were virtually nonexistent. The
summary judgment record shows that Farmers openly required agents
wishing to access FANS to do so only with computers purchased from
Farmers. Any agent hired would have known of the two ways to
obtain policy information and could have easily inquired about the
cost of electronic access. The computer installment contract
clearly states that no non-Farmers computer will be allowed to
access FANS without the written consent of Farmers. Division
manager Bob Akers testified that he regularly told his agents that
Farmers' policy was to not allow any computers purchased from
third-party vendors to access FANS. Internal correspondence shows
that a corporate officer who led an agent to believe that he could
hook up his computer to FANS even though it was purchased from a
6
Substitutes limit market power by giving consumers an
alternative to paying an above-market price for a product. The
existence of a good substitute at a competitive price (in this
case manual access to policy information for free) prevents a
producer from selling its product at an above-market price. An
attempt to raise price of the product above a competitive level
will be met with a shift in demand from the product to its
substitute. See 2 Areeda & Turner, Antitrust at ¶ 525a.
10
third party was quickly reprimanded and informed that Farmers
policy was to not allow FANS access to any computers purchased from
third parties. The plaintiffs produce no evidence that suggests
that this information was difficult to obtain. Agents would
clearly have become aware of Farmers' policy long before they faced
significant switching costs.
If an agent, unhappy with Farmer's computer policy, wished to
move to a new company, he was free to do so. Switching costs for
most agents were very low. The only switching cost evident in the
summary judgment record is the inability to continue earning
commission from Farmers policies which agents have already sold.
New agents have virtually no switching costs because they have sold
no policies or only a few. These agents can switch to selling
insurance for another insurance company without incurring any
significant cost. The only group of agents that faced switching
costs of any significance were Farmers agents hired before 1981
when FANS was implemented. Switching costs for these agents could
have been high because the agents could not take their customers
with them if they left. Policyholders are Farmers' customers under
the terms of the agency agreement and departing agents would be
forced to give up the income from the numerous policies they had
sold in previous years.7
7
It is important to note that even agents who faced high
switching costs in the decision to switch insurance companies
could easily have continued selling policies with the manual
system. Farmers clearly did not require agents to use FANS and
continued to supply its agents with manual policy information for
free. Even, if manual access to policy information was inferior
to electronic access, it was a reasonably good substitute that
11
The absence of significant information costs to the agents and
the existence of switching costs for some agents but not for others
means that in order for Farmers to have exercised market power in
the markets for electronic access and computers, it must have
engaged in price discrimination. Farmers could exercise market
power and sell electronic access or computers at above-market
prices only to those agents with high switching costs. Agents with
low switching costs would refuse to pay an above-market price for
the bundled electronic access and computers. Rather than pay a
premium, these agents could simply leave Farmers and move to
another insurance company.
Plaintiffs submit no evidence that Farmers charged agents with
many policies in force more than it charged new agents or those
with few policies in force. They do not even allege that Farmers
attempted to engage in price discrimination. Without an allegation
that price discrimination occurred or evidence that Farmers agents
faced prohibitive costs in discovering Farmers' computer policy,
the plaintiffs cannot seriously argue that Farmers had or exploited
any market power. Plaintiffs fail to raise a question of material
fact as to whether Farmers had market power in the market for
electronic access to policy information.
Conclusion
We agree with the district court and the magistrate judge that
electronic access to policy information is merely a component of
would have seriously limited Farmers' ability to charge
above-market prices for electronic access and computers even to
those agents with many policies in force.
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Farmers' insurance product and that the relevant market for an
antitrust inquiry is the insurance sales market. Farmers exercised
no market power in this highly competitive market and plaintiffs'
antitrust action fails for this reason alone. Additionally, even
if we accept plaintiffs' alleged markets as the relevant markets
for our inquiry, plaintiffs still fail to raise a question of
material fact on the issue of whether Farmers has market power.
Plaintiffs fail to offer any evidence of above-market computer
prices or high switching or information costs. They present no
evidence that Farmers engaged in price discrimination and they
offer no plausible economic argument that would support market
power. For all of these reasons, we find that plaintiffs have
failed to raise a question of material fact as to whether Farmers
violated antitrust laws. The judgment of the district court is,
therefore, AFFIRMED.
AFFIRMED.
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