Allstate Ins. Co. v. Abbott

Citation495 F.3d 151
Decision Date01 August 2007
Docket NumberNo. 06-10500.,06-10500.
PartiesALLSTATE INSURANCE COMPANY and Sterling Collision Centers, Inc., Plaintiffs-Appellants-Cross-Appellees, v. Greg ABBOTT, in his official capacity as Attorney General of Texas, and Susan Combs, in her official capacity as Texas Comptroller of Public Accounts, Defendants-Appellees-Cross-Appellants, v. Automotive Service Association and Consumer Choice for Autobody Repair, Intervenors-Appellees-Cross-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Kenneth Winston Starr (argued), Kirkland & Ellis, Los Angeles, CA, Colin Kass, Tefft W. Smith, Kirkland & Ellis, Washington, DC, Orrin L. Harrison, III, William Henry Church, Jr., Cara Foos Pierce, Akin, Gump, Strauss, Hauer & Feld, Dallas, TX, for Allstate Ins. Co. and Sterling Collision Centers, Inc.

Don Cruse (argued), Austin, TX, for Greg Abbott and Susan Combs.

Michael Vance Powell (argued), Thomas George Yoxall, William Scott Hastings, Locke, Liddell & Sapp, Dallas, TX, for Automotive Service Ass'n and Consumer Choice for Auto Body Repair.

Glenn Paul Orgeron, Lisa Ann Easterling, Kean, Miller, Hawthorne, D'Armond, McCowan & Jarman, New Orleans, LA, for Property Casualty Insurers Ass'n of America, Amicus Curiae.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, DAVIS, and BARKSDALE, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Allstate Insurance Co. ("Allstate") and Sterling Collision Centers, Inc. ("Sterling") brought this action against Greg Abbott and Susan Combs as Defendants in their official capacities as Attorney General of Texas and Texas Comptroller of Public Accounts (collectively "State Defendants")1 to challenge a Texas statute known as House Bill 1131 (codified as Tex. Occ.Code § 2307.001, et seq.). H.B. 1131 restricts the right of an auto insurer to own and operate auto body shops in Texas. Allstate and Sterling argue the statute violates the dormant Commerce Clause and the First Amendment of the United States Constitution.

After a bench trial, the district court rejected Allstate's dormant Commerce Clause challenge but found that certain provisions of the statute violated the First Amendment. We AFFIRM.

I. FACTUAL AND PROCEDURAL BACKGROUND

In 2000, Allstate, a Delaware insurance company holding approximately 15% of the automobile insurance market in Texas, implemented a plan to enter the auto body repair business by acquiring Sterling, a multi-state chain of repair shops. Sterling operates approximately 60 auto body repair shops in 14 states, including 15 shops in the state of Texas. Allstate planned to improve existing Sterling facilities and to cultivate new ones. By influencing its customers and other claimants to obtain repair work from Sterling rather than from unaffiliated shops, Allstate believed it could minimize charges for unnecessary or overpriced repairs.

At the time of its acquisition of Sterling, Allstate maintained a relationship with several local body shops in Texas through a program called the Priority Repair Option ("PRO"). Allstate recommended the PRO shops to its insureds and other claimants if the shops maintained a certain level of quality and efficiency. If a customer chose to go to a PRO shop, Allstate provided a guarantee for the repairs performed and became the direct purchaser for the repair services. Allstate found that most PRO shops had a lower average repair cost than other body shops. However, while the PRO program led to some cost savings, Allstate—still troubled by the prevalence of fraud and inefficiencies in repair work (even in PRO shops) and seeking to gain an advantage over competitors that maintained similar programs—decided to explore auto body shop ownership as an additional strategy for cost savings.

After its acquisition of Sterling, Allstate had its telephone service representatives use a script in speaking with policyholders and other claimants. Representatives would first offer the services of the Sterling shops to policyholders, without offering a referral to PRO shops as had been done previously. Allstate followed this approach to boost business at Sterling shops which had lost their pre-existing referral relationships with other insurers after Allstate's acquisition. Under the new practice, Allstate referred policyholders to PRO shops only when asked.2

In addition to using this sales pitch from the script, Allstate sought to boost Sterling's market share by eliminating its PRO relationship with shops that were near a Sterling shop, thus funneling repair opportunities to Sterling.

In 2003, the Texas Legislature began considering H.B. 1131, a bill which would bar insurers from acquiring an interest in auto body shops. The parties dispute the precise motivation for the bill's introduction and passage. Allstate claims that the bill was part of a coordinated political strategy to hurt its venture with Sterling and to maintain the dominance of local Texas body shops. The State Defendants argue that the bill grew out of concerns for customer welfare, particularly that Allstate's dual role as insurer and body shop owner would create a conflict of interest and an incentive to short change customers.

Transcripts of the legislative hearings on the bill reflect both consumer protection and local industry concerns. On consumer protection, members in the House and Senate heard testimony from several individuals, many of them affiliated with body shop trade groups, detailing the danger of insurance company ownership of auto body repair shops. These witnesses all warned of the conflict of interest inherent in such an arrangement, arguing that it raised the risk of illegal customer steering. The witnesses also predicted that such arrangements would encourage body shops "tied" to insurers to cut corners in an effort to reduce repair costs.3 Legislators also heard about the adverse impact on local industry which would result from Allstate's entry into the auto body repair business. For instance, the Vice President of the Automotive Services Association warned that the rise of insurer owned repair shops would lead to the demise of the independent repair industry, along with billions of dollars in local economic impact and hundreds of thousands of jobs. Another bill proponent, a body shop owner, told the House Committee about how his shop had been forced from Allstate's PRO referral program after a Sterling shop opened down the street. Several representatives for Allstate also spoke at the hearings. These individuals attempted to assuage fears about illegal steering and to frame the bill as an obstacle to consumer choice.

It is difficult to say from the legislative history what primary factor motivated passage of the legislation. We have the not unusual situation where both sides find passages from the legislative history supporting their view of the predominant reason for the legislation.4

H.B. 1131 was passed on May 27, 2003, and took effect on September 1, 2003. As enacted, it accomplished two broad reforms. First, the new law generally prohibits an insurer from owning or acquiring an interest in an auto repair facility.5 However, facilities already open for business at the time of the bill's passage are exempted.6 Second, the statute establishes a set of rules to govern these existing shops. Most notably, it requires an insurer to offer the same referral arrangement it has with its tied body shop to at least one unaffiliated body shop.7 The law does not require that an insurer treat all body shops the same, only that the insurer extend an invitation into a referral program to at least one untied shop and that the insurer treat all tied and untied shops in that referral program the same.

H.B. 1131 carries no criminal penalties. It instead creates a private cause of action in "any person aggrieved by a violation of the statute."8 Based on the seriousness of the violation, a court may impose a civil penalty which is to be sent to the comptroller for deposit in the state's general revenue fund.9

Allstate and Sterling are the only entities affected by the law because Sterling is the only body shop in Texas directly owned by an insurer and Allstate is the only insurer in Texas which owns a body shop.

In 2003, Allstate filed the present suit, claiming that H.B. 1131 violates the dormant Commerce Clause and the First Amendment. Allstate argued that because H.B. 1131 forecloses Sterling, an interstate body shop, from opening more body shops in Texas, the purpose and effect of the law is to discriminate against interstate commerce. The company acknowledged that while the law does not accomplish this discrimination directly by using statutory classifications based on domicile, the law was adopted for the purpose, and has the effect, of advantaging local industry at the expense of Sterling, a non-resident. Allstate also claimed that the bill's provisions, which make Allstate's ability to promote Sterling shops contingent on Allstate's promotion of other body shops, run afoul of the First Amendment's protection of truthful and non-deceptive commercial speech.

A bench trial was completed in October 2004. At the conclusion of the trial, the district court upheld the bill's restrictions on the acquisition of auto body repair shops. The district court found that the bill was not intended to, nor did it have the effect of, discriminating against interstate commerce. Rather, the district court explained, H.B. 1131 created different treatment of two business forms, independent (or "mom and pop") operations on the one hand versus auto body repair shops owned by insurance companies on the other hand—a permissive basis for discrimination. However, the district court concluded that the bill's speech provisions violated the First Amendment. The court explained that H.B. 1131's provisions were not sufficiently narrow and instead served to deprive consumers of information which may be beneficial. The judge observed...

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