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NEWARK, N.J.Policyholder anti-trust and racketeering litigation against dozens of brokers and insurers was dealt a damaging but not fatal blow last week when a federal judge dismissed certain of the charges for a second time.
In a victory for the insurance industry, U.S. District Judge Garrett E. Brown Jr. threw out claims that brokers and insurers conspired to stifle competition by steering clients and fixing prices.
Judge Brown, though, also gave policyholder plaintiffs one last opportunity to bolster their cases with supplemental pleadings. Plaintiffs now have 30 days to amend their filings to address problems that the Newark, N.J.-based judge cited in last week's rulings, including their failure to show a conspiracy among insurers to restrain competition and failure to outline a plausible racketeering "enterprise" involving potentially every U.S. insurer.
Mitchell J. Auslander, a lawyer for defendant Marsh & McLennan Cos. Inc., hailed the rulings and said he expects the judge ultimately to dismiss all of the claims.
The cases level not only federal antitrust and racketeering charges but also a variety of state law claims, noted Mr. Auslander, a partner at Willkie, Farr & Gallagher in New York. Judge Brown has indicated, though, that he will not retain jurisdiction of the state law claims if the federal claims are finally dismissed, meaning that policyholders would have to pursue allegations in state courts.
"Plainly, this is their last chance," Mr. Auslander said.
Some legal observers, however, doubt that the federal litigation is close to being over.
Even if the court dismisses the antitrust and racketeering charges for a final time after the next round of filings, policyholders will likely appeal at least the antitrust ruling, possibly as far as the U.S. Supreme Court, said James M. Burns, a lawyer with Williams Mullen in Washington and chairman of the American Bar Assn.'s antitrust section insurance industry committee.
There is also a "strong possibility" that policyholder lawyers will narrow the sweeping scope of their cases--either in the next round of pleadings or in future complaints--to a smaller group of broker and insurer defendants, he added.
"We are not looking at a circumstance where there's going to be one more opportunity and it's going to be yea or nay, life or death," Mr. Burns said.
Bryan L. Clobes, a plaintiffs' lawyer with Cafferty Faucher L.L.P. in Philadelphia, said he was "very disappointed" with Judge Brown's rulings and that plaintiffs are "evaluating various options" in the case.
Several other plaintiff attorneys did not immediately return calls seeking comment.
The litigation, originally filed in 2004, followed state attorneys general investigations into bid-rigging and client steering related to brokers' contingent compensation agreements with insurers. Several insurers and brokers, including Marsh, eventually paid hundreds of millions of dollars to settle lawsuits filed by the state officials.
Numerous proposed class action suits naming dozens of brokers and insurers were consolidated in U.S. District Court in Newark in two groups: those brought by commercial property/casualty policyholders and those brought by employee benefit plan sponsors.
Last October, U.S. District Judge Faith Hochberg dismissed the antitrust and racketeering charges of both groups for lack of factual support, and ordered the plaintiffs to file supplemental case statements adding particulars to support the allegations. Plaintiffs made the amended filings and defendant brokers and insurers filed renewed motions to dismiss.
In separate rulings on the antitrust and racketeering claims, Judge Brown--who took over the case in January--found that the complaints still fall short, but gave policyholders another chance to flesh out their charges.
Policyholders' Sherman Act claims alleged a "horizontal" antitrust conspiracy in which several brokers and insurers colluded with one another to allocate clients and fix prices. The plaintiffs alleged that defendants shared information about the terms of different contingent commission agreements and that insurers knew which other insurers were participating.
Judge Brown, though, found that the pleadings failed to show how insurers may have violated antitrust law.
"While there was an exchange of information about these contingent commission agreements, which plaintiffs allege were the method by which the market or customers were allocated among the insurers, plaintiffs have not shown that the insurers colluded to allocate business," the judge wrote.
Policyholders also failed to show that the mere existence of contingent commission agreements is in itself illegal under the Sherman Act.
"Plaintiffs claim that defendants utilized legitimate practices, such as contingent commission agreements, to facilitate an anticompetitive and exclusionary scheme. However, the scheme that plaintiffs allege is not apparent," the judge wrote. "It is necessary for plaintiffs to adequately allege conduct which constitutes market or customer allocation and not just the steering of business to preferred partners" to assert a Sherman Act violation.
Meanwhile, in a separate, more forcefully worded opinion, Judge Brown dismissed policyholder claims under the federal Racketeer Influenced and Corrupt Organizations law.
The complaints offered three theories under which brokers and insurers allegedly engaged in racketeering schemes: one in which the Washington-based Council of Insurance Agents & Brokers allegedly operated as a RICO enterprise; a second through 10 "broker-centered" schemes, in which individual brokers directed illegal activity; and a third describing a "strategic partnership enterprise" consisting of the defendant brokers and any insurer they might do business with.
Judge Brown first dismissed the allegations regarding the CIAB, finding that "no fact" in the plaintiffs' submissions indicates that alleged frauds by individual brokers and insurers "were related in any way to the activities of CIAB."
The judge also rejected the "broker-centered" conspiracy charges, noting that each broker-centered enterprise could conceivably consist of a broker and every insurance company in the nation.
"Without any factual substantiation linking each broker defendant to what potentially might be the entire insurance carrier industry, plaintiffs' self-serving conclusions are unwarranted and would transform RICO into a legal monster the drafters never envisioned," Judge Brown wrote.
The judge added that the claims must be rejected if a plaintiff "attempts to stretch a handful of actual interactions into an industrywide RICO conspiracy."
He similarly rejected the strategic partnership theory as overbroad.
"Because of the inclusion of an infinite number of unidentified and potentially unidentifiable entities into the strategic partnership enterprise, plaintiffs' allegations as to a nationwide industry being a RICO enterprise are unduly amorphous per se and should be dismissed," he wrote.