Thoughts On The Third Circuit’s New Section 1 and RICO Enterprise Opinion in the Insurance Brokerage Antitrust Litigation

Last week, after more than a year of drafting following oral argument, and nearly two years after the original District Court order, a Third Circuit panel (Chief Judge Scirica and Judges Fisher and Greenberg) issued their magnum opus on pleading Section 1 antitrust violations after Twombly and Racketeer Influenced and Corrupt Organizations ("RICO") Act "enterprises" after Boyle in the consolidated Multi-District Litigation In re: Insurance Brokerage Antitrust Litigation.

The plaintiffs alleged a massive, "global" conspiracy among the major insurance companies and insurance brokers to artificially allocate customers and rig prices for commercial insurance:

Plaintiffs are purchasers of commercial and employee benefit insurance, and defendants are insurers and insurance brokers that deal in those lines of insurance. According to plaintiffs, defendants entered into unlawful, deceptive schemes to allocate purchasers among particular groups of defendant insurers. The complaints assert that conspiring brokers funneled unwitting clients to their co-conspirator insurers, which were insulated from competition; in return, the insurers awarded the brokers contingent commission payments—concealed from the insurance purchasers and surreptitiously priced into insurance premiums—based on the volume of premium dollars steered their way. As a result of this scheme, plaintiffs allege they paid inflated prices for their insurance coverage and were generally denied the benefits of a competitive market. The question on appeal is whether plaintiffs have adequately pled either a per se violation of § 1 of the Sherman Act (plaintiffs have foresworn a full-scale rule-of-reason analysis) or a violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. Concluding they had not, the District Court dismissed the complaints. 

(Here’s the First Amended Complaint; the Second Amended Complaint was, I believe, sealed).

§ 1 of the Sherman Act and § 1962 of the RICO Act are almost constitutional in their breadth and power. Here’s the relevant part of § 1 of the Sherman Act:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

And here’s § 1962(c) of the RICO Act:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.

Such breadth is a blessing and a curse for plaintiffs; like with the Bill of Rights, § 1 of the Sherman Act and § 1962 of the RICO Act are so broad, and so empowering, that Courts have spent decades literally ignoring the statutes’ text to narrow the relief available to plaintiffs. See, e.g., Fitzgerald v. Chrysler Corp., 116 F. 3d 225 (7th Cir. 1997)(admitting that a judicially-created exclusion to the meaning of "enterprise" under the RICO Act "doesn’t emerge from the statutory language," but applying it anyway).

The Third Circuit panel does an exceptional job summarizing this unwieldy body of extra-textual precedent on pages 32-42 of the opinion (for § 1 antitrust claims) and 153-172 (for RICO enterprises); any associates or clerks trying to figure out these complex fields could do worse than to review them.

These artificial restrictions force plaintiffs bringing antitrust and RICO claims — who typically only have circumstantial evidence at the beginning of their case given the efforts undertaken by the defendants to conceal their wrongdoing — to make suppositions about how the defendants carried out their scheme.

That’s where Twombly and Iqbal come in. 

In the Insurance Brokerage Antitrust cases, there were, shall we say, a lot of defendants*, defendants who, for purposes of antitrust and RICO allegations, could have been configured in a wide variety of ways. The plaintiffs thus, understandably, had to make some tactical decisions about their allegations, like with the type of antitrust violation alleged:

Although plaintiffs’ 16 First Amended Complaints (FAC) expressly pled a rule-of-reason claim in the alternative, see, e.g., Comm. FAC ¶ 530; EB FAC ¶ 454, their Second Amended Complaints omit any reference to the rule of reason, and their moving papers and appellate arguments make clear they are alleging exclusively per se violations. In their initial motions to dismiss, defendants contended that the First Amended Complaints had not adequately defined a market or pled anticompetitive effects and had thus failed to state a claim under the rule of reason. In response, plaintiffs did not assert that they had, in fact, met these requirements; they argued only that “where plaintiffs allege per se claims,” these requirements do not apply.

And with the type of RICO enterprise they alleged:

While plaintiffs strenuously insist they have adequately pled the existence of “broker-centered enterprises,” they have conspicuously refrained, throughout the district-court proceedings and on appeal, from asserting alternative bilateral or single-entity enterprises.

Presumably, the plaintiffs deliberately chose to avoid rule-of-reason claims (in which the plaintiff is required to demonstrate, e.g., the defendant’s market power in a defined market) and the allegation of "bilateral or single-entity enterprises" to preserve their class action status against all defendants. If, for example, the plaintiffs had split their claims up into multiple allegations of single-entity enterprises, each of those respective defendants tied to a particular scheme would move to decertify themselves from the bigger case. 

In the end, that’s what did the plaintiffs in; their "parallel conduct" allegations ran smack into Twombly**:

Contrary to plaintiffs’ arguments, one cannot plausibly infer a horizontal agreement among a broker’s insurer-partners from the mere fact that each insurer entered into a similar contingent commission agreement with the broker. As the District Court concluded, the first stage of the alleged brokercentered conspiracies—the consolidation of the groups of insurers to which each broker referred business—evinces nothing more than a series of vertical relationships between the broker and each of its “strategic partners.” 2007 WL 2533989, at *15.

Moreover, plaintiffs’ argument proves too much. If the parallel decisions by several insurers to pay contingent commissions imply a horizontal agreement, then it is difficult to see why parallel decisions to pay standard commissions (that is, a fixed percentage of each policyholder’s premium payment) would not also imply an agreement. For that matter, plaintiffs’ logic would divine a horizontal agreement from virtually any parallel expenditures for marketing services, on the mistaken ground that a firm would not pay for advertising, for example, in the absence of an agreement with its competitors to enter into similar contracts with the advertising company. Cf. Twombly, 550 U.S. at 566 (noting that “resisting competition is routine market conduct,” and that “if alleging parallel decisions to resist competition were enough to imply an antitrust conspiracy, pleading a § 1 violation against almost any group of competing businesses would be a sure thing”)

And the same problem hit the RICO claims:

In seeking to establish a “rim” enclosing the insurer-partners in the alleged RICO enterprises, plaintiffs rely on the same factual allegations we found deficient in the antitrust context: that each insurer entered into a similar contingent-commission agreement in order to become a “strategic partner”; that each insurer knew the identity of the broker’s other insurer-partners and the details of their contingent-commission agreements; that each insurer entered into an agreement with the broker not to disclose the details of its contingent-commission agreements; that the brokers utilized certain devices, such as affording “first” and “last looks,” to steer business to the designated insurer; and that, in the Employee Benefits Case, insurers adopted similar reporting strategies with regard to Form 5500. As noted, these allegations do not plausibly imply concerted action—as opposed to merely parallel conduct—by the insurers, and therefore cannot provide a “rim” enclosing the “spokes” of these alleged “hub-andspoke” enterprises. Even under the relatively undemanding standard of Boyle, these allegations do not adequately plead an associationin- fact enterprise. They fail the basic requirement that the components function as a unit, that they be “put together to form a whole.” Boyle, 129 S. Ct. at 2244 (internal quotation marks omitted). Because plaintiffs’ factual allegations do not plausibly imply anything more than parallel conduct by the insurers, they cannot support the inference that the insurers “associated together for a common purpose of engaging in a course of conduct.” Id. (quoting Turkette, 452 U.S. at 583); see id. at 2245 n.4 (stating that “several individuals” who “engaged in a pattern of crimes listed as RICO predicates” “independently and without coordination” “would not establish the existence of an enterprise”) …

In short, plaintiffs’ allegations didn’t "plausibly" suggest any actual agreement among all the insurers; instead, they merely suggested parallel conduct that, in the Third Circuit’s eyes, could just as equally be explained by way of the insurers acting independently.

Thus, the bulk of the claims were dismissed, although the plaintiffs can continue on some of their bid-rigging claims against the Marsh-connected defendants.

But there’s plenty for plaintiffs to be relieved about with the opinion.

First, there’s the massive size of the case. Although the Third Circuit couldn’t outright say it — just like the Supreme Court didn’t say it in deciding Twombly — the sheer size of the Insurance Brokerage Antitrust cases was undoubtedly a factor. The cases were an indictment of the entire commercial insurance industry, with a demand for treble damages (and attorney’s fees) for years of industry-wide conduct, damages that reached into the billions. If you bring a case of that magnitude, you invite heightened scruinty.

Moreover, and more importantly, the sheer number of defendants, and the extraordinary breadth of the allegations against them, is what stretched the plaintiffs claim from "probable" into "implausible." It is understandably difficult for a court to swallow allegations of a vast conspiracy across an entire industry when the plaintiffs only have concrete evidence against a single group of defendants (the Marsh defendants whose misdeeds launched the whole investigation). The real lesson is, if you’re going to file a nationwide suit of that scope, you need either to find yourself a whistleblower or to follow on the coattails of a government investigation (as the claims against the Marsh defendants did). Fair or not, nothing else will work these days.

Second, there’s the actual law in In Re: Insurance Brokerage Antitrust:

 “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (quoting Fed. R. Civ. P. 8(a)(2)). Because Federal Rule of Civil Procedure 8(a)(2) “requires a ‘showing,’ rather than a blanket assertion, of entitlement to relief,” courts evaluating the viability of a complaint under Rule 12(b)(6) must look beyond conclusory statements and determine whether the complaint’s well-pled factual allegations, taken as true, are “enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 & n.3. The test, as authoritatively formulated by Twombly, is whether the complaint alleges “enough fact[] to state a claim to relief that is plausible on its face,” id. at 570, which is to say, “‘enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal[ity],’” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (quoting Twombly, 550 U.S. at 556) (alteration in Arista Records).Fn 17

FOONOTE 17:


Twombly affirms that Rule 8(a)(2) requires a statement of facts “suggestive enough” (when assumed to be true) “to render [the plaintiff’s claim to relief] plausible,” that is, “enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal” conduct. Twombly, 550 U.S. at 556. Iqbal, which reiterated and applied Twombly’s pleading standard, endorses this understanding. See Iqbal, 129 S. Ct. at 1949–51. Although Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009), stated that Twombly and Iqbal had “repudiated” the Supreme Court’s earlier decision in Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002), see Fowler, 578 F.3d at 211, we are not so sure. Clearly, Twombly and Iqbal inform our understanding of Swierkiewicz, but the Supreme Court cited Swierkiewicz approvingly in Twombly, see 550 U.S. at 555–56, and expressly denied the plaintiffs’ charge that Swierkiewicz “runs counter” to Twombly’s plausibility standard, id. at 569–70. As the Second Circuit has observed, Twombly “emphasized that its holding was consistent with [the Court’s] ruling in Swierkiewicz that ‘a heightened pleading requirement,’ requiring the pleading of ‘specific facts beyond those necessary to state [a] claim and the grounds showing entitlement to relief,’ was ‘impermissibl[e].’” Arista Records, 604 F.3d at 120 (quoting Twombly, 550 U.S. at 570 (alterations in Arista Records). In any event, Fowler’s reference to Swierkiewicz appears to be dicta, as Fowler found the complaint before it to be adequate. 578 F.3d at 212; see also id. at 211 (“The demise of Swierkiewicz, however, is not of significance here.”).

(Bolding mine). I previously covered the Second Circuit’s approach to antitrust post-Twombly; it’s good news for plaintiffs to see the same approach approved in the Third Circuit, particularly over a prior Third Circuit case (Fowler). Under Twombly and Iqbal, the issue isn’t whether or not the plaintiff has uncovered enough evidence to make a prima facie case on the face of their complaint — as some defense lawyers have claimed — but rather whether the plaintiff has alleged "enough fact to raise a reasonable expectation that discovery will reveal evidence of illegality."

The dismissal in In Re: Insurance Brokerage Antitrust might thus prove to have made the law better for plaintiffs in the Third Circuit. That the plaintiffs in the case itself lost many of their claims is of no moment; the case quite literally alleged an industry-wide agreement to commit antitrust and racketeering violations. Plaintiffs with cases of lower orders of magnitude — like those against anything less than dozens of companies at the top of two major industries, insurance and insurance brokering — will have little trouble distinguishing those facts.

* Here were the defendants:

American International Group, Inc.; American  International Specialty Lines Insurance Company;  Lexington Insurance Company; AIG Casualty Company  f/k/a Birmingham Fire Insurance Company of  Pennsylvania; American Home Assurance Company;  National Union Fire Insurance Company of Pittsburgh,  Pa.; National Union Fire Insurance Company of  Louisiana; American International Insurance Company;  The Insurance Company of the State of Pennsylvania;  AIU Insurance Company; Commerce and Industry  Insurance Company; New Hampshire Insurance  Company; The Hartford Steam Boiler Inspection and  Insurance Company; Illinois National Insurance Co.;  AIG Life Holdings (US), Inc. f/k/a American General  Corporation; AIG Excess Liability Insurance Company  Ltd. f/k/a Staff Excess Liability Company, Ltd.; AIG  Life Insurance Company; The United States Life  Insurance Company in the City of NewYork  The Hartford Financial Services Group, Inc.; Hartford  Fire Insurance Co.; Twin City Fire Insurance Co.; Pacific  Insurance Co., Ltd.; Nutmeg Insurance Co.; The Hartford  Fidelity & Bonding Co.; Hartford Life and Accident  Insurance Company; Hartford Life Group Insurance  Company; Hartford Life Insurance Company  Aon Corporation; Aon Broker Services, Inc.; Aon Risk  Services Companies, Inc.; Aon Risk Services, Inc. U.S.;  Aon Risk Services, Inc. of Maryland; Aon Risk Services,  Inc. of Louisiana; Aon Risk Services of Texas, Inc.; Aon  Risk Services, Inc. of Michigan; Aon Group, Inc.; Aon  Services Group, Inc.; Aon Re, Inc.; Affinity Insurance  Services, Inc.; Aon Re Global, Inc.; Aon Consulting, Inc.  ACE Limited; ACE INA Holdings, Inc.; ACE USA, Inc.;  ACE American Insurance Co.; Westchester Surplus  Lines Insurance Co.; Illinois Union Insurance Co.;  Indemnity Insurance Co. of North America; ACE Group  Holdings, Inc.; ACE US Holdings, Inc.; Westchester Fire  Insurance Company; INA Corporation; INA Financial  Corporation; INA Holdings Corporation; ACE Property  & Casualty Insurance Co.; Pacific Employers Insurance  Co. American Re Corporation; American Re-Insurance  Company; Munich-American Risk Partners; American Alternative Insurance Corporation  AXIS Specialty Insurance Company; AXIS Surplus  Insurance Company; AXIS Capital Holdings Ltd.  CNA Financial Corp.; The Continental Insurance Co.;  Continental Casualty Co.; American Casualty Co. of Reading, PA; Chicago Insurance Co.; Fireman’s Fund Insurance  Company; National Surety Corp.; The Chubb Corporation; Federal Insurance Company;  Executive Risk Indemnity Inc.; Vigilant Insurance  Company; Crum & Forster Holdings Corp.;  United States Fire Insurance Company; Greenwich Insurance Company; Indian Harbor Insurance  Company; XL Capital Ltd.; X.L. America, Inc.; XL  Insurance America, Inc.; Wells Fargo & Co.; Acordia, Inc.; Hilb, Rogal & Hobbs Company; Willis Group Holdings Limited; Willis Group Limited;  Willis North America, Inc.; Willis of New York, Inc.;  Willis of Michigan, Inc.; Liberty Mutual Holding Company, Inc.; Liberty Mutual  Insurance Co.; Liberty Mutual Fire Insurance Co.;  Wausau Underwriters Insurance Co.; Employers  Insurance Co. of Wausau; Wausau Business Insurance  Co.; Wausau General Insurance Co.; The Travelers Companies, Inc.; St. Paul Fire and Marine  Insurance Company; Gulf Insurance Company; St. Paul  Mercury Insurance Company; Travelers Casualty and  Surety Company of America; The Travelers Indemnity  Company; Athena Assurance Company; Travelers  Property Casualty Corp.; Munich Reinsurance; Life Insurance Company of North America; Connecticut  General Life Insurance Company; MetLife, Inc.; Metropolitan Life Insurance Company;  Paragon Life Insurance Company; General American  Life Insurance Company; New England Life Insurance  Company; Citicorp Life Insurance Company; Travelers  Life and Annuity Company; Travelers Insurance  Company; Reinsurance Group of America, Inc.; MetLife, Inc.; Metropolitan Life Insurance Company; Paragon Life Insurance Company; Prudential Financial, Inc.;  The Prudential Insurance Company of America; The Unum Group Corporation; Unum Life Insurance  Company of America; Provident Life and Accident  Insurance Company; Universal Life Resources; ULR Insurance Services Inc.;  Benefits Commerce; Douglas P. Cox; USI Holdings Corporation; USI Consulting Group, Inc.;  USI Services Corporation f/k/a USI Insurance Services Corp.

That’s most of the big players in the insurance and insurance brokerage industry. Little wonder the allegations drew so much scrutiny.

** Not that the plaintiffs knew they were running into Twombly, which was decided well after the suit was originally filed, after the suits were consolidated, and right around the time the Second Amended Complaint was filed. I suppose, in theory, the plaintiffs could have requested the court dismantle the MDL and allow them to refile seperate suits against each group of conspiring defendants, but pulling apart a nationwide class action after it’s been filed is as easy — and wise — for a plaintiff’s lawyer to do as leaving a fiancé at the altar.

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