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UNR INDUSTRIES, INC. v. CONTINENTAL INS.

November 30, 1984

UNR INDUSTRIES, INC., ET AL., PLAINTIFFS,
v.
CONTINENTAL INSURANCE COMPANY, ET AL., DEFENDANTS.



The opinion of the court was delivered by: William T. Hart, District Judge.

  MEMORANDUM OPINION AND ORDER

UNR Industries, Inc. and its affiliates are debtors in Chapter 11 bankruptcy proceedings in this district. As part of those proceedings UNR initiated this adversary action to enforce its rights as an insured under numerous liability insurance policies with the various defendant insurance companies, and for other relief. After the decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), and before the Bankruptcy Amendments of 1984 this court withdrew the reference of the adversary proceeding. Presently before the Court are several motions to dismiss directed against the two federal law counts and some of the state law counts in UNR's first amended complaint.

I. Count 1

Count 1 alleges that defendant insurance companies Continental, Bituminous, and Zurich (the "primary carriers"), along with Underwriters Adjustment Company, violated Section One of the Sherman Act, 15 U.S.C. § 1, by conspiring to deprive UNR of its right to full indemnification for and defense of asbestos-related claims under policies previously issued by the primary carriers. Specifically, UNR alleges that defendants agreed to a formula capping the liability of each primary carrier for asbestos claims at a stated percentage of UNR's total liability, thereby forcing UNR to pay at least 35% of both the cost of defending asbestos claims and the cost of any judgments. This formula is claimed to be in violation of each defendant's contract of insurance which provides for full indemnification and defense of UNR in asbestos claims. Defendants also allegedly misled UNR as to the availability of full indemnification and defense under its policies. UNR claims defendants forced it to comply with their formula by misleading UNR as to the meaning of their policies, threatening to withdraw all indemnification for and defense of asbestos claims, and threatening to institute litigation concerning UNR's policies. Continental, as the only defendant whose policy was current at the time of the alleged conspiracy, is said to have agreed to enforce the agreement by threatening to cancel its policies midstream, demand higher premiums, and impose a $15,000 deductible for all asbestos claims arising after January 1, 1976.

UNR claims that defendants have made good on the above threats. Defendants have sued UNR concerning the interpretation of UNR'S policies. Continental did in fact impose a $15,000 deductible in early 1976, by 1978 had increased the deductible to $30,000, and subsequently added an asbestos exclusion to its policies. When in 1981 UNR demanded full indemnification for and defense of its asbestos claims Zurich, Bituminous and Continental responded by terminating all payments for indemnification and defense.

The motion to dismiss count 1 has two bases. Defendants first argue the activities alleged do not violate the antitrust laws. Second, they argue that even if they have violated the antitrust laws their activities are exempt from antitrust scrutiny under the McCarran-Ferguson Act, 15 U.S.C. § 1011-15.

UNR's answer to defendants' motion offers three theories to support its claim that defendants have violated the antitrust laws. The first and most strongly argued theory is that defendants' combined refusal to abide by their contracts of insurance constitutes "retroactive price-fixing." If the price-fixing label is applicable to these facts then the complaint adequately states a claim under the antitrust laws, since price-fixing is a per se antitrust violation. Arizona v. Maricopa County Medical Society, 457 U.S. 332, 102 S.Ct. 2466, 73 L.Ed.2d 48 (1982).

To bring defendants' actions under the heading of price-fixing, UNR first points out that the price paid and the value received by a consumer are economically equivalent. From that equivalence UNR argues that competitors can price-fix in two different ways. The first and traditional method is for competing sellers to agree on a price (usually higher than that which competitive forces would have set) to be charged in the future. The second method, and the method charged in UNR's complaint, is for sellers to sell at a competitive price but then agree among themselves to deliver less of the product or service than is called for by the sale contract. Put simply, UNR's argument is that charging more than something is worth and delivering less than what was bought both have the same result: the consumer gets back less value than he paid out. Since both methods give the same bad result, argues UNR, both methods deserve the same bad label: price-fixing.

The Seventh Circuit has recently stated that the "mere attachment of a per se label by a plaintiff to defendants' conduct does not automatically invoke the per se doctrine and eliminate the requirement that the plaintiff allege and prove the anticompetitive effects of defendants' conduct. The defendants' conduct must be analyzed to determine whether it should receive per se treatment." Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1284 (7th Cir. 1983).

Here, such analysis reveals defendants' conduct is not per se illegal. The flaw in UNR's argument is that it confuses the conduct the antitrust laws are aimed at with what they try to achieve. The antitrust laws are based on the assumption that consumers are best served by a competitive market and to that extent can be said to promote consumer welfare. Reiter v. Sonotone Corp., 442 U.S. 330, 343, 99 S.Ct. 2326, 2333, 60 L.Ed.2d 931 (1979); Sutliff, Inc. v. Donovan Companies, 727 F.2d 648 (7th Cir. 1984). But the Sherman Act does not outlaw every action that hurts consumer welfare, it outlaws "[e]very contract, combination . . . or conspiracy [] in restraint of trade." 15 U.S.C. § 1 (emphasis supplied). As the Supreme Court has said, the antitrust laws do "not purport to afford remedies for all torts committed by or against persons engaged in interstate commerce." Hunt v. Crumboch, 325 U.S. 821, 826, 65 S.Ct. 1545, 1548, 89 L.Ed. 1954 (1945). See also Sutliff, 727 F.2d at 655 ("the Sherman Act did not make ordinary business torts federal torts for which treble damages could be recovered'). Therefore, while every antitrust violation is presumed to harm consumers, not every harm to a consumer is or can be presumed to be an antitrust violation. All UNR's argument shows is that it is a consumer and has been harmed by conspiring sellers, but that allegation is not sufficient to state an antitrust claim.

Another way to see the flaw in UNR's argument is to remember that per se status (which is what UNR is after) has been conferred on price-fixing not merely because it harms consumers (which it does) but because it harms consumers in a particular way — by (almost always) restraining competition. Maricopa, 457 U.S. 332, 102 S.Ct. 2466, 73 L.Ed.2d 48. The price-fixing label can by analogy attach to conduct more subtle than a simple conspiracy to directly fix prices, Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 100 S.Ct. 1925, 64L.Ed.2d 580 (1980) (agreement to stop selling on credit); In re Wheat Rail Freight Rate Antitrust Litigation, 579 F. Supp. 517 (N.D.Ill. 1984) (agreement on how freight rates would be calculated), but the analogy is successful only if the challenged conduct is, like traditional price-fixing, virtually certain to reduce competition. Catalano, 446 U.S. at 649-50, 100 S.Ct. at 1928-29; Bunker Ramo Corp. v. United Business Forms, Inc., 713 F.2d 1272, 1284 (7th Cir. 1983) ("only conduct that is `manifestly anticompetitive' will be considered a per se offense"). UNR's analogy, by contrast, rests on the fact that defendants' conduct is broadly like traditional price-fixing in the sense that it harmed a consumer. What UNR has not shown is that defendants' conduct is like traditional price-fixing in that it "would always or almost always tend to restrict competition and decrease output." Broadcast Music, Inc. v. CBS, 441 U.S. 1, 19-20, 99 S.Ct. 1551, 1562-63, 60 L.Ed.2d 1 (1979). Absent such a showing, defendants' conduct cannot be per se illegal.

Rejecting UNR's per se argument does not, of course, end the inquiry. The question remains as to whether any of the facts alleged could constitute an unreasonable restraint of trade under a rule of reason analysis. UNR's second and third theories attempt to show such an unreasonable restraint. Its first argument on this issue is brief but to the point:

    A rule of reason analysis of the alleged facts
  would demonstrate that three competitors and
  their agent, all of whom should have been
  servicing UNR at the same time, agreed to
  eliminate any possibility of competition in the
  provision of such servicing. They agreed to
  withhold benefits; to apply deductibles
  retroactively to cover a period when no
  deductibles were included in the policies, and to
  eliminate coverage entirely when UNR demanded the
  full coverage to which it was entitled. UNR was
  required to pay, not only for the original
  policies, but [for] the very benefits for which
  it had [already] paid.

(UNR's answer brief at 20.)

UNR's third theory, though phrased in terms of boycott and coercion, is based on essentially the same facts as its second theory*fn1 and therefore the two theories will be analyzed together.

The problem with both these theories is that they fail to show that defendants' conduct had any effect on competition. This is not a situation where defendants were competing to get or even keep UNR's business — they already had UNR's business. Defendants' duties are therefore not derived from the antitrust laws' vision of how competitors should behave; they are derived from the contracts each defendant had with UNR. Of course it is always open to competitors to provide more than their contract requires, and the Supreme Court has apparently recognized that agreements foreclosing that possibility violate the antitrust laws. St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 553, 98 S.Ct. 2923, 2935, 57 L.Ed.2d 932 (1978). However, UNR's complaint and answer make clear that it is not complaining of a lack of competition in extra-contractual service. Its complaint is that defendants have failed to do that which their contracts require. Since defendants' conduct towards UNR is fixed by each defendant's contract, there is no role for competition to play. If one of these defendants decided to defend and indemnify UNR against a particular asbestos claim, that decision would not be made because free market forces compelled it; it would be made because that defendant's contract required it. Similarly, if one of these defendants wrongfully refused to defend and indemnify UNR, that refusal is not wrongful because it represents a lessening of competition but rather because it represents a breach of contract.

UNR also asserts that while each of these defendants could have breached their contracts individually without violating the antitrust laws, a conspiracy to breach is a violation. However, that assertion misapprehends the reason why conspiracies and simultaneous individual acts are treated differently under the Sherman Act. As already noted, the antitrust laws are designed to protect competition. If competitors simultaneously but independently raised their prices, the antitrust laws assume that since there was no conspiracy the price increase must have been caused by market forces and is therefore unobjectionable. That is, a conspiracy is a necessary condition for a violation of Section One of the Sherman Act. Monsanto Co. v. Spray-Rite Service Corp., ___ U.S. ___, 104 S.Ct. 1464, 1469-71, 79 L.Ed.2d 775 (1984). However, a conspiracy is not a sufficient condition as UNR seems to assume. Accepting that further assumption would mean that every conspiracy to commit some kind of wrong in the course of business would ipso facto constitute a restraint of trade in violation of the Sherman Act. That result was certainly not intended by the Sherman Act's framers, Sutliff, Inc. v. Donovan Companies, 727 F.2d 648, 655 (7th Cir. 1984). Moreover, it is simply not true that every such conspiracy has the effect of restraining trade, and this case is a good example. UNR does not allege that defendants' conspiracy affected the market for insurance policies or any other market. The only effect alleged, ignoring UNR's conclusory allegations, is a simple breach of contract and the concomitant harm to UNR. Even assuming that defendants would have been unable to successfully breach their contracts unless they acted in concert, that fact does not transform a breach of contract into a restraint of trade.

The essential difference between an agreement not to compete and an agreement not to honor contracts makes the cases principally relied on by UNR inapposite. In Radiant Burners v. Peoples Gas Co., 364 U.S. 656, 81 S.Ct. 365, 5 L.Ed.2d 358 (1961), the Court held that a conspiracy to make the sale of plaintiff's gas burner impossible by refusing to provide gas to plaintiff's purchasers stated a claim under the Sherman Act. In St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 98 S.Ct. 2923, 57 L.Ed.2d 932 (1978), the claim was that defendants conspired to prevent St. Paul's policy holders from getting medical malpractice insurance from any other insurance company. The conduct involved in these cases was a potential violation of the Sherman Act not simply because a conspiracy was involved and a competitor or consumer was injured as a result. Those cases involved an attempt to prevent one or more competitors from making contracts in the future; that is, from engaging in trade. Since UNR makes no allegation that anyone was restrained from engaging in trade (as opposed to abiding by a contract), those cases do not support UNR's position.

Put simply, UNR's argument is an attempt to avoid the requirement that anticompetitive effect be pleaded and adequately supported by factual allegations. See Bunker Ramo, 713 F.2d at 1284; Havoco of America v. Shell Oil Co., 626 F.2d 549, 555 (7th Cir. 1980). UNR's view is that every conspiracy that harms a consumer violates the Sherman Act. For the reasons stated above, that theory is simply untenable. Without ...


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