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Judge rejects antitrust, racketeering charges in brokerage suit

Plaintiffs in a class action suit alleging bid rigging and account steering by commercial insurers and brokers have failed to show that the defendants’ actions amounted to fraud under federal racketeering statutes or that they violated federal antitrust laws, a federal judge in New Jersey has ruled in dismissing the charges.

Judge Garrett E. Brown Jr. in U.S. District Court in Newark, N.J., found that the plaintiffs failed to support their assertions that insurers and brokers conspired to suppress competition and fraudulently sell insurance and benefits by agreeing on certain bid-rigging, account steering and contingent commission arrangements.

The judge did, however, give plaintiffs one more shot, granting them a 30-day window to come back with an amended case addressing his concerns.

In addition to dismissing the conspiracy charges, the ruling points out that contingent commissions paid to brokers are not illegal or anti competitive. It also frees a major broker organization of assertions that it facilitated illegal activity.

Brown’s dismissal of the federal charges came in two separate but related rulings, one on charges made under the Racketeering Influence and Corrupt Organization Act (RICO) and other on charges made under federal Sherman Antitrust Act. The rulings involved consolidated cases brought by employees of companies that bought benefits from MetLife and other insurers through various large insurance brokers, including Marsh & McLennan, Seabury & Smith and Aon, and employees whose companies purchased property/casualty insurance from AIG, Chubb, Fireman’s Fund, XL, Berkshire Hathaway and other insurers through Marsh, Aon, Willis, Brown & Brown and others brokers.

The class action suits were filed in 2005 after then-New York Attorney General Eliot Spitzer and others began investigating possible bid rigging and insurers’ payment of contingent commissions.

Plaintiffs alleged that there were classic “hub and spoke” conspiracies in play, with brokers being the hub and insurers being the spokes, serving as strategic partners in agreeing to bid-rigging and account steering.

Plaintiffs also alleged that brokers communicated this strategy to their carriers.

But the court said it wasn’t clear that the insurers themselves were collaborating in any scheme or had any agreed-upon method for divvying-up accounts.

Just because insurers paid a brokers higher commissions to receive more of their business does not mean a conspiracy to allocate market and restrain competition existed, the court found.

The court further found that while such a conspiracy might be plausible based on the plaintiffs’ allegations, there would only be an antitrust violation if the underlying behavior was itself illegal, which plaintiffs failed to show. Contingent commissions by themselves are not illegal or anti competitive, the court noted.

“The court is not satisfied that plaintiffs have set forth sufficient allegations that the conduct alleged, i.e., the consolidation of the insurance markets and the steering of certain customers based on contingent commission payments, constitutes a per se illegal horizontal customer or market allocation scheme,” Brown wrote.

In their racketeering complaint, plaintiffs tried to show that membership of the brokers in The Council of Insurance Agents and Brokers, was proof of a conspiracy. While CIAB provides networking and communications, plaintiffs “failed to assert any fact indicating the presence of a nexus” between CIAB and defendants’ alleged fraudulent activity.

The plaintiffs failed to prove that the brokers and insurers acted as a single unit, despite their membership in CIAB, shared industry relationships and use of similar operating models. “The presence of such similarities does not preclude a competition among these entities for their share of the market, but the presence of such competition precludes a finding of a RICO enterprise,” the opinion states.