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 government may have legislatively protected the enterprise from competition 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 U.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 $4.5 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 was 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 in competition with the Postal Service. The Task Group also predicted that if such competition with the Postal Service were sanctioned it would focus most heavily upon local business mail. However, at present there is insuflicient data available 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 a favorable ruling on subsequent appeals, it will seek legislation to affirm its present 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' power to regulate insurance absent specific federal insurance legislation and provided an antitrust exemption for private concerted price-fixing activities 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 39 U.S.C. §§ 601-06; 18 U.S.C. §§ 1693-99, 1727 (1970). 1976). F. 2d Opinion and Decision in Docket No. R74 1. May 28, 1975, Vol. 1 at 13; National Association of Greeting Card Publishers v. U.S. Postal Services, (D.C. Cir. National Association of Greeting Card Publishers v. United States Postal Service, F.2d(D.C. Cir. 1976). United States v. South-Eastern Underwriters Association, 322 U.S. 533. 15 U.S.C. § 1011 et seq. competition and the demise of many insurance companies, thereby denying the public the benefit of a reliable insurance mechanism. All of the states adopted regulatory schemes relating to property-liability insurance rates. Some states set the rates themselves. Most adopted "prior approval" systems which feature private rate bureaus as the moving force in the determination of rates. Still other states adopted "open competition" systems which allow cartel rate setting but enable insurers to price independently with relative ease. In life insurance and most group health insurance there is virtually no direct state regulation of rates, but individual health insurance and Blue Cross/Blue Shield services are subject to varying degrees of state rate regulation. The Task Group focused a substantial portion of its efforts on a comprehensive analysis of the effects of state regulation and the companion antitrust exemprice A working paper, prepared by Antitrust Division staff, is attached to this report. The following is a summary of that paper. State regulation of insurance The basic question considered by the study is whether the present exemption of the business of insurance from the federal antitrust laws, by the McCarran Act and the resulting state regulation intended to replace competition, has operated in the public interest. To answer this question, the study attempted to determine whether thirty years of state regulation has provided the publ with the benefits normally attributed to competition, i.c., reasonable prices based on the cost of rendering the services; efficient services rendered at the lowest possible cost; and innovation-the utilization of new or improved products or services and methods of distribution. Experience with competition and regulation The study found that over the past ten years, there have been a number of states that have adopted an "open competition" system of rate regulation after attempting to administer a highly regulated system. This experimentation with competitive controls as a substitute for concerted ratemaking appeared to be saza evidence of the inadequacies of state rate regulation. Moreover, the emergence d independent pricing in segments of the property-liability industry, despite re strictive state laws, may well be attributed to an industry structure that fav competition, to certain inherent weaknesses in rate regulation, to the successi experimentation with deregulation in a number of states, and to the continuing Congressional investigation into insurance industry practices. In addition, our study of the effects of rigid rate regulation in automobile insurance indicates that such regulation has fostered greater adherence to bureza rates, discouraged rate reductions, contributed to instability in insurance pany operations, established various forms of cross-subsidization between g** and bad drivers, imposed unnecessary restrictions on the collective merchandis and the direct writing of insurance, and aggravated the availability problem which marginal or high risk drivers have difficulty obtaining coverage in '* open market at the prevailing rates. On the other hand, the long-run experience of at least one major insura state under an open competition sytem, in which the state has relied on mat forces to control prices, suggests that full price competition can provide an ef tive substitute for rate regulation as a means of achieving reasonable prices acmaximum efficiency in the sale and distribution of insurance. A comparison the experience of the same insurers under certain open competition and pr approval systems suggests that competition fosters independent pricing, opera ing stability, and flexibility in the pricing structure. The relatively favore performance of the insurance companies under the highly competitive st suggests that it provides a more effective mechanism for accomplishing basic insurance goals of providing a reliable insurance mechanism and genera." available coverage at a price reasonably related to cost. In the commercil lines, it appears that state regulatory schemes are lar illusory and insurers are generally free to set their own prices, owing to availability of state-authorized rating plans which permit insurers to ind ually price risks based essentially on their business judgment and compet pressures. The prevalence of these plans in the commercial lines raises a damental question as to the purpose and need for the ostensible state rate re lation in these lines of insurance. Finally, it would appear that the industry should be able to conduct its s ness without any special exemption from the federal antitrust laws. For exa¤, 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 unde 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 traditional 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 by federally-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 pertaining 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. no-fault). Insurance companies electing to remain state-chartered would be subject to the full scope of state insurance regulation, as well as McCarran Act protection. The dual system of regulation, either with respect to federally-chartered companies or state-chartered companies participating in the federal guaranty fund, Would 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 exempt by federal law or unless the state laws interfere or conflict with the purposes of the federal scheme. In summary, the study finds that a predominant segment of the property. liability insurance industry is favorably structured for competition, with a large number of competitors, relatively moderate concentration, ease of entry, a standardized service, a relatively simply and short-term contract, and an increasingly price-sensitive consumer market. The available evidence suggests that unrestricted price competition would be an effective alternative to state rate regulation and would be compatible with regulatory objectives for a reliable insurance mechanism. The study concludes that all of the major lines of propertyliability insurance should have the option of operating in a fully competitive environment. This would be made possible by the proposed dual system of state and federal regulation. Other lines of insurance, including life insurance, are probable candidates for a similar system subject only to the need for possible state regulation of maximum agent compensation and related matters to counter the phenomenon of reverse competition. Further study appears necessary to reach any definitive conclusions in health insurance and medical malpractice. LABOR The labor exemption, which has emerged from a series of related legislative and judicial actions, is an attempt to accommodate two broad but divergent national policies: the first is the policy embodied in the Sherman Act to protec "competition based on efficiency" in markets for goods and services; the second is the "strong labor policy favoring the association of employees to eliminate competition over wages and working conditions." At least some conflict is inevitable because a labor union has a necessary interest in the market for products produced by its members: it must seek to insure that those who pay higher labor rates under collective bargaining agreements are not undercut by compet. tors who do not pay such higher rates. 43 Stated another way, there is a close and continuing relationship between the so-called "primary" market for labor itself and the so-called "secondary" marke for the products produced by labor. The higher the labor costs as a componet" of the final product, the closer the connection-and, as antitrust history teaches us, the more likely that labor unions will become involved in trying to contro secondary market competition. Almost anything successful that a labor union does in negotiating terms and conditions of employment will have an indirect effect on the secondary market because it affects the product's ultimate cost. Antitrust concern arises not with such indirect effects flowing from primary labor market activity, but with rela tively direct effects on the secondary product market caused by unions. The line between the two is neither clear nor simple and we conclude is best developed case by case. History of the labor exemption The statutory labor exemptions are embodied in Section 6" and 20% of the Clayton Act, enacted in 1914; and in the Norris-LaGuardia Act, enacted = 1932. We describe them here in the context of the history that gave rise to the enactment. In the very early days of the Sherman Act, labor unions were the principa object of successful antitrust enforcement. This trend was confirmed by t Supreme Court's 1908 decision in the Danbury Hatters case" which squareja held that the Sherman Act applied to union activities. There antitrust liability was imposed upon a labor union for inspiring a nationwide consumers' boot of the plaintiff's hats which were manufactured with non-union labor. That decision led to the enactment six years later of Sections 6 and 20 of t Clayton Act. Section 6 stated the general principle that "the labor of a bu being is not acommodity or article of commerce;" and specifically provided *. the antitrust laws should not be construed (a) to prohibit the existence of 25 organizations or (b) to prevent them "from lawfully carrying out the legiti objectives thereof.” Section 20 broadly barred the use of injunctions by fede” 43 Connell Construction Co. v. Plumbers and Steamfitters Local Union No. 100, 421 * * 616, 622 (1975). 4415 U.S.C. § 17. 45 29 U.S.C. § 29. 46 29 U.S.C. § 101–113. 47 Loewe v. Lawlor, 208 U.S. 274 (1908). 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. Deering," 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 injunctions, 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 gave 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-LaGuardia Act not only limited the use of injunctions against union activities, but also created a substantive 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 licit and illicit under Secton 20 are not to e 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." " Labor combinations with nonlabor groups 52 Subsequent decisions have turned heavily on the Hutcheson requirement that the union "act[s] in its self interest and does not combine with non-labor groups..." In Allen-Bradley Co. v. 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 manufactured 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. Under the union's collective bargaining agreements, the contractors agreed to buy electrical equipment only from New York manufacturers organized by the union, and The manufacturers in turn agreed to sell equipment only to those New York contractors who employed members of the union. The union, through picketing and boycotts, effectively prevented non-union operations in New York City. Union members, unionized contractors, and New York City manufacturers all profited from this arrangement. As the Supreme Court viewed the facts, the nion was merely participating in an anticompetitive scheme of the manufac turers and contractors. It was therefore subject to antitrust liability. Similarly, in United Mine Workers v. Pennington," the Supreme Court upheld an antitrust complaint by a non-union coal mine operator alleging that the union ind the large coal mine operators had agreed to impose on all operators an &dustry-wide wage scale which was higher than the smaller, less-mechanized perators could afford and therefore would eliminate them from the business. 254 U.S. 443 (1921). See also Coronado Coal Co. v. United Mine Workers of America, 268 U.S. 295 (1925). *310 U.S. 469 (1940). 312 U.S. 219 (1941). 312 U.S. at 323. |