In re Pennsylvania Title Ins. Antitrust Litigation

• Decision Date: 21 July 2009
• Docket Number: Civil Action No. 08-01202.
• Citation: 648 F.Supp.2d 663
• Parties: In re PENNSYLVANIA TITLE INSURANCE ANTITRUST LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

648 F.Supp.2d 663

In re PENNSYLVANIA TITLE INSURANCE ANTITRUST LITIGATION.

Civil Action No. 08-01202.

United States District Court, E.D. Pennsylvania.

July 21, 2009.

COPYRIGHT MATERIAL OMITTED

Barbara J. Felt, Vincent J. Esades, Heins Mills & Olson PLC, James S. Reece, Richard M. Hagstrom, Aaron M. McParlan, Michael E. Jacobs, Zelle Hofmann Voelbel Mason & Gette LLP, Minneapolis, MN, Jennifer Sarnelli, Joseph J. DePalma, Mayra V. Tarantino, Lite DePalma Greenberg & Rivas LLC, Newark, NJ, Ann D. White, Ann D. White Law Offices, P.C., Jenkintown, PA, Joseph F. Roda, Michele Stawinski Burkholder, Daniel N. Gallucci, Dianne M. Nast, Roda & Nast PC, Lancaster, PA, Eugene A. Spector, Spector Roseman Kodroff & Willis, P.C., Joshua H. Grabar, Bolognese & Associates, LLC, Ralph J. Luongo, Christie Pabarue Mortensen & Young, Robert S. Kitchenoff, Weinstein Kitchenoff LLC, H. Laddie Montague, Jr., Peter R. Kohn, Berger & Montague PC, Jeffrey B. Gittleman, Gerald J. Rodos, Barrack, Rodos & Bacine, John C. McNamara, Christie Pabarue Mortensen $ Young, Bruce K. Cohen, Steven J. Greenfogel, Daniel B. Allanoff, Meredith Cohen Greenfogel & Skinick PC, Philadelphia, PA, Marc H. Edelson, Edelson & Associates, LLC, Doylestown, PA, Michael P. Lehmann, Michael P. Lehmann, Christopher L. Lebsock, Hausfeld LLP, San Francisco, CA, Casandra A. Murphy, Steven J. Greenfogel, Meredith, Cohen & Greenfogel, P.C., Terence S. Ziegler, Joseph H. Meltzer, Barroway Topaz

Kessler Meltzer & Check LLP, Radnor, PA, Jayne A. Goldstein, Natalie Finkelman Bennett, Shepherd Finkelman Miller & Shah LLC, Media, PA, for Plaintiffs.

Jayson R. Wolfgang, P. Kevin Brobson, Buchanan Ingersoll & Rooney PC, Harrisburg, PA, Barry R. Ostrager, Kevin J. Arquit, Patrick Shilling, Simpson Thatcher & Bartlett LLP, Mark A. Robertson, Fulbright & Jaworski, LLP, James Ian Serota, Brian T. Feeney, Kenneth A. Lapatine, Stephen L. Saxl, Greenberg Traurig LLP, David G. Greene, Kevin J. Walsh, Locke Lord Bissell & Liddell LLP, New York, NY, Gerard D. Kelly, Kevin M. Fee, Michael P. Doss, Sidley Austin LLP, Chicago, IL, David M. Foster, Fulbright & Jaworski L.L.P., Washington, DC, Michael P. Coughlin, Kaplin Stewart Meloff Reiter & Stein, Blue Bell, PA, David J. Creagan, David E. Edwards, White & Williams LLP, Carolyn Hazard Feeney, George G. Gordon, Jennings F. Durand, Peter Michael Ryan, Dechert LLP, Darryl J. May, Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, PA, for Defendants.

Memorandum

YOHN, District Judge.

Plaintiffs, purchasers of title insurance in Pennsylvania, have filed this action alleging antitrust violations by title insurance companies and their affiliates and the Title Insurance Rating Bureau of Pennsylvania ("TIRBOP") arising out of a conspiracy to fix rates for title insurance purchased in Pennsylvania. This suit began as a series of separate class actions by named plaintiffs against various defendants. Pursuant to an order from this court consolidating these actions, plaintiffs filed a consolidated complaint that raises one claim for violation of § 1 of the Sherman Act (15 U.S.C. § 1 (2006)). Presently before the court is defendants' motion to dismiss the complaint, with prejudice, against all defendants pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.

I. Facts and Procedural Background

Plaintiffs allege that defendants participated in anti-competitive conduct via a conspiracy to engage in the "collective price-setting of [title insurance] rates in the Commonwealth of Pennsylvania." (Pls.' Consolidated Compl. ["CC"] ¶ 1.) The collective setting of title insurance rates forms the central theme of plaintiffs' complaint. (CC ¶¶ 1, 5, 6, 37, 39, 50, 54.) To establish context for their antitrust allegations, plaintiffs' complaint provides an overview of title insurance and its regulation in Pennsylvania. For the purposes of this motion, the court must accept as true facts pleaded in the complaint.

A. Title Insurance and the Title Insurance Industry

Title insurance provides a warranty "against a loss arising from [past] problems that ... may affect the title to the real estate that a consumer is buying." (Id. ¶ 2.) More precisely, "[t]itle insurance protects the purchaser ... from any unidentified defects in the title that would in any way interfere with the full and complete ownership and use of the property," including resale. (Id. ¶ 38.) Title insurance also "protects the lender up to the amount of the mortgage ... [and protects] a purchaser from loss for hazards and defects in title that already exist at the time of purchase." (Id.)

"[I]n most residential and commercial real estate transactions," (id. ¶ 38), in Pennsylvania, lenders require purchasers to obtain title insurance (id. ¶¶ 38, 40). In practice, purchasers exercise little discretion in choosing their title insurer because typically "lawyers, [mortgage] brokers, ... lenders[, and title agents] ... decid[e] which title insurer to use." (Id. ¶ 42; see also id. ¶ 44.) Because purchasers do not shop around or negotiate price, the sale of title insurance occurs outside normal competitive processes. (See id. ¶¶ 42, 44.)

A title insurer "bears [the risk] for any undiscovered defects in title, [which amounts to] a very limited risk of loss to the insurer ... because title insurance protects against prior events that cause defects." (Id. ¶ 40.) A title insurer can "readily identif[y] and exclude[ ]," (id.), these defects before issuing a policy by conducting a "proper search and examination of prior ownership records" (id.; see also id. ¶ 43). Thus, any remaining risk comes largely from incomplete searches or erroneous public records.

Because of this unique nature of title insurance, "the title insurance industry operates ... [in a manner that] fueled defendants' conspiracy." (Id. ¶ 43.) An individual purchases "[t]itle insurance ... primarily through title agents, many of whom" both operate under the ownership or control, or both, of title insurers and provide the searches of public records so vital to the decision "to underwrite a particular property." (Id.) Title insurers generate business "most effective[ly] ... [by] encourag[ing] the real estate middlemen — the lawyers, brokers, lenders, and title agents — to steer business to [them]." (Id. ¶ 44.) Title insurers provide this encouragement "through kickbacks in the form of finder's fees, gifts, and other financial enticements." (Id.) To pay for these "inducement[s] to steer business their way," title insurers need "to inflate their revenues" beyond the costs "[]related to the issuance of title insurance," i.e. the risk involved in insuring the property against title defects. (Id. ¶ 45)

In Pennsylvania, many title insurers set rates "based on a percentage of the total value of the [insured] property." (Id. ¶ 37.) "[T]wo principal cost components ... go into [this] calculation": (1) "the risk associated with issuing the title policy," which, as explained above, records searches can minimize, and (2) "[t]he `agency commissions' ... [paid] to title agents." (Id. ¶ 41.) Of the agency commissions component, "a small portion ... [pays] for the search and examination of prior ownership records of the property being purchased to identify ... defects in the title." (Id.) Almost invariably, title insurers "outsource this task to title agents," (id.), many of whom, as mentioned above, work for title agencies in which title insurers have an ownership or management stake (id.). Consequently, it is "the bulk[ ] of the agency commissions" component that pays the cost of "kickbacks and other financial inducements title insurers provide to title agents and indirectly (through title agents) to the lawyers, brokers, and lenders who, in reality, ... decid[e] which title insurer to use." (Id. ¶ 42.)

In other words, perverse incentives underlie title insurance pricing: higher rates increase the revenue for kickbacks, which in turn increases the likelihood of referrals and thus business for title insurers. (Id.) As a result, much of the rate collected for title insurance goes, not for the cost of providing insurance, but to inducements. (Id. ¶ 45.)

B. Title Insurance Regulation in Pennsylvania

"Pennsylvania [law] requires title insurers to file their rates with the [state's] Department of Insurance [ ("DOI") ]," (id. ¶ 39), which "supervise[s], examine[s], and regulate[s] title insurers" (id. ¶ 4). Title insurers must file their rates with the DOI and can do so individually or through a rating organization, which collectively files rates on title insurers' behalf. (Id. ¶ 39); see also 40 Pa. Stat. Ann. § 910-37(a)-(b) (West 2009) (permitting ratings organizations to submit rates on behalf of title insurers); id. § 910-41 (permitting title insurance companies to form rating organizations).¹ With any rate filing, a title insurer must provide a statement concerning the basis for establishing the rate. Id. § 910-38. The insurer or rating organization making the filing can base the rate on its own judgment or experience, the experience of any other insurer or ratings agency, or any other factor that the filer deems relevant. Id.

Once rates are filed, the DOI "shall make such review of the filings as may be necessary to carry out the provisions of" the statutes governing title insurance. Id. § 910-37(c). The standards for title insurance rates require that they "shall ... not be excessive." Id. § 910-39(b). Consequently, the rates shall permit a title insurer to earn a "reasonable profit," after paying all taxes and accounting for expenses and losses arising out of the normal course of business. Id. Typically, any rate filed becomes effective upon agency approval or within thirty days of filing, with or without agency review. Id. § 910-37(d). Any rate that becomes effective shall be "deemed to meet [these above] requirements." Id. § 910-37(e). An individual title insurer must charge...