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to be seen whether future courts will adopt the “sovereign/commercial" distinction in antitrust cases.
As stated above, the question whether the enterprise is engaged in “sovereign" or "commercial” activities is merely the threshold question in determining antitrust immunity. Even where an enterprise is performing commercial functions, the gorernment may have legislatively protected the enterprise from coinpetition or the prohibitions of the antitrust laws. An example of a government enterprise engaged in activities, at least part of which could be performed by private enterprise, and which enjoys legislative freedom from competition is the l'.S. Postal Service. The "Private Express Statutes" * make it unlawful for any person, except the Postal Service, to carry what is defined as a letter or first class mail. As a result, the Postal Service is insulated from meaningful competition in what generally is the lower cost, higher profit part of the mail delivery business, first class mail and the Postal Service has used the first class letter to subsidize other Postal Services. Other restrictions, such as restrictions limiting the use of user-maintained mailboxes, limit competition in other classes of mail as well.
First class postal rates have increased 117% in the past six years; nonetheless postal deficits have continued to climb. It has been estimated that the Postal Service's operating deficit-an amount that does not include the so-called "public service" subsidy--will exceed $1 billion this year, and that its cumulative deficit will rise to about $1.5 billion for the fiscal year ending in 1977.
In 1975, the Task Group initiated a preliminary review of the Private Express Statutes to ascertain their effects on Postal Service efficiency. The Task Group Fas concerned with Postal Service efforts to expand the scope of these statutes to include many kinds of computer data processing activities, financial document deliveries and even newspaper carrier boy activities. The Postal Service was concerned that recent developments in electronics funds transfer systems were threatening to divert revenues from the Postal Service.
The Task Group found that taking the present Postal Service rate policies into account, relaxing or eliminating the Private Express Statutes would result ili competition with the Postal Service. The Task Group also predicted that if such competition with the Postal Service were sanctioned it would focus most beavily upon local business mail. However, at present there is insufficient data arailable to predict the extent to which rescinding the restrictions in the Private Express Statutes would produce competitive activity.
The recent decision of the Court of Appeals for the D.C. Circuit overturns many of the basic pricing policies now employed by the Postal Service and may signal changes in the Postal Service pricing system and economic policies." The Postal Service has announced that absent à favorable ruling on subsequent appeals, it will seek legislation to affirm its presont pricing practices that have been declared unlawful. Hence, the topic is likely to be the subject of further public policy debate. The working paper attached to this Report is designed to assist in an intelligent evaluation of these issues.
INSURANCE Historically, the regulation of insurance had been ceded to the states by the federal government. However, in 1944, the Supreme Court held that the sale of property-liability insurance took place in interstate commerce and was subject to the provisions of the federal antitrust laws." That decision made illegal the numerous private cartel rate-fixing agreements which had determined prices in the property-liability field and raised questions as to the validity of the various types of state regulation of insurance. The next year Congress enacted the McCarran-Ferguson Act,” which ratified the states' jwwer to regulate insurance absent specifie federal insurance legislation and provided an antitrust exemption for private concerted price-fixing activ: ities which were subject to state regulation. The antitrust exemption was justified on the ground that competitive pricing in the insurance field would lead to ruinous ** V.S.C. $$ 601-06 : 18 USC $8 1693-99, 1727 (1970). * Opinion and Decision in Docket No. R7+ 1. May 28, 1975, Vol. 1 at 13; National Association of Greeting Card Publishers v. 7.8. Postal Services,
(D.C. Cir. National Association of Greeting Card Publishers v. I'nited States Postal Service, - F.2d - D.C. Cir. 1976),
(nited States v. South-Eastern Underwriters Association, 322 U.S. 333.
* 15 C.S.C. $ 1011 et seq.
precedent indicates that insurance companies could pool their loss competition and the demise of many insurance companies, thereby denying the public the benefit of a reliable insurance mechanism. All of the states adopted free through a statistical bureau consistent with federal antitrust standregulatory schemes relating to property-liability insurance rates. Some states set noter, the federal antitrust laws would not prohibit any necessary the rates themselves. Most adopted "prior approval" systems which feature prl of future losses on a composite basis by advisory organizations independvate rate bureaus as the moving force in the determination of rates. Still other Decopanies they were serving. Likewise, the antitrust laws would not states adopted "open competition" systems which allow cartel rate setting but I have roluntary risk-sharing arrangements, such as insurance pools and enable insurers to price independently with relative ease.
chine agreements, that were either necessary to the conduct of business In life insurance and most group health insurance there is virtually no direct la une other legitimate business purpose without
substantially lessening state regulation of rates, but individual health insurance and Blue Cross/Blue psy cumpetition. Shield services are subject to varying degrees of state rate regulation, The Task Group focused a substantial portion of its efforts on a comprehensive
** of these conclusions on the adverse effects of regulation and the ability analysis of the effects of state regulation and the companion antitrust exempelige udstry to function effectively in a fully competitive environment, an A working paper, prepared by Antitrust Division staff, is attached to this report 2e scheme of regulation, without
MeCarran Act antitrust protection may The following is a summary of that paper.
. This alternative could consist of a system of regulation of insurState regulation of insurance
apezies similar to that applicable to other federally-chartered financial The basic question considered by the study is whether the present exemption 3. Insurance companies would have the option of seeking a federal of the business of insurance from the federal antitrust laws
, by the McCarran thereby losing McCarran Act protection from the antitrust laws, or Act and the resulting state regulation intended to replace competition, bas a hat protection undeep a state charter. Insurers operating under federal operated in the public interest. To answer this question, the study attempted sund perhaps others) would participate in a federal guaranty system. to determine whether thirty years of state regulation has provided the public copanies meeting minimum financial standards of eligibility could with the benefits normally attributed to competition, i.e.,
reasonable prices based a federal charter
, although those writing certain lines of insurance possible cost; and innovation--the utilization of new or improved products or services of the agent rather than the ultimate consumer) might have services and methods of distribution.
2. subject to state regulation of maximum agent compensation and
matters regarding that particular line. Experience with competition and regulation
i tal, federally-chartered companies would be exempt from state rate states that have adopted an "open competition" system of rate regulation after state guaranty funds, and state solvency regulation. A federal agency, The study found that over the past ten years, there have been a number of
* state restrictions on collective merchandising and direct writing of attempting to administer a highly regulated system. This experimentation with Federal Insurance Administration, could develop a uniform system evidence of the inadequacies of state rate regulation. Moreover, the emergence of mal of failing companies from the marketplace, rather than the tradicompetitive controls as a substitute for concerted ratemaking appeared to be some og regulation in which the emphasis was on the early detection and strictive state laws, may well be attributed to an industry structure that favorit Fy fund, much like the FDIC, could operate on a preassessment basis independent pricing in segments of the property-liability industry, despite te die approach to solvency regulation of “keeping every insurer afloat." competition, to certain inherent weaknesses in rate regulation, to the successt du herres in the event that a weak company goes undetected. experimentation with deregulation in a number of states, and to the continuine falls-bartered companies would be required to participate in a federal Congressional investigation into insurance industry practices.
• ! the following federal controls replacing analogous controls by
fund, and the insurers (and their agents to the extent relevant) would In addition, our study of the effects of rigid rate regulation in automobile in surance indicates that such regulation has fostered greater adherence to bareur rates, discouraged rate reductions, contributed to instability in insurance Co
federal solvency and investment standards; federal laws against pany operations, established various forms of cross-subsidization between good
Asrimination in the selection and classification of risk based on race, and bad drivers, imposed unnecessary restrictions on the collective merchandisine syrience. The federal antitrust laws would also fully apply, without
*sand federal standards on disclosure of price information and underand the direct writing of insurance, and aggravated the availability problem in which marginal or high risk drivers have difficulty obtaining coverage in the
Pete would continue to play an affirmative role in regulating certain activi. open market at the prevailing rates. On the other hand, the long-run experience of at least one major insurat cipate in a residual market plan so as to service drivers unable to ob
federally-chartered companies. The state could require these companies state under an open competition sytem, in which the state has relied on market
plation in the voluntary market. The state could regulate the rates charged forces to control prices, suggests that full price competition can provide an en
ally-chartered companies provided that they were administered on a selftive substitute for rate regulation as a means of achieving reasonable prices and maximum efficiency in the sale and distribution of insurance. A comparison
e lexix. In lieu of cross-subsidization between high and low risk drivers, tire experience of the same insurers under certain open competition and price
unce protection. The state could levy taxes on federally-chartered
id furnish a direct "external" subsidy to individuals who could not approval systems suggests that competition fosters independent pricing, operat ing stability, and flexibility in the pricing structure. The relatively favorable ang business within the state, although further study is recom
Khe the competitive effects of retaliatory state taxes. suggests that it provides a more effective mechanism for accomplishing the performance of the insurance companies under the highly competitive 55
1, the state would continue to play a dominant role in regulatory matters 2n and renewal of policies, financial responsibility laws, compulsory
to the insurance contract, such as minimum coverage requirements, available coverage at a price reasonably related to cost. basic insurance goals of providing a reliable insurance mechanism and generally
polley forms, licensing of agents, and systems of liability (fault vs. In the commercil lines, it appears that state regulatory schemes are large illusory and insurers are generally free to set their own prices, owing to the availability of state-authorized rating plans which permit insurers to indirik
companies electing to remain state-chartered would be subject to the
2 state insurance regulation, as well as McCarran Act protection. ually price risks based essentially on their business judgment and competitie
the system of regulation, either with respect to federally-chartered compressures. The prevalence of these plans in the commercial lines raises at state-chartered companies participating in the federal guaranty fund, damental question as to the purpose and need for the ostensible state rate mo
sure the reconciliation of federal and state regulation. In this regard,
Pag of the banking laws may provide some guidance so that all inness without any special exemption from the federal antitrust laws. For example yenies would be subject to state law, unless they are expressly
Finally, it would appear that the industry should be able to conduct its to
lation in these lines of insurance.
antitrust precedent indicates that insurance companies could pool their loss experience through a statistical bureau consistent with federal antitrust standards. Moreover, the federal antitrust laws would not prohibit any necessary trending of future losses on a composite basis by advisory organizations independent of the companies they were serving. Likewise, the antitrust laws would not prohibit those voluntary risk-sharing arrangements, such as insurance pools and reinsurance agreements, that were either necessary to the conduct of business or served some other legitimate business purpose without substantially lessening industry competition. A proposal
In view of these conclusions on the adverse effects of regulation and the ability of the industry to function effectively in a fully competitive environment, an alternative scheme of regulation, without McCarran Act antitrust protection may be desirable. This alternative could consist of a system of regulation of insurance companies similar to that applicable to other federally-chartered financial institutions. Insurance companies would have the option of seeking a federal charter and thereby losing McCarran Act protection from the antitrust laws, or retaining that protection under a state charter. Insurers operating under federal auspices (and perhaps others) would participate in a federal guaranty system. Insurance companies meeting minimum financial standards of eligibility could qualify for a federal charter, although those writing certain lines of insurance in such fashion as to raise problems of "reverse competition” (that is, competition for the services of the agent rather than the ultimate consumer) might have to remain subject to state regulation of maximum agent compensation and related matters regarding that particular line.
In general, federally-chartered companies would be exempt from state rate regulation, state restrictions on collective merchandising and direct writing of insurance, state guaranty funds, and state solvency regulation. A federal agency, such as the Federal Insurance Administration, could develop a uniform system of solvency regulation in which the emphasis was on the early detection and swift removal of failing companies from the marketplace, rather than the tradi. tional state approach to solvency regulation of "keeping every insurer afloat." A guaranty fund, much like the FDIC, could operate on a preassessment basis to provide reserves in the event that a weak company goes undetected.
Federally.chartered companies would be required to participate in a federal guaranty fund, and the insurers (and their agents to the extent relevant) would be subject to the following federal controls replacing analogous controls by the states : federal solvency and investment standards; federal laws against invidious discrimination in the selection and classification of risk based on race, age, and sex; and federal standards on disclosure of price information and underwriting experience. The federal antitrust laws would also fully apply, without any special exemptions.
The state would continue to play an affirmative role in regulating certain activities of federally-chartered companies. The state could require these companies to participate in a residual market plan so as to service drivers unable to obtain protection in the voluntary market. The state could regulate the rates charged bs federalls-chartered companies provided that they were administered on a selfsustaining basis. In lieu of cross-subsidization between high and low risk drivers, the state could furnish a direct "external" subsidy to individuals who could not afford insurance protection. The state could levy taxes on federally-chartered companies doing business within the state, although further study is recommended on the competitive effects of retaliatory state taxes. Finally, the state would continue to play a dominant role in regulatory matters Dertaining to the insurance contract, such as minimum coverage requirements, cancellation and renewal of policies, financial responsibility laws, compulsory insurance, policy forms, licensing of agents, and systems of liability (fault vs. Insurance companies electing to remain state-chartered would be subject to the full scope of state insurance regulation, as well as MeCarran Aet protection.
The dual system of regulation, either with respect to federally-chartered companies or state-chartered companies participating the federal guaranty fund, hould require the reconciliation of federal and state regulation. In this regard, the experience of the banking laws may provide some guidance so that all insurance companies would be subject to state law, unless they are expressly
* pters. Enjoyees u ervus sens emos exempt by federal law or unless the state laws interfere or conflict with the
2 dque cürern:ng terms EUCE purposes of the federal scheme.
In summary, the study finds that a predominant segment of the properts. liability insurance industry is favorably structured for competition, with a large
LES** MISC 1 suimteper e Gees II number of competitors, relatively moderate concentration, ease of entry, 1
22 (btil 28 t Sob Circ standardized service, a relatively simply and short-term contract, and an in
an air ultet when deured creasingly price-sensitive consumer market. The available evidence suggests
Serraci lEr rooFL: that unrestricted price competition would be an effective alternative to state
*+1 zi seeT TAI CENDED LI. 215rate regulation and would be compatible with regulatory objectives for a reliabie
ILUL WIL DE TOTE helles 33 ensed insurance mechanism. The study concludes that all of the major lines of properts
ILIBRIT D-L-ULUI FIE 1 ML The liability insurance should have the option of operating in a fully competitive
*** jer jeten L *It XD LICE environment. This would be made possible by the proposed dual system of state
suola 1 D+ ULUL ung scuit WESES * and federal regulation. Other lines of insurance, including life insurance, are
That go berel **: Feed ADC probable candidates for a similar system subject only to the need for possible
bbm .pyllit' jr DÓ= "EIT & Test dem state regulation of maximum agent compensation and related matters to counter the phenomenon of reverse competition. Further study appears necessary to
par min 5* 410 411.02KET reach any definitive conclusions in health insurance and medical malpractice. ***2 lbs Jerčng De Es 240
as its & LUISE C2220 C 22 )
Til the grave 113
FILMO 342 54. Su 1 21.-13 22 The labor exemption, which has emerged from a series of related legislative ana na tenir i com a empre en and judicial actions, is an attempt to accommodate two broad but divergent ***** + Elvin national policies: the first is the policy embodied in the Sherman Act to protectie is the strong labor policy favoring the association of employees to eliminate
.: CL IM LALAT PEL CSC
**** recue 72. Le CE evitable because a labor union has a necessary interest in the market for producto
• 5.** EN***** je zared labor rates under collective bargaining
agreements are not undercut by competi cors who do not pay such higher rates.
Stated another way, there is a close and continuing relationship between the so-called "primary" market for labor itself and the so-called "secondary" market of the final product, the closer the connection--and, as antitrust history teaches for the products produced by labor. The higher the labor costs as a component
*I* 20 * 21 TC11536 us, the more likely that labor unions will become involved in trying to cootril secondary market competition. conditions of employment will bave an indirect effect on the secondary market
Almost anything successful that a labor union does in negotiating terms and because it affects the product's ultimate cost. Antitrust concern arises not with
31* 1.** such indirect effects flowing from primary labor market activity, but with rela between the two is neither clear nor simple and we conclude is best developed tively direct effects on the secondary product market caused by unions. The line
case by case.
Clayton Act, enacted in 1914; and in the Norris-LaGuardia Act, enacted
The statutory labor exemptions are embodied in Section 6" and 20 of the 1932.4* We describe them here in the context of the history that gave rise to the
In the very early days of the Sherman Act, labor unions were the principal object of successful antitrust enforcement. This trend was confirmed by the Supreme Court's 1908 decision in the Danbury Hatters case" which squired held that the Sherman Act applied to union activities. There antitrust liability of the plaintiff's hats which were manufactured with non-union labor. was imposed upon a labor union for inspiring a nationwide consumers' boycott being is not acommodity or article of commerce;" and specifically provided that Clayton Act. Section 6 stated the general principle that "the labor of a humas
That decision led to the enactment six years later of Sections 6 and 30 of the the antitrust laws should not be construed (a) to prohibit the existence of labor objectives thereof." Section 20 broadly barred the use of injunctions by federal organizations or (b) to prevent them "from lawfully carrying out the legitimate
43 Connell Construction Co. v. Plumbers and steam fitters Local Union No. 110, 1931 13
616, 622 (1973)
415 U.S.C. & 17.
courts in any case between employers, employees, or persons seeking employment “involving, or growing out of, a dispute concerning terms or conditions of employment."
These provisions were narrowly construed in subsequent court decisions. In Dupler v. Derring," the Supreme Court held that (a) Section 6 of the Clayton act did not confer immunity from antitrust liability where unions departed from "normal and legitimate objectives" and (b) Section 20 did not bar judicial intervention in cases involved in secondary activity. Therefore it issued an antitrust injunction against a craft union and its New York members who refused to install printing presses manufactured by non-union workers in Michigan. The purpose of this exercise was to put pressure on the Michigan manufacturer to agree to a “closed shop" and to pay the union's going scale of wages.“
The Norris-LaGuardia Act was passed in 1932 to reverse this trend. Among other things, it defined a "labor dispute" to include “any controversy concerning terms or conditions of employment ... regardless of whether or not the disputants stand in the proximate relation of employer and employee." It greatly narrowed the use of federal court injunctious, including the use of injunctions against secondary as well as primary activities arising out of a labor dispute. The judicial tide turned thereafter. In 1940, the Supreme Court, in Aper Hosiery Co. v. Leader, held exempt from the antitrust law a violent sit-down strike sponsored by a union in an attempt to organize an employer. The mere fact that the strike restrained the employer's ability to compete in the product market was not sufficient for antitrust liability. Rather the Court focused on the fact that the union's action did not have as its purpose restraint upon competition in the market for petitioner's product. Its object was to compel petitioner to accede to the union's demands” for organization.
The next year, in United states v. Hutcheson, the Supreme Court gare a broad reading to the Norris-LaGuardia Act and made clear that it had overruled the Section 20 holding in Dupler. Specifically, it held that the combination of Section 20 and the Norris-La Guardia Act not only limited the use of injunctions against union activities, but also created a substantire antitrust exemption for "legitimate“ union activities. So long as a union acts in its self-interest and does not combine with non-labor groups, the iicit and illicit under Secton 20 are not to be distinguished by any judgment regarding the wisdom or unwisdom, the rightness or wrongness, the selfishness or selflessness of the end which the particular union activities are the means.* 52 Labor combinations with nonlabor groups Subsequent decisions have turned heavily on the Hutchesom requirement that the union “act in its self interest and does not combine with non-labor groups..." In Allen-Bradley ('0. 1. Local Union No.3, the Supreme Court used this to impose antitrust liability on a union, which had jurisdiction only in New York City, for restraints it imposed on the installation on equipment manufac| tured outside the city. The union had organized both the electrical equipment manufacturers and the building contractors in the area : its efforts were plainly designed to preserve manufacturing jobs for its members in the area. 'l'nder the union's collective bargaining agreements, the contractors agreed to buy electrical equipment only from New York manufacturers organized log the union, and the manufacturers in turn agreed to sell kuipment only to those New York contractors who employed members of the union. The union, through picketing and boycotts, effectively presented non-union operations in New York City. l'nion members, unionized contractors, and New York City manufacturers all profited from this arrangement. As the Supreme Court viewed the facts, the mníon was merely participating in an anticompetitive scheme of the manufacturers and contractors. It was therefore subject to antitrust liability.
Similarly, in United Nine Workers v. Pennington," the Supreme Court upheld ån antitrust complaint ly a non-union coal mine operator alleging that the union and the large coal mine *rators had agreed to impose on all operators an industry-wide wage scale which was higher than the smaller, less-suechanized operators could afford and therefore would eliminate them from the business, * 254 C.S. 443 (1921). See also Coronado Coal Co. v. L'nited Vine Workers of America, 268 C.S. 295 (1925). 310 C.S. 469 (1940). 2512 C.S. 219 1941). ** 325 C.S. 797 (1945).
** 312 C.S. at 323.
1381 C.S. 657 (1965).