Tuesday, 10 May 2011 16:28

California Court Permits Plaintiffs’ “Aftermarket Parts” Antitrust Action Against Auto Insurers to Proceed After Five Year Delay

In April this year Judge James Ware of the U.S. District Court for the Northern District of California denied the summary judgment motions of several car insurers in a class action alleging they created a sham organization to eliminate competition in the market for repair parts.

The plaintiffs in Perez et al. v. State Farm Mutual Automobile Insurance Co. et al. are California automobile insurance policyholders who allege that defendant car insurers set up the Certified Automotive Parts Association to provide inferior replacement parts in violation of California’s Cartwright Act and Unfair Competition Law. The plaintiffs also allege that the insurers unlawfully conspired to stifle competition in the auto repair market by agreeing to offer exclusively policies that provide inferior repair parts and to exclude other insurance companies.

The original complaint was filed in 2006, and a third amended complaint was filed in November 2010.  Defendants argued that the amended complaint should be dismissed because the plaintiffs did not meet the Twombly standard to establish a conspiracy. Judge Ware disagreed and held that the facts, if taken as true, were sufficient to show that the insurers conspired to eliminate competition for auto parts.

The defendants include State Farm Mutual Automobile Insurance Company, Geico General Insurance Company, Liberty Mutual Fire Insurance Company, and Allstate Insurance.

The following legal analysis appears in a Legal blog by Williams Mullen law firm, written by James M. Burns

In late March, a long-simmering antitrust action filed against several auto insurers and the Certified Automotive Parts Association (“CAPA”) in the Northern District of California, in which the defendants are accused of conspiring to promote the use of inferior quality repair parts for insured repairs, was finally cleared to begin discovery by District Court Judge James Ware.  Judge Ware’s ruling in Perez v. State Farm Mutual Auto Insurance et al, finally permits the plaintiffs’ action to move forward into discovery, a full five years after the case originally was filed and after two prior dismissals of the case by the district court were reversed by the Ninth Circuit.

Unlike Judge Ware’s earlier rulings in the case (that plaintiffs lacked Article III standing to assert their claims -- reversed by the Ninth Circuit in 2009 -- and a subsequent ruling that plaintiffs’ claims fell under the exclusive authority of the Insurance Commissioner, reversed in 2010), the defendants’ most recent motion to dismiss plaintiffs’ action focused on more pedestrian legal theories -- whether plaintiffs’ Third Amended Complaint alleged sufficient facts to satisfy the pleading requirements of the Supreme Court’s Twombly decision and whether the alleged agreement, even if proved, actually constituted a restraint of trade.

Turning first to defendants’ Twombly argument, Judge Ware noted that plaintiffs had alleged that the defendants had “conspired to suppress competition on the basis of the quality of repair parts,” and that the alleged conspiracy had been furthered by “an agreement to create, finance and direct CAPA as a sham organization whose true purpose is to certify inferior-quality parts.” Acknowledging that “at this stage of the litigation, the Court does not determine whether actual proof of these facts is probable,” but only “whether a plaintiff has done more than offer a bare assertion of conspiracy,” Judge Ware ruled that plaintiffs had sufficiently alleged a conspiracy to suppress competition and denied defendants’ Twombly argument.

Next, Judge Ware assessed whether defendants’ alleged agreement, if proved, constituted a restraint of trade under the Cartwright Act, the California antitrust law under which plaintiffs’ action was brought.  (Notably, plaintiffs’ claims were pled under the Cartwright Act, and not the federal antitrust laws, because similar claims – brought by the same plaintiff’s attorney – were found to be McCarran-exempt by the 11th Circuit Court of Appeals in 2004 in Gilchrist v. State Farm Automobile Insurance).  Judge Ware noted that “the Cartwright Act, like the Sherman Act, makes a conspiracy among competitors to restrict output unlawful per se,” and that “output reduction does not simply refer to the number of units produced, but also involves a qualitative judgment.”  Applying this principle, Judge Ware concluded that plaintiffs’ allegation of an agreement “to restrict output to a product of inferior quality counts as an output restriction,” and thus plaintiffs had stated an actionable antitrust claim under the Cartwright Act.  Accordingly, after five years in the California courts, the case will now proceed into full merits discovery.

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