Blackburn v. Pre-Paid Legal Servs., Inc.

• Citation: 398 S.W.3d 630
• Decision Date: 30 June 2010
• Docket Number: No. M2009–01584–COA–R3–CV.,M2009–01584–COA–R3–CV.
• Court: Court of Appeals of Tennessee
• Parties: BLACKBURN & McCUNE, PLLC v. PRE–PAID LEGAL SERVICES, INC. and Pre–Paid Legal Services of Tennessee, Inc.

398 S.W.3d 630

BLACKBURN & McCUNE, PLLC

v.PRE–PAID LEGAL SERVICES, INC. and Pre–Paid Legal Services of Tennessee, Inc.

No. M2009–01584–COA–R3–CV.

Court of Appeals of Tennessee, Western Section, at Nashville.

Dec. 1, 2009 Session.

June 30, 2010.

Application for Permission to Appeal

Denied by Supreme Court

Dec. 30, 2010.

William D. Leader, Jr.; Eugene N. Bulso, Jr.; and Taylor C. Sutherland, Nashville, Tennessee, for the appellant, Blackburn & McCune, PLLC.

John S. Hicks and Brigid M. Carpenter, Nashville, Tennessee; and Brooke S. Murphy and Timila S. Rother, Oklahoma City, Oklahoma, for the appellees, Pre–Paid Legal Services, Inc., and Pre–Paid Legal Services of Tennessee, Inc.

OPINION

HOLLY M. KIRBY, J., delivered the opinion of the Court, in which ALAN E. HIGHERS, P.J., W.S., and J. STEVEN STAFFORD, J., joined.

HOLLY M. KIRBY, J.

This appeal involves legal insurance. The defendants have sold legal insurance for many years. The plaintiff law firm provided legal services to policyholders pursuant to the defendants' legal insurance policies. After Tennessee began to regulate legal insurance, the defendants were required to obtain State approval of their insurance rates and plans. The defendants submitted plans to the State. The plans included proposed rates and anticipated claims expenses, consisting primarily of the fees paid to the plaintiff law firm. The State informed the defendants that the initial filings did not reflect a sufficient loss ratio, that is, ratio of expenses to premium rates. The defendants revised the State filings to reflect an increase in the compensation paid to the plaintiff law firm. At the same time, the defendants presented the plaintiff law firm with a contract that required the plaintiff to pay the defendants for certain administrative services. The amount to be paid to the defendants essentially equaled the amount by which the defendants increased the plaintiff's compensation rate. Years later, the plaintiff discovered facts that caused it to conclude that the contract was a subterfuge to allow the defendants to recoup the increased compensation to the law firm while appearing to comply with the State's loss ratio requirement. The plaintiff informed the State of these facts and of its suspicion that the purpose of the arrangement was to circumvent the loss ratio requirement. After receiving this information, the State took no adverse action against the defendants. The plaintiff then filed this lawsuit seeking restitution, asserting that the contract with the defendants was fraudulently induced and that it was void and unenforceable as against public policy. The plaintiff also asserted a claim under the filed rate doctrine, seeking to recover the difference between the pay rate that the defendants filed with the State and the rates actually paid to the plaintiff. The trial court granted summary judgment in favor of the defendants on all of the plaintiff's claims. The plaintiff now appeals. We reverse the grant of summary judgment as to the claims of fraudulent inducement and violation of public policy, finding that genuine issues of material fact exist as to those claims. We affirm the trial court's decision on all remaining claims.

Facts and Proceedings Below

This is the second appeal in this case, despite the fact that the proceedings are still at the pretrial stage. See Blackburn & McCune, PLLC v. Pre–Paid Legal Servs., Inc., No. M2006–01380–COA–R3–CV, 2007 WL 2409671 (Tenn.Ct.App. Aug. 24, 2007). This appeal presents issues related to fraud, public policy, and an issue of first impression under the filed rate doctrine. At the outset, some background information is helpful.

Pre–Paid Legal Expense Plans

Defendant/Appellee Pre–Paid Legal Services, Inc. (“PPLSI”), is an Oklahoma corporation engaged in underwriting and marketing legal expense plans, also called legal service contracts or legal insurance. The plans have been sold to consumers throughout the United States and in four provinces of Canada since 1972. Consumers who purchase these plans are called “members.” Under PPLSI's plans, members pay a monthly premium to PPLSI, and PPLSI in turn pays a “provider law firm” to provide members certain legal services defined in the plan. The services enumerated in the plans typically include telephone consultation, will preparation, traffic violation defense benefits, and IRS audit assistance at no cost beyond the monthly premiums. Legal services beyond those specified in the plans are available at a 25% discount from the provider attorney's regular hourly rate.

Of the forty-nine states in which PPLSI sells its legal expense plans, thirty-four do not consider the plans to be insurance products, and thus not subject to State regulation. In fifteen states, including Tennessee, the legal expense plans are considered to be insurance products, subject to state regulation.

The “provider law firms” who administer the services under the plans are selected and compensated by PPLSI in each state or geographic region. In February 1994, the predecessor to Plaintiff/Appellant Blackburn & McCune, PLLC (“Blackburn & McCune”),¹ became the official provider law firm for PPLSI's members in the State of Tennessee. Under this arrangement, Blackburn & McCune was compensated pursuant to an Attorney Provider Agreement, first executed with PPLSI in 1994. Under the Attorney Provider Agreement, Blackburn & McCune agreed to provide PPLSI's members with the specified legal services, and PPLSI agreed to pay the law firm a certain amount per member per month, regardless of whether any legal services were provided to members. The payments to the law firm are referred to as capitated payments, per capita payments, or retainers. Under the Attorney Provider Agreement, the amount of the capitated payment to the law firm can vary depending on the type of plan purchased by the member. In 1994, the agreed capitated payment to Blackburn & McCune was $4.50 for the basic family plan (Plan 242) and $7.50 per month for the expanded family plan (Plan 242OPT).² The Attorney Provider Agreement stated that it could be terminated by either Blackburn & McCune or by PPLSI for any reason, upon written notice.

Approval by TDCI

In 1980, when PPLSI began selling its legal expense plans in Tennessee, Tennessee did not regulate the legal insurance business. This changed in 1990 upon the enactment of the Tennessee Legal Insurance Act, Tennessee Code Annotated § 56–43–101 et seq. (“the Act”). Under the Act, companies selling legal insurance plans in Tennessee are required to obtain a certificate of authority from the Tennessee Department of Commerce and Insurance (“TDCI”). T.C.A. § 56–43–104 (2008). In order to obtain a certificate of authority, the insurer must file with the State the legal insurance plans that are marketed and sold in the State and must receive approval of the plans from the TDCI. In addition, the insurer must file with TDCI “all rates, supplementary rate information, supporting information, policy forms, and endorsements.” T.C.A. § 56–43–106(b); § 56–5–305(a). The TDCI must approve the rates in order for the insurance company to conduct its business.

For reasons not clear in the record, PPLSI did not immediately begin filing its legal insurance plans with the TDCI. In May 1997, the TDCI notified PPLSI that its legal insurance business was subject to regulation and oversight by the TDCI pursuant to the Act. PPLSI was informed that it had to obtain a certificate of authority from the State in order to market, sell, and service the pre-paid legal expense plans in Tennessee. The TDCI told PPLSI that it was required to file with the State all of the required documents and information concerning its rates, and to otherwise comply with TDCI's regulatory requirements.

After receiving the TDCI notification, in November 1997, PPLSI formed a subsidiary, Pre–Paid Legal Services of Tennessee, Inc. (“Pre–Paid of Tennessee”), for the purpose of applying for and obtaining a certificate of authority from the TDCI.³ Accordingly, Pre–Paid of Tennessee prepared to file an application with the TDCI for a certificate of authority and for approval of its plan and its rates.⁴ Meanwhile, PPLSI continued to do business in the State.

The TDCI disapproved of PPLSI continuing to do business in Tennessee without a certificate of authority, and sought to stop PPLSI's ongoing business activities. In February 1998, the TDCI issued an administrative consent order requiring PPLSI to “cease and desist from engaging in the business of legal insurance in the State of Tennessee” until it obtained a certificate of authority.⁵ The order allowed PPLSI to continue servicing its current members, but it was not permitted to enter into new contracts for legal expense plans until it received a certificate of authority.

On March 20, 1998, Pre–Paid of Tennessee filed with the TDCI proposed forms and rates for four legal expense plans: 202 (basic), 202OPT (expanded); 242(basic), and 242OPT (expanded).⁶ This filing reflected that members would pay premiums of $16 per month for the basic plans and $25 per month for the expanded plans.

The information submitted by Pre–Paid of Tennessee to the TDCI included a calculation of the “loss ratio” for its proposed plans, that is, the ratio of its claims expense to the premiums charged to its members. The loss ratio can be computed simply by dividing the “claims expense,” which primarily consists of the amount paid to the provider law firm, by the premium to be charged. The proposed rates for the plans submitted by Pre–Paid of Tennessee reflected loss ratios of 28% to 31%, depending on whether the member chose an individual or group plan.

In early April 1998, representatives of the TDCI had conversations with counsel for Pre–Paid of Tennessee, Rob Ledyard, in which the TDCI apparently asked Pre–Paid of Tennessee to “justify” the proposedrates it had submitted to the TDCI. In particular, the TDCI's concerns appeared to...