Safeco Title Insurance Corporation

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IN THE 1dATTER OF TICOR TITLE INSURANCE COMPANY, ET AL.

FINAL ORDER, OPINION, ETC. , IN REGARD TO ALGED VIOLATION OF SEC. 5 OF THE FEDERA TRAE COMMISSION ACT Doclwt 9190. Grnplaint, Jan. 1985-Final Orde, Sept. , 1989 This final order prohibits, among other things, each respondent from discussing, proposing, setting, or filing any rates for title search and examination servces through a rating bureau in New Jersey, Pennsylvania, Connecticut, Wisconsin Arzona and Montana.

Appearances For the Commission: Michael E. Antalics, James C. Egan, Jr. and Ann Maleste.

For the respondents: John C. Chritie, Jr., Bell, Boyd Lloyd Washington, D.C, Davi M. Foste, FUlbrght Jaworski Washington, D.C. Robert E. Cooper, Gibson, Dunn Crutcher Los Angeles Ca. and John F. Graybeal, Adams, McCullough Beard Raleigh COMPLANT Pursuant to the provisions of the Federal Trade Commission Act, as amended (15 U. C. 41 et seq. and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that the respondents named in the caption hereof have violated the provisions of Section 5 of the Federal Trade Commission Act and that a proceeding by it in respect thereof would be in the public interest, hereby issues this complaint, stating its charges as follows: DEFIITIONS PARGRAH 1. The following definitions shall apply in this complaint: Title search and examination seres means all activities which are designed to identify and describe the ownership of a particular parcel of real property as well as any other actual or potential rights to, encumbrances on, or interests in the property.

344 Complaint Settemt seres means those servces related to the closing of a real estate transaction, including but not limited to those servces performed in connection with or in supervsion of the execution, delivery or recording of transfer and lien documents, or the disbursement of funds.

RESPONDENTS PAR. 2. Respondent Ticor Title Insurance Company is a corporation organized under the laws of the State of California, with its principal place of business at 6300 Wilshire Boulevard, Los Angeles, California, PAR. 3. Respondent Chicago Title Insurance Company is a corporation organized under the laws of the State of Missouri, with its principal place of business at 111 W. Washington Street, Chicago Ilinois.

PAR. 4. Respondent Safeco Title Insurance Company is a corporation organized under the laws of the State of California, with its principal place of business at 13640 Roscoe Boulevard, Los Angeles California.

PAR. 5. Respondent First American Title Insurance Company is a corporation organized under the laws of the State of California, with its principal place of business at 114 East 5th Street, Santa Ana California.

PAR. 6. Respondent Lawyers Title Insurance Corporation is a corpration organized under the laws of the Commonwealth of Virginia, with its principal place of business at 6630 West Broad Street, Richmond, Virginia.

PAR. 7. Respondent Stewart Title Guaranty Company is a corporation organized under the laws of the State of Texas, with its principal offces at Stewart Building, Galveston, Texas. JURISDICTION PAR. 8. Respondents maintain, and have maintained, a substantial course of business, including the acts and practices as hereinaftr set forth, which are in or affect commerce within the meaning of the Federal Trade Commission Act.

PAR. 9. Title search and examination servces do not constitute the business of insurance" within the meaning of the McCarran-Ferguson Act, 15 U, C. 1012(b), PAR. 10. Settement servces do not constitute the "business of insurance" within the meaning of the McCarran-Ferguson Act, 15 C. 1012(b).

346 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

ANICOMPETITIV ACTS AND PRACTICES PAR, 11. Respondents have agreed on the prices to be charged for title search and examination servces or settlement servces through rating bureaus in various states. Examples of states in which one or more of the respondents have fixed prices with other respondents or other competitors for all or part of their search and examination servces or settlement servces are Arizona, Connecticut, Idaho Louisiana, Montana, New Jersey, New Mexico, New York, Ohio Oregon, Pennsylvania, Wisconsin and Wyoming. ANTICOMPETITIVE EFFECTS PAR. 12. As a result of the aforesaid acts and practices, competition in the sale of title search and examination servces or settlement servces has been restrained in various states. PAR. 13. The aforesaid acts and practices therefore constitute unfair methods of competition in or affecting commerce in violation of Section 5 of the Federal Trade Commission Act. INITAL DECISION By MORTON NEEDELMAN, ADMINISTRATIVE LAw JUDGE DECEMBER 22, 1986 1. STATEMENT OF THE CASE The complaint in this proceeding was issued on January 7, 1985. It charges that in violation of Section 5 of the Federal Trade Commission Act, 15 U . C. 45, respondent insurers l operating through rating bureaus, have restrained competition in setting rates for title search and examination servces and settement services. The gravamen of the complaint appears in Paragraph 11- Respondents have agrd on the price to be charged for title search and examination servces or settement servces through rating bureaus in various states. Examples of states in which one or more of the Respondents have fixed prices with other Respondents or other competitors for all or part of their search and examination servces or settlement services are Arizona, Connecticut, Idaho, Louisiana, Montana New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Wisconsin and Wyoming.

1 The comp!aintcites six title insurers as respondents.On June, 1986, the Sereta withdrew this matter from adjudication with respet to Firat American Title Insurance Company in order for the Commission to consider a settlement agrment under 25(c) of the Commission s rules. ... ._), _. _. ), 344 Initial. Decision spondents' answers, which were filed on February 11 and February 13, 1985, admit that from time. to. time they have ben members of rating bureaus in several states, but challenge the Commission s subject matter jurisdiction. on the. grounds that rating bureau. acivity relating to title search and examination and settlement constitute part of the business of insurance and is their"foreexempt from the Federal Trade Commission Act by reason of the McCarran- Ferguson Act. Respondents' answers also assert that the alleged anticompetitivepractices are immune from the federal antitrust)aws by reason of the "state action" dqcrine. Additional defenses include mootness based upon withdrawal frm the. rating bureaus, and the claim that respondents' collective rate making activities come within the NOer-Penningto doctrine. (3) proceeding. that the It became apparent at. the outset. of this complaint allegation respecting settlement or escrow servces was an ancilary issue; Almost it onlypertains to rating bureau activity in five states Arzona, Ohio, Connecticut, Pennsylvania, and New Jersey and since respondents' escrow practices in Arzona are already the subject of injunctive relief as a result ofthefinal order in Unite S ates v. Title Insranc Rating Bureau of Ariz., Inc. 517 F. Supp. 1053 (D, Ariz, affd 700F,2d 1247 (9their. em. deied, 104 S. Ct 3509 (1984), both sides directed their effort. almost exclu ively to the search and examination issue. The escrow or settlement question, to the extnt that it is stil an issue in this case, is treated separately for the most part in the Findings of Fact and Discussion herein.

In the. prehearing stage, the parties were allowed discovery including advanced notice of proposed exhibits and the prospective testimony of witnesses. Complaint counsel's case- in-chief was heard during the week of February 18, 1986. The defense case was presented between April 21 and July 28, 1986. Rebuttl evidence was offered by complaint counsel on July 29. The record was closed for receipt of evidence on August 29, 1986. During the hearings, counsel for all parties were given full opportunity to be heard and to crossexamine the witnesses. Both sides filed their main briefs and proposed findings on September 22, 1986; replies were filed on October 14 1986, Aftr reviewing all of the evidence, as well as proposed findings and briefs submitted by the parties, and based on the entire record including a determnation of the credibilty of witnesses (which took 348 FEDERA TRE COMMSSION DECISIONS Initial Decision 112 F.

into account demeanor and the consistency between testimony prepared for litigation and the plain meaning of everyday business records), I make the following findings of fact: 2 (4) 2 Prpose findings not adopted in the form or substnce propose ar rejec as either not support by the entire reord or as involving immaterial or irrlevant matrs. The following abbreviations ar use throughout in citing to the reord: (Complaint counsel's exhibit) (Rpondents' exhibits) Joint Physical Exhibit A (JX, 311 pages) is a compilation of relevant stte title insurce sttutes. Seon 33-25-302 of the Montana Title Insurance Act (cite at p. 184, Vol I of repondents' main brief) does not appear in JX but the entire text is quote in note 269,inf Testimony is cite by the name of the wines followed by the trscript pa as in DiSanto 2738-41. ex 1 and RX 1 ar the indices reuire by 3.46(b) of the Commission s Rules.

Repondents reuest in camera treatment for certn exhibits, and afr an adequate justification was made pursuant to 3.45 of the Rules, it was ordered that these exhibits were to be segrgate and plac in an in came file. The Omnib In Came Or issued on Februar 10, 1986, which govern all in came exhibits, prodes as follows:

It should be clearly unders that nothing contained in this Order in any way limit the public use of this material in decisions wrttn by the Administrative Law Judge, the Commssion, or reviewing court. Whle I have no intention of making unnecss disclosures, whether or not to publish in my Initial Deision all or par of the material contained inin camera exhibits must be left solely to the discretion of Administrative Law Judg, and I must rerv the right to exercise this discretion without counseling any pary or third pary.

The Omnibu In Came Or also provides that documents shall be removed frm the in camera file thre year afr the date on which the reord was clos-that is, on August 29, 1989. The .appearnces of the witneBBs were as follows: Name Called By Trascript Plus Lawrnce F. Anito, Jr. Complaint counsel 248-348 (Independent Attorney and Attorney-Agent for Respondents Ticor and First American) Irn E. Cooper 357-430 (Independent Attorney and Attorney-Agent for a nonrespondent title insurer) (5) Albert F. Quadraia 486-530 (Agent for a nonrespondent title insurer Robert A. Frundorf 3425-3463 (Bureau Chief, Licensing, Idaho Deparment of Insurance) Gerad L. Ippe! Repondents 608-706 (President, Respondent Ticor) resp. Albert D. Malaker resp. 707-836 (Great Lakes Regional Counsel, Respondent Chicago Title) (footnote cont'd) ,p.,p.,p. ,p.,p.

Initial Decision 843-934 Mark W. Sinkhorn (Ohio State Counsel Respondent Lawyers Title) 941-1034 reap. Michael J. Frmhold (Senio ABsoiate Title Counsel Respondent Ticar) 1040-1128 Michael F. Waiwoo (Agent for Respondent Ticar) 1134-1182 Perr J. Armstrong (Agent for Respondent Ticar) 1185-1245, resp. 2298-2368 Thomas F. Ferr (Vice Prident, Respondent Chicago Title) 1251- 1309 reap. Joseph C. Bonita (Vice Prident, Respondent Ticor) 161 1311-1418 resp. Erich E. Everbach (Genera Counsel Respondent TIcor) 1429-1601 resp. Robert B. Haltom (Independent Insurance Consultant and Expert) 1610-1686 resp. Lenard C. Donohoe (Genera Counsel Respondent Chicago Title) 1686-1732 reap. Donald E. Grablki (Vice President, Respondent Lawyers Title) 1738-1827 reap. Norman J. Wirt (Insurance Rate and Forms Analyst. Prperty and Casualty Seon, Wisconsin Ofce of Commissioner of Insurance) 1828-1879 Joseph M. Claytn (Deputy Managr, New Jersey Land Title Rating Bureau) 1885-2037 reap. Neil A. Bethel (A Prncipal Owner 'NI1nghas. Nelson & Warrn, an insurance actuarial consulting finn) 2055-2144 resp. John B. Wilkie (President, Respondent Lawyers Title (Arzo 2167-2216 Deloris Willamn (Chief Deputy Director Prperty and Casualty Section, Arizona (1) Department of Insurance) (footnow cont' 350 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

II, FIINGS OF FACT A. IDENTITY OF RESPONDENTS 1. Respondent insurers are engaged in the business of insuring the ownership of real estate for buyers and those lenders (mortgagees) who rely on real estate as security for their loans. As part of the Emil L. Barrich resp. 2222-2297 (Market Conduct Examiner, Arzona Deparment of Insurance) Irvng H. Plotkin resp. 2376-2566 (Title Insurance Rate 2573-2718 Expert, Arthur D. Little) Waldo R. DiSanto !'sp. 2724-2823 (Direr, Prperly and Casualty Division Connecticut Insurance Deparment) Walter S. Bell reap. 2824-2847 (Examner, Prperty and Casualty Division Connecticut Insurance Department) Robert L. Stattn I'Sp. 2853-2874 (Vice President Respondent SAFCO) Robert C. Mitchell resp. 2875-2952 (Vice Prident Respondent SAFCO (Idaho)) Nonnan T. Smith feSp. 2958-3046 (Executive Direr, Ohio Title Insurance Rating Bureau) Peg Ising resp. 3047-3068 (Asistant Chief Prperty-Casualty Division, Ohio Deparment of Insurance) Robert L. Ratchford resp. 3069-3102 (Fonner Director Ohio Deparment of Insurance) IS) Robert T. Haines resp. 3107-3243 (Fonner General Underwting Counsel Respondent Chicago Title) Marn C. Bowling, Jr. resp. 3265-3420 (Executive Vice President (Law), Respondent Lawyers Title) (9) 344 Initial Decision package of servces they offer, respondents p!'dvide search and examination and settlement or escrow servces.' 2. Respondent Ticor Title Insurance Company ("Ticor ) is a corporation organized under California law, with its principal place of business located at 6300 Wilshire Boulevard, Los Angeles, California. Ticor, which conducts its title insurance business in 49 states and the District of Columbia, maintains approximately 300 branch offces and has over 5 000 employees. For the year ending December , 1983, Ticor reported income of $219 869 518 from title insurance premiums and $62 488 172 from other sources. 3. Respondent Chicago Title Insurance Company ("Chicago Title is a corporation organized under Missouri law, with its principal place of business located at 111 W. Washington Street, Chicago, Ilinois. 7 Chicago Title, which conducts its title insurance business in 49 states and the District of Columbia, maintains approximately 150 branch offces. 8 For the year ending December 31 , 1983 , Chicago (10) Title reported income of $205 525 412 from title insurance premiums and $51 713 074 from other sources.

4. Respondent SAFECO Title Insurance Company ("SAFECO") is a corporation organized under California law, with its principal place of business located at 13640 Roscoe Boulevard, Los Angeles, California. !O SAFECO, which conducts its title insurance business in 46 states and the District of Columbia, maintains branch and agency offces throughout the United States. 11 For the year ending December , 1983, SAFECO reported income of $163 088 978 from title insurance premiums and $29 713 045 from other sources. 5. Respondent Lawyers Title Insurance Corporation ("Lawyers Title ) is a corporation organized under Virginia law, with its principal place of business located at 6630 West Broad Street Richmond, Virginia. !3 Lawyers Title conducts its title insurance business through approximately 2500 branch and agency offces 3 ex 156Z- , Z- , ex 247F- , ex 250H- , ex 293D. 4 Complaint and Ticor s Answer 2. Pror to 1982, Ticor was known as Pioneer National Title Insurance Company. ex 164A.

5 ex 165B.

6 ex 148Z- , ex 258.

7 Complaint and Chicago Title s Answer ex 167B.

CX 149Z-28.

10 Complaint and SAFECO' s Answer 11 ex 169.

12 ex 150Z-22.

13 Complaint and Lawyers Title s Answer, -,6. 352 FEDERA TRE COMMISSION DECISIONS Initial Decision 112 F.

located in 49 states and the District of Columbia. " For the year ending December 31 , 1983, Lawyers Title reported income of $98 302 394 from title insurance premiums and $16 395 472 from other sources. 15 (11) 6. Respondent Stewart Title Guaranty Company ("Stewart" ) is a corporation organized under Texas law, with its executive offces located at Stewart Building, Galveston, Texas. Stewart conducts its title insurance business in 45 states and the District of Columbia through regional, district, and state offces." For the year ending December 31 , 1983, Stewart Title reported income of $97 443 521 from title insurance premiums and $3 382 457 from other sources. 7. In 1982, respondents Ticor, Chicago Title, SAFECO, Lawyers Tite, and Stewart, collecively accounted for 57 percent of the $1.35 billon title insurance industry. Ticor with 16.5 percent of the market Chicago Title with 12.8 percent, Lawyers Title with 12 percent, and SAFECO with 10.3 percent, are the four largest title insurers, First American Title Insurance Company, a named respondent which has a consent settlement agreement pending before the Commission, is the fifth largest title insurer with 9.7 percent of the market. Stewart which accounts for 5.4 percent of the market, is the eighth largest title insurer. 19 B. COMMERCE 8, Respondent insurers write policies and provide search and examination and settlement servces in all states except Iowa, which 20has a statutory prohibition against issuing title insurance. (12) 9, The search and examination of title and the issuance of title insurance policies are integral parts of interstate real estate transactions in which loans either cross state lines or are guaranteed by agencies of the United States located in Washingtn, D.C. Typically, these lenders or loan guarantors require that the title to the real estate ex 173.

15 ex 152Z-84.

16 Complaint and Stewar' s Answer, '17. 17 ex 174B.

18 ex 153Z-22.

19 Market shares are measure in terms of grss operating revenues. ex 166Z-3. See also ex 293E. While Stewart' s national market shar is relatively small, it is the leading title insurer in Texas and it is strongly positioned in the West and Southwest. ex 293G. 20 ex 171.

, IH..u.nnl llli:U.r'1Li!' LiUNlt'JU' , !'l 1\. .hhJ 344 Initial Decision securing the loan be searched and examined, and that a title insurance policy be issued.

10, Similarly, the settlement services provided by respondents are part and parcel of interstate real estate transactions. 22 11. Respondents offer their search and examination and settlement servces through nationwide networks of regional, divisional, and branch offces, which are subject to and benefit from the financial support, control, direction, policies, and national advertising and marketing campaigns of respondents' home offces. C. TITLE, THE ABSTRACT OF TITLE, THE A'IRNY S OPINION, TITLE INSURANCE Real Estate Title 12. Title is a legal concept covering the bundle of rights possessed by the owner of real property. These rights, which are recognized and protected at law, include possession, use, control, enjoyment, and the power to transfer the property. 2' (13) 13, In real estate transactions in which title is to be transferred buyers are interested in determining whether there are any title defects in the form of liens, encumbrances, easements, covenants restrictions, or claims that might interfere with the quiet enjoyment of possession. This translates into the buyer s need to know if a seller title is limited or afected by such pre-existing rights or interests of others as the right of a utilty company to maintain a right-of-way across the property, or the marital rights of a prior spouse of the seller, or the abilty of an adjoining landowner to invoke a restrictive covenant, or the existence of enforceable mortgages, use restrictions tax judgments, mechanic s liens, and other liabilties, limitations charges, or liens.

14. Similarly, the interest of a mortgagee involved in a real estate transaction centers around his need to know of the existence of any clouds on title that may adversely effect the priority of his own lien. 15. Historically, there have emerged several ways of assuring 21 Haines 3231 , Bowling 3316; ex 171, ex 182D, ex 196Z-136 to Z- 137, ex 237T- , ex 247e, ex 253Z- 31 to Z- , ex 303A; RX 431M.

22 ex 155D, ex 196Z-60to Z- , ex 238F-G; RX 394Z-58 to Z- , RX 4091" RX 427Z- 135, RX 431Z- 116 to Z- 118.

28 ex 2478; RX H3G , RX 44210', RX 444J, 1. se also Frmhold 955- , Bonita 1253. 24 ex 155" , ex 253Z-3; RX 409Z-32.

26 CX87X- , ex 253Z-3; RX MIlM. By custm, the cost of a title evidence is borne by the buyer. RX 436e. 26 ex 156Z-62 to Z- , ex 237T- 354 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

buyers and lenders of the existence of good title (see Findings 16- 39).

The Abstract of Title 16. The earliest evidence of good title (which persists to the present day) was provided by title searchers (sometimes called "abstractors who originally were in the business of researching public records and providing purchasers or lenders with a summary (called the "abstract of title ) of all the documents forming a chain of title. 17. The purpose of the abstract of title was to arrange in chronological order all pertinent information respecting title that appeared on the public record, the assumption (14) being that the buyer or lender would then either cure the revealed defects or decide not to go forward with the purchase or loan. 29 18. If in making a purchase or loan decision, the buyer or lender relied on what turned out to be an incomplete or inaccurate abstract the abstractor was only liable for negligent failure to exercise the level of vocational skil expected of title searchers in the locality where the search was conducted. In the absence of proof of negligence, the abstractor was not liable for mistakes, errors, or omissions in the search. '0 19. The negligence liabilty of the abstractor only attached to errors and omissions in searching public records. The abstractor had no liabilty for failure to uncover unrecorded defects in title. 20. Over the years, the abstracting business developed several refinements. First, abstractors began to issue "certificates of title which certified that title vested as shown in the documents searched; stil later, abstractors actually guaranteed title and set aside cash reserves to assure their capabilty for paying losses. 32 21. Presently, the abstract of title is rarely sold to a buyer or lender who relies on it in lieu of the other, more widely used evidences of good title such as an attorney s opinion or title insurance. 22. Typically, the modern commercial abstract company performs its searches and examinations as an agent for an insurance compa- 27 See also ex 253Z-3 to Z- , Z.9; RX 409Z-32, 28 Bowling 3335; ex 87Z- 114 to Z- 119, ex 154C-E, ex ISSC, ex 156V, Z-29, Z-234, ex 249D, ex 258Z- 4 to Z-S, ex 261F-G, ex 310B-C; RX 409C, RX 427Z- 132, RX 433. 29 ex 189F, ex 253Z-4 to Z- 30 ex 91Z-36, ex 246E. ex 253Z-5 to Z- 31 ex 253Z-6, ex 261F- 32 ex 154C-E, ex 155D, ex 253Z-6; RX 391D- 33 Everbach 1414; ex 261F- 344 Initial Decision ny, 34 or it may be retained by an (15) independent attorney, attorneyagent, or insurance company personnel who then examine the abstract before issuing an attorney s opinion or a title insurance policy.

Attorneys' Opinions 23. Since the abstract of title did not include an evaluation of the legal significance of the recorded documents, there eventually evolved a practice, which continues to this day, of submitting either original title records or abstracts to a qualified ipdependent real estate attorney (sometimes called a "conveyancer ) who makes a critical review of the records and then renders for buyers or lenders an attorney s opinion or a certification of title. 24. These independent real estate attorneys are also retained by title insurers or their agents for the purpose of providing an attorney opinion prior to the issuance of a title insurance policy. 25. Like the abstract, the main purpose of the attorney s opinion is to give the buyer or lender a full accounting of any title defects so that an informed decision can be made as to whether to attempt to cure the revealed defects or to just drop the deal. The attorney s opinion merely adds to the abstract an interpretation of the legal significance of documents uncovered in the search.

26. The attorney s opinion, like the simple abstract, carres with it limited liability for errors or omissions, amounting essentially to malpractice liabilty grounded (16) on negligence or failure to meet the accepted standard of professional legal competence in the locality S9 If the attorney conductedwhere the attorney s opinion was given, the search himself, he is liable for negligence in both the search and examination. In those instances, however, in which the attorney opinion is based on an abstract prepared by an abstractor, his liabilty 34 Bowling 3336; ex 172F; RX 48BH.

35 Anito 293- , Coper 365- 370-72 Ippe1699, 702, Frmhold 954-55, Everbach 1341 , Donohoe 1665 Bowling 3379; ex 87M, ex 91Z- , ex 145A, ex 175Bi ex 237Z- , ex 245B, ex 261F-G. Beause the work of the abstrar is direy afecte by local real estate laws and custms, the present-day commercial! abstra company is usually a small, locally-owned business. ex 261R-S. 36 Everhach 1314; ex 154D, ex 156Y to Z- , ex 175B, ex 182E- , ex 189Z-15 to Z- , ex 196Z- 136 ex 25HZ-s to Z-6. ex 262E-F; RX 391E. If the attorney conduct the search himself, he issues a certification of title. ex 156Y to Z- 37 ex 172F' RX 488H 38 Coper 368-69; ex '189Z- 15 to Z-16; RX 489E- 39 Anito 281; ex 182D, ex 196Z- 136, ex 237P-R, ex 253Z-5; RX 489D. 356 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

is limited to due care in the preparation of an opinion based on the information reviewed. 4.

27. Also, as is the case of the abstract, an attorney rendering an attorney s opinion is not liable for either hidden defects not discoverable by a dilgent record search or for inaccuracies in the public records. 41 28. The liabilty of the attorney for his opinion is also limited by his solvency, and ends with the death of the attorney or the tollng of a statute of limitations.

29. A variation of the attorney s opinion is the so-called "bar fund" in effect, a title insurance company organized by independent attorneys who then issue policies based upon their own searches and examinations. 48 Bar funds, which offer an additional layer of protection beyond the attorney s opinion or the simple abstract by covering losses from hidden defects, were organized as the bar answer to loss of search and examination business to title insurance companies. 4' (17) Title Insurance 30. The origin of title insurance as a form of evidence of good title traces to an 1863 Pennsylvania case Watson v. Muirhead 57 Pa. 161 (1868), which held that an attorney rendering an attorney s opinion was liable only for negligence. The negligence standard of Watson imposed a significant barrer to recovery for errors or omissions made by abstractors or attorneys in conducting a title search and examination.

31. Title insurance (technically, an agreement to indemnify an owner or mortgagee for loss or damage sustained by reason of a defect in title not explicitly excluded or excepted from the policy) was designed to go beyond either the abstract or the attorney s opinion by imposing on insurance companies liability for errors in the conduct of the search and examination irrespective of any negligence in carrng out the process.

32. Title insurance covers errors or mistakes made by those who Ippel 659, Eo'verbach 1325- 26; ex 196Z- 136, ex 263Z- , ex 261F+ 41 Anito 281; ex ISZE- , ex 246E, ex 253Z-6 to 42 ex 196Z- 136, ex 237P- , ex 246E, ex 253Z-6 to Z-7; RX 489D. 43 Ferr 2319-23; ex 196Z-1Si3 to Z- 155. In Connecticut, however, the bar fund is not regulated by the stte insurance deparment. Ferrro 2319-23.

44 Ferr 2319-23. As it happens, title insurers themselves, like respondent Lawyers Title, have ben fanned by lawyers who speialize in real estate work. RX 456F. 45 Everbach 1326-28; ex 237P, ex 31OB-D; RX 391D- , RX 417Z-32. 46 ex 155" , ex 196Z-136, ex 319B; RX 417Z- , RX 491A. TICOR TITLE INSURANCE COMPANY, ET AL. 357 344 Initial Decision perform the search and examination on behalf of the insurer whether or not they are agents, independent contractors, or employees (see Findings 40-57).

33. Title insurance in its present form also exceeds the protection given by abstracts or attorneys' opinions in that it survves even if the person who conducted the search and examination dies. 34, Unlike the abstract or an attorney s opinion, title insurance includes the obligation to defend in the event that an insured is sued. (18) 35. Like the abstract and the attorney s opinion, however, title insurance policies are basically assurances to the buyer or lender that defects in title discoverable from examining the public record have been brought to the attention of the buyer or lender so that they can cure the defect or decide not to go ahead with the deal. 36. A secondary purpose of title insurance, developed over the years and going beyond the scope of the abstract or attorney s opinion, is to protect the buyer or lender from hidden or so-called "off-record" risks not discoverable from examination of public records such as forgery, missing heirs, previous marrage, impersonation, or confusion in names, 51 37. Title insurance is largely a post-World War II phenomenon whose growth reflects the need for a standardized form of assurance of good title to complement standardized mortgages that are resold in a nationwide secondary mortgage market.

38. While title insurance is now the predominant form of title evidence, the attorney's opinion is stil commonplace especially in the New England and Southeastern states. 53 As indicated in Findings 21- , the abstract of title is now rarely used alone as an evidence of good title, and instead usually serves as the basis for issuing either an attorney s opinion or the report that precedes the issuance of a title insurance policy, 54 (19) 39. Viewed from a market perspetive, the search and examination of title is a servce business acquired by respondents and other title 47 Se also Bowling 8363; ex 18ZE.

B ex 196Z-136, ex 237P.

49 ex 182E, ex 253Z-9; RX 417Z-31.

Ii See Findings 58-59, 61 ex 82V- , ex 87Yto Z- , Z-25 to Z-26, ex 154E- , ex 182E- , ex 237P, ex 26t" K; RX 391F- There ar several major aras (which may be viewed as off-reord risks) that ar excepte from the Btndar covera, such as easments and liens not shown on the public reord (se Finding 87 and ex 250H 62 Ippel 699-700; ex 91Z-37 to Z-SS, ex 182D, F. ex 189Z- , ex 196Z-136 to Z-137. !; Ippe! 699, Everbach 1411-17, Bowing 3367; ex 154D, ex 189F, ex 261F-G; RX 39lE, RX 436' 64 IppeJ 701- , Frmhold 954- , 1005; ex 87M, ex 156Z- , ex 175B, ex 237Z-2; se also Finding 358 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

insurers as a result of their aggressive merchandising of title insurance (at the expense of abstracts and attorneys' opinions) as a superior way of evidencing good title.

D. ATTORNY-AGENTS, APPROVED ATTORNYS, AND EMPLOYEES OF TITLE INSURERS 40. As indicated in Findings 22 and 24, a title insurance policy may be based on a search and examination conducted by an independent abstractor or an unaffliated independent attorney. Most title insurance policies, however, are issued after the search and examination has been made by either attorney-agents, approved attorneys (a variation of the independent attorney), or employees of respondent insurers (see Findings 41-57).

41. It is a common practice in the title insurance industry for searches and examinations to be conducted by attorneys who have been designated as agents of title insurers. 56 These attorney-agents often are recruited from the ranks of independent attorneys (see Findings 23-28) who formerly rendered attorneys' opinions or issued certificates of title.

42. Agents for title insurers have also been drawn from the body of independent commercial abstractors who own title plants 58 and who may continue to offer abstracting servces apart from their work as agents for title insurers. 59 (20) 43. Agents, whether they are attorneys or abstractors, are liable (like the independent attorney rendering an attorney's opinion) to the title insurer for negligence in conducting the search and examination.

44. The relationship between agents (especially attorney-agents) and title insurers is fraught with opportunities for directing the placement of title insurance business. While ostensibly acting as independent legal counsel to a usually uninformed buyer, the attorney-agent is in a position to channel the . consumer s title 55 Ippe! 699-700, Ferraro 1219, 1239. , Donohoe 1664-65, 1667- , Bowling 3293; ex 87W to Z.S, ex 154A-H, ex 156Z-2, ex 182D- , ex 189Z- 16, ex 196Z- 150 to Z- t5l, ex 236E, ex 237P- , ex 246Aex 249D, ex 253Z.3 to Z- ll. ex 261H, ex 262E- , ex 292D- , ex 311A-J, ex 3128, ex 313B, ex algA. B; RX 312, RX 391O-H, RX 394Z-3I, RX 475-RX 475E, RX 476A, RX 484A, RX 489D- 56 Ippe! 698; ex 182G-H; RX 444N, RX 491A- 57 Ferraro 1241; ex 182G- 58 Armstrong 1136, Everbach 1341 , Bowling 3376; ex 228A. 59 Ippel 698, Armstrong 1135.

60 Cooper 388; ex 145C, ex 1460; RX 410J. The wilingness of respondent insurers to test agent liability is tempered by the strategic importance of agents in garnering insurance business. Bowling 3300- , 3311; RX 487N-Q; see also Finding 44.

TICOR TITLE INSURANCE COMPANY, ET AL. 359 344 Initial Decision insurance business to the agent's insurer-principal in exchange for commissions, commonly referred to in the title insurance business as agent' s retention" since the agent collects and transmits the premium less his "retention" to the insurer. The agent's retention however, includes not only the actual cost of conducting the search and examination, but may also reflect his abilty to negotiate for a large part of the total insurance premium (as much as 90 percent) on the basis of his strategic position in the real estate transaction. 61 In point of fact, the growth of a title insurer is largely tied to its abilty to solicit and retain attorney-agents who can influence the placement of business. 62 45. "Approved attorneys" are independent attorneys who have been formally designated by respondent insurers as qualified to conduct a search and examination prior to the issuance of a title insurance policy. 63 (21) 46. An approved attorney, who often wil graduate to the attorneyagent status described in Findings 41- 64 may also continue to function as an unaffliated independent attorney, and in that capacity conduct searches and examinations and issue opinions and certificates for individual buyers or sellers or even other insurance companies which have not designated him as an approved attorney. 65 Moreover an attorney may function as an approved attorney for one insurer and an attorney-agent for another.

47. An approved attorney is neither an employee nor an agent of the title insurer which designated him as an approved attorney. 48. The approved attorney may perform the search himself or base his examination upon the abstract of an independent abstractor. 68 49. The approved attorney s analysis, which is indistinguishable 6J Anita 279, Sinkhorn 917- , Annstrong 1165 , Ferraro 1241-42, Plotkin 2681- , 2705- , DiSanto 2737- 2799-2808, Bowling 3301; ex aDZ-8S, ex 145E, ex 156Z-7, ex 182G- , ex 232G, ex 247Xex 257A, ex 278W- , ex 30lE, ex 306B ex 307B, ex 323., ex 324L, ex 333Z.11 to Z- 15, ex 334C- RX 3E, RX 23K. , RX 32, RX 114, RX 502Z-55. 62 Ferrf1ro 2356- , Plotkin 2698- , Bowling 3301; ex I66R, ex 237Z- , ex 293E. 63 ex 160G-H; RX 410L-M, RX 491A.

64 ex 182G-H. Approved attorneys (usually lawyers with a real estate practice) are oftn selected on the basis of their ability to influence the placement of title insurance business. Bowling 3367. Frm the approved attorney s standpoint, the relationship is desirable beause not only may they graduate tu the status of an atturney-agent (and the prospet of large "retentions ) but as an approved atturney he can expet tu reeive substantial fees from conducting searches, examinations, and settlements (DiSantu 2806, Bowling 3368; CX 30Z-85; RX 410L) as well as whatever other advantages accrue frm being identified with a national title insurance company in professional direturies. Sinkhorn 847. 65 Cooper 364-70.

66 Cooper 370.

RX 491A.

CX 160G- 360 FEDERA TRE COMMISSION DECISIONS Initial Decision 112 F. from the attorney s opinion or certification of the ordinary independent attorney (see Findings 23-25), is relied upon by the insurer or the agent of the insurer in issuing initially a binder or commitment, and 69 (22)eventually a title insurance policy (see Finding 80). 50. The approved attorney, however, unlike the attorney-agent prepares neither the preliminary binder leading up to the issuance of the title policy nor the title policy itself. 51. The approved attorney, like any other independent attorney rendering an attorney s opinion for an insurer or an insurer attorney-agent, is liable to the insurer for failure to exercise due dilgence and reasonable professional skil in the search and examination of public records.

52, If the approved attorney s examination of title is not based on his own search but rather upon a commercial abstract, liabilty is limited to the exercise of reasonable care and due professional skil in rendering an opinion in light of the information contained in the abstract. 72 53. The approved attorney receives no financial remuneration from the title insurer. The approved attorney bils. his client-the buyer or the lender-for the cost of conducting the search and examination. 54, Respondent insurers do not set, either jointly or separately, the fee that the approved attorney charges his client, The approved attorney sets his own fees, 55, In addition to approved attorneys and attorney-agents, searches and examinations are conducted by employees of respondent insurers stationed in respondents' branch offces. 75 (23) 56. The mix of attorney-agents, approved attorneys, and direct employees not only varies according to custom and geography, but also reflects how successful a particular title insurer has been in enlisting the support of well-established attorneys who can influence the placement of their client's insurance business, 69 Sinkhorn 928.29, Frmhoid 953, 1021 , Claytn 1838, Bowling 3371-72; ex 165D. ex 160G- , ex 182G. ex 237Z-9 to Z-lO; RX BE.

70 ex 132F, ex 160G, ex 182G, ex 196Z- 11 to Z-12; RX 4tol, X to Z- , RX 491A. it ex 160G, ex 237Z-9 to Z-lO, ex 257A.

72 ex 160G- 7B ex SOZ. , ex 160G, ex 182G; RX BE. 14 Frmhold 1020-22; Bowling 3363-64; ex SOZ-85. 75 ex 87M ex 175C, ex 237Z-2; RX 4BSH.

76 Ippel 624; ex 237Z-3 to Z- , ex 262" ; RX 491A; se also Finding 44. The mix may also reflect the ntensity of the competitive struggle between attorneys and insurance companies for the search and examination and settlement business. In some areas, respondent insurers may have ben compe!led to use their own employees beause of organized bar opposition to having independent lawyer. work as insurance Dmpany agents or approved attorneys. Se ex 196Z- 150 to Z-151. g., TICOR TITLE INSURANCE COMPANY, ET AL. 361 344 Initial Decision 57. Essentially all title insurers operate in the same way, and while there may be differences among respondent insurers as to how business is allocated among employees, agents, and approved attorneys, the practices and policies described in these findings are fairly attributable to all respondents. 77 E. THE SEARCH AND EXAMINATION PROCESS FOR ABSTRACTS OF TITLE, ATTORNEYS ' OPINIONS , AND TITLE INSURANCE 58. Irrespective of the form in which the buyer or lender are assured of good title (i. e., through abstracts, attorneys' opinions, or title insurance) and irrespective of the hat worn by the searcher and examiner (abstractor, independent attorney, attorney-agent, approved attorney, or insurer s employee) the condition of the title is determined 78 The process is theby the same search and examination process. same because in all cases the objective is the same-to uncover significant impediments to ownership. 79 (24) 59. Neither the use by respondents and their agents of insurance jargon to describe the purpose of their searches and examinationstheir view to determine what risks they are willng to insure nor the existence of state statutory requirements conditioning the issuance of a title insurance policy upon the conduct of a search, materially changes the nature of the search and examination conducted prior to the issuance of an insurance policy as compared to the process used before an abstract or an attorney's opinion are rendered. In all instances, the objective of the searchers and examiners is to provide a statement of the status or condition of title and to call the attention of the buyer or lender to defects discoverable from the public records so that these clouds on title are corrected before the purchase is made, or if the risks are too great, to call the deal off. In the words of respondent Ticor: 77 See Bowling 3374-75.

18 Anita 280-81. Cooper 370- 383, Frmhold 1003- , Haines 3234-35; ex 155D, ex 172Ft ex 182G, ex 287Z.9 to Z- IO, ex 244" R, ex 245B, ex 247" , ex 249D, ex 250G, ex SIO" ; RX 290A, RX 488B. While the searhes and examinations conducted by an independent attorney, approved attorney, and attorney-agent arc identical and indeed the same pernon may wear aU thre hats, the reord indicates that the standard abstract is more detailed than the typical product of the independent attorney, approved attorney, or attorney-agent (see Findings 16. 17, 81).

79 Everbach 1395-98; ex 87M, Z- IO to Z- ll, ex 175B- , ex 182E- , ex 247F-G, ex 253Z- to Z- , ex 261J-K, CX 262C-D, CX gOlE, ex 302B, ex 30BB; RX 394Z-47. lppel 627, Malaker 745- , Frmhold 1033, Waiwood 1079, Everbach 1329, Bowling 3337. 81 See, e. , p. 11I.

82 Anito 265-67, eooper 421, Quadraccia 490, Sinkhorn 887-89. Frmhold 970, 1033, Waiwood 1103 Haines 3224. , 3240-43, Bowling 3335; ex 87H-J, N, Z- 10 to Z-ll, ex 91Z- , ex 175C, ex 194, ex 236B, ex 246G, ex 247D-G, CX 249D, ex 252S, ex 253Z-9 to Z- , ex 261" K, ex 262C-D, ex 293D (footnote cont' Initial Decision 112 F.

Basically. title insurance is the company's opinion of the ownership and marketability of tjtle to a particular parcel of real property. This can only be ascertained aftr a thorough and complete search of aU the records affecting tjtle to the parce) insured. This search is much more extensive and requires more time than any other investigation conducted in connection with the issuance of other forms of jnsurance. A title company is required, not only by law, but in order to make quick and accurate searches, to keep complete records covering ail the lands in a particular county. A title company is a servce organization and perfonns a servce for those interested in buying, selling and loaning money on real estate. One may make his own search because all of the records necessary to complete such a search are available at the Court House, the City Have and the Federal Court House. How this search is made and the accuracy of such a (25) search will depend upon an individual' s skjJ knowledge and perseverance. It could take days, weeks or months, and aftr completion, the verdict would be inconclusive because with the passage of time additional filings have been made which have to be considered and construed. This task would be akin to trying to dig away a hil of sand which slides continuously. Through a system of records, kept on each individual parcel, the title company is able to complete this search on a definite date with certainty. When you purchase a title insurance policy, you are buying the servces of expert. The company is wiIHng to back the opinion of these experts with the additional feature of insurance. Hence, the use of the word insurance, when naming the product of title insurance. 83 Title Search 60. Whether the ultimate product is an abstract, attorney s opinion or title policy, the first part of the search and examination processthe search-proceeds on the basic premise that important interests in real property (deeds, mortgages, leases, grants, easements, judgments, tax liens) must be made a matter of public record by recording the document in the county recorder s office where the property is located. 84 61. By recording evidence of a claim or interest in real property, legal or "constructive" notice is given-that is, all persons, including prospective buyers and lenders, are presumed to know what is in the public records even though they do not have actual knowledge. 85 62. From these public records, the searcher endeavors to establish a chain of title " consisting of a chronological account of recorded ex 294D- , ex 297, ex 298B, ex 2998, CX 311" , ex 318B, ex 320Z- 157 to Z-159; RX 3D, RX 396C RX 413D, RX 417Z- , RX 431M- , RX 488" 83 CX 250G. See also CX 3088 ("Title Insurance combines the function of the abstracter, in making the chain of title, and the atWmey in his examination of the title, plus coverage to the land owner thein form of insurance.

84 ex 155" , ex 156Z-32 to Z- , ex 1758, ex 196Z- , ex 247E; RX 389Z-245 to Z-253. RX 413C, RX 431N- 85 CX 156Z-32 to Z- , ex 247E, ex 253Z-3 to Z-4: RX 413C. \.vn UU.d H""UKAlJJ: lJUMtANY . t.T AL. ibi! 344 Initial Decision instruments affecting title, beginning with the earliest and concluding B6 (26)with the latest.

63, The "direct" search method of establishing the chain of title entails an examination of public records for all documents relating to the property in question, 87 Historically, the presumptive search period is 60 years, but depending upon local custom or the existence of an earlier, reliable title policy, or a marketable title act, the search may 8 In an especially complex transaction, thebe considerably shortr. search may go well beyond 60 years to the issuance of the original patent by the sovereign.

64. Typically, the public records searched include county land records (deeds, easements, and mortgages) municipal records covering sewer, sidewalk, and other assessments, tax collector records, and state and federal court records showing bankruptcies, divorces judgments, and civil actions indicative of liens or other enforceable interests in the property.

65. Instead of starting with public records, which oftn are not effciently organized, a search (especially in large metropolitan areas) may be initiated by use of a privately owned "title plant" or "abstract plant." A title plant contains virtually complete summary information (as well as some reproductions) from the public records affecting real estate title in a limited geographic area, organized and indexed in a way that enables a title search to be performed in a fraction of the time and with greater accuracy than a direct search of the public records. (27) 66. Title plants are owned and operated by abstractors, attorneys real estate brokers, and title insurers or their agents. 92 67. Stil another method of conducting a title search is to go back no further than a pre-existing tite policy or a pre-existing abstract. 68. There are no special educational or training requirements for becoming a title searcher, and with training and experience, high 86 Sinkhorn 852- , 856- , Haines 3158-59; ex 196Z- 16; RX 409K, RX 427Z- 135, RX 431N- 87 ex 196Z-16 toZ-18; RX409Z- , Z-33.

88 Anito 291- , Quadraeia 510- , Ippel 704- , Malaker 723- , 743- , 792- , Sinkhorn 853-55, 923- , Waiwoo 1053- , Armstrong 1147- , Ferrar 1198; ex 87Z-B2 to Z- , ex 160M- , ex 196Z-18, ex 223A, ex 294D.

89 Quadracia 511; ex 160M- , ex 196Z- , ex 223A. If a searcher has confidence in the work of a particular absrar, he may begin the search frm the point in time when the abstra ended. ex 196Z-19. 90 Anito 254, 262- , Malaker 722, 728-30; ex 196Z- 17 to Z- , ex 247G. 91 ex 196Z- , ex 261L-M; RX 4QIZ-21 to Z- , RX 409Z-33, RX 427Z-132, RX 488H. 92 ex 196Z-36; RX 290A, RX 335, RX 4.01Z-21 to Z-24.. In BOrne areas of the country, title plants ar cooperative effort operate by several title insurers or their agents. ex 196Z-54 to Z-55. 93 Anito 251-53, 270-72, 287- , Quadracia 510, Waiwoo 1055-56, 1097- , 1121- , Arstrong 1146 Bonita 1267-68, Donohoe 1665; ex 196Z-19, ex 223A; RX 389Z-246. _ .......

364 FEDERA TRDE COMMISSION DECISIONS Initial Decision 112 F. school graduates soon acquire the expertise necessary to move frm routine searches to more complex assignments. Examination 69. The examination phase of the search and examination process involves a critical analysis or interpretation of the condition of title as revealed in the documents uncovered by the search. 70, Examination may be done by approved attorneys, attorneyagents, independent attorneys, searchers, or anyone else who is experienced in interpreting title documents and is knowledgeable 95 Some examiners dispense entirely with aabout real estate law. separate search and instead simply combine the search and examination in a single process. 1281 71. Similarly, while search is commonly identified as a separate and distinct process from examination by title insurers, and in large insurance company or agency offces the two processes are oftn performed by separate staffs, in the smaller offces, and in matters involving complex questions of title, the two processes tend to merge. .8 F. SEARCH AN EXAINATION AN RISK ASSUMPTION 72. Respondents' retained insurance expert " as well as respondents' offcers and agents, argued that search and examination undertaken prior to the issuance of a title insurance policy is either underwriting" or part of what they referred to as the "underwting process" because it is on the basis of the search and examination that risk (chance of loss) is identified and a decision is made either to accept or reject it. 100 This effort of affxing the lofty "underwriter label to searchers and examiners proceeds initially from the premise that all providers of information respecting the property to be insured 94 Frmhold 973, Annstrong 1179; ex 172F. See also Arstrng 1151 for testimony that searhers simply puh every document that is even remotely relevant "and then leave it to the examiners or at least the head searcher to throw them out or not" and ex 196Z-36 where one respondent describes the work of a searcher as akin to drudgery.

96 Anito 264; ex 155F, ex 156Y, Z-2, ex 160G- , ex 237M, ex 2448, ex 249D, ex 25HZ. , ex 262" RX 401Z.30 to Z. , RX 406D.

It ex 262"

97 ex 87M, ex 253Z- , ex 262F.

98 Anito 297. Ippel 631 , 635-36. Malaker 720. Frmhold 978- , Waiwoo 1049- , Ferrro 1200, Bonita 1260- , Bowling 3336; ex 196Z-36, ex 237M. !1 The opinions of the retained expert, Robert Haltom, were uninformed by any experience whatsver with title insurance. Haltom 1493, 1594.

100 Ippe1629, Malaker 730, Frmhold 977, Waiwoo 1067-68, Armstrong 1159, Bonita 1285- , Everbach ...no"', n - '..". On n ,__- ..'", o. n_. 344 Initial Decision must be engaged in "underwting" (or, if you wil, be part of the underwriting process ) although this expansive view of underwriting would of necessity embrace the abstractor, the independent surveyor the approved attorney, and' practically anyone else who gives insurers some information bearing on the subject of the policy, including presumably the insured himself who provides his name and a description of the property, and perhaps even the receptionist who records this information on the face of the policy. !O! Going beyond the ilogic of this open-ended definition, this endeavor to (29) elevate searchers and examiners to the status of "underwriters " also fails to take into account the fact that the search and examination conductd for title insurance purposes is virtually indistinguishable from the process undertaken for the non-insurance (and concededly non- underwriting ) purposes of rendering abstracts or attorneys' opinions and that irrespective of the purpose, search and examination is carried out by a corps of searchers, abstractors, conveyancers, attorneyagents, and approved attorneys who move freely from one form of title evidence to another without any perceptible change in what they do. !02 Moreover, to the extent that respondents' expansive concept of underwriting rests on the assumption that searchers and examiners for title insurers have discretion about assuming risk, the record evidence is that in an industry in which standard forms predominate and company manuals have reduced most transactions to a set routine, this discretion is narrowly circumscribed. !O' This strained effort at rollng search and examination, underwriting, and risk into one ball of wax is also suspect on its face since the basic approach of respondents in conducting their title insurance businesses is not to assume any significant risks uncovered by searchers and examiners. !o, Finally, respondents' strained extension of the underwriter label to searchers and examiners is fundamentally unsound since the title policy, in contrast to casualty insurance, does not insure against the happening of some unforeseen future event, and while the searchers and examiners may bend every effort to eliminate risk by 101 Malaker 717- , Frmhold 977- 1005, 1013- , Everbach 1398- , 1402- , Haltom 1541- , 1584- 86, 1587- , Haines 3196-97. , e. Frmhold 977 1108 and RX 413C for the pivota! roles played by the surveyor and abstrr (both independent contracrs not connecte with insurers) in the search and examination pross.

102 Se Findings 16-71. The occasional use of the "underwriter" title in respondent.'! ' manuals in no material way changes the way in which search and examination are conduct for a title policy as compar to the search and examination undertken for any other evidence of title.Se RX 401Z-27 to Z-34. 108 Se Findings 73-96 and ex 172F.

104 Se Findings 73- , 99.

366 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

finding recorded title defects (30) they are not engaged in the underwriting function of assuming and spreading risk among a large universe of insureds. 106 73. Consistent with respondents' guiding principle of not assuming risk, their primary objective before issuing a title insurance policy is in the conduct of an accurate search of the public title records for the purpose of uncovering possible defects which are to be cured by the insured or excepted from coverage. 106 74. Also consistent with respondents' risk-avoidance approach are their company manuals, underwting guides, and other directives which are replete with admonitions that risks are to be excepted from coverage. 107 The testimony of respondents' officers and agents directed at diminishing the importance of these directives by claiming in effect that searchers and examiners have wide latitude in ignoring 108 is not credible. The insurer-agent contracts as well as thethem underwriting manuals, guides, and directives themselves instruct employees and agents that they are to be followed to the point that 10. It is alsoagents may be liable for damages if they are not followed. significant that while these materials are constantly being updated, no documents were offered by respondents indicating that the admonitions (31) respecting risks have been significantly modified. no On the contrary, respondents' own witness acknowledged that the manuals underwriting guides, and directives are meant to be followed, and are written in absolute terms because respondent insurers do not want their agents and employees, whose primary function is to generate 106 Holtom 1496-98, 1505- , Wirt 1790+91; ex 56e- , ex 82E, ex 87H-J, ex 116B- , ex 156Z-2 to Z- , ex 182D-E, ex 237Z-8, ex 250F, ex 253Z- , CX 260H- , ex 262C- , ex 292G+ , ex 294e- , ex 310D- , ex 3HB; RX 102Z-95 to Z- , RX 417Z-32, RX 442; se also Findingu 98, 114. 106 ex 30Z-67, ex 91Z-85, ex 160R, ex 166Y, ex 172F, CX 175e, ex 237Z-8, ex 294C-D; RX 482B. 107 ex 160H, ex 161Z-342, Z-358, Z-382, CX 184A-G, ex 192, ex 214, ex 215, CX 216, ex 219, CX 220 ex 237Z- , ex 240, ex 241 , ex 253Z- 10; RX 444Q. 108 See, e. Waiwoo 1072- , Armstrong 1161- , Ferr 1200, Haines 3123- , 3146- , Bowling 3331-33.

109 ex 140B, ex 145B- , ex 160H, ex 228A, ex 232e, ex 237Z-3 to Z-6, ex 309Z; RX 413L, RX 482A. See also Sinkhorn 903- , Haines 3225- , Bowling 3300-05 for testimony by respondent offcials that agents are audite to determine whether they have complied with respondents' manuals and underwriting guidelines and that the terms of the agent-insurer contrats must be observed. 110 Haines 3118- , 3126. Se also Haines 3124, 3139-40 for testimony that until guides ar change they should be taken literally and Statton 2872-73 for the statement that manuals are "a broad set of operating guidelines for speific questions that they (branches and regional offces) may have, to save them the time of calling the home offce to find out what they should do." The suggstion advanced by respondents that the underwriting guides are only used by "a real grn horn" (se, e. , Haines 3123) is meaningless. While agents or employees may only consult the guides until they beome familar with the contents, it would be absurd to deny that the experienced agent or employee has not incorprate into his total experience the risk limitation admonitions to which he has ben exposed frm the start of his carer. _ TICOK 'ltl .u"'''U.L,,,,,..n 344 Initial Decision business, to be making risk decisions that could result in huge claims. 11 The Title . Report Of Binder 75, That therestrictiQns in respondents' manuals on risk. assumption are followed (in the sense that searchers or examiners typically neither eliminate nor make any decision to insure. over enforceable defects) is clearly demonstrated by the process forworking\lp the standard form reports or binders provided to respondent insurers by the. American Land Title Association (ALTA), and used wheneyer title insurance is being acquired irrespective of how the responsibility for search and examination may have been allocateda.among agents approved attorneys, Of insurance company employees. These standard title reports (also referred to as commitments or binders) purport to show the condition of title as of the date of the search and examination, and are enforceable contracts constituting an agreement by the insurer to issue a policy subjec to certain standard requirements and a standard limitation, 11 The standard requirements are the (32) paynentofthe purchase price for the property, reordation Qf the deed, and payment of the title insurance premium. The heart of the title report, however, is a standard limitation in the form of general notice that the policy will not insure against loss from any title defects listed on Schedule B of the title. report, or any new title defect arising between the date of the report and satisfaction of .the standard requirements. 113 76. As a matter of strict rule, respondent insurers require thattheir agents and employees indicate all enforceable or even doubtful title defects, liens, and encumbrances on Schedule B Qf the title report)!4 11 Frmhold1000-01. Haines 3117, 3123.26.

112 Ant0265. , Quadia 490. Ippel 662- FimhoJd 1083, Wilwoo 1078- 1099 1100, l103; Arng 1165- Bonita 1276 77, Everbach 1324, Bowling. . 3268, 3337 -38;CX 155D , ex 2528,. ex 253Z-9 to Z-1O,ex297, CX302B, CX820Z-157toZ.159 CX 342F; RX 3D RX 417Z-34-oZ 35, RX487F. Although repondents apparently prefer thedesignation eommitment" as 3: way ofdistingishigtbe preliminary report frm the abstors s or attorney s statement of tbecondition oftitJe the search and examnation is the same for report, binder, or commitment, and there isno evidence thatthe Contents of thes pre-policy doCunentschange depending on whattheYar called. See RX 400Z-84 toZ-95. By the sae token; notWithstriding the similarity between a title report and an attorney s opinion, repondents scrupulously avoid the attorney s opinion designation since its use might bring a charg of unauthori prace of-hlw. Everbach 1328 29; Bowling 3293 94..

113 ex . 2528; RX 4207;-4 fu Z- 10. Schedule B .of the title reportcontans two seions:seion l speifes those ac, such as paying off an existng mortge, tha.t must be performed before the policy issues; eeon2 lists the matters whiehWiI1 constitute exeeptionson ScheduleR of the finalpalicy. eX' 222Z 90. 1H Anito 264-66;CX 156Z 45 to Z , ex 161Z- 342 358 382, ex 1791. ex 184A-G ex 197e ex 199A. ex 214, ex 215, ex 216, ex 219, ex 220; ex 222Q, Z- 99, ex 227Z- ex 230A,-CX 232e ex 237" , ex 240, eX241 ex 254Z-7;CX 320Z-159, ex 342F-M; RX 420. 368 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

Thus the title report issued by the attorney as an agent for an insurer is virtually indistinguishable from the attorney s opinion or certification that is issued by the same attorney when he is not acting as an insurance company agent.

77, Respondents' offcers and agents made extravagant claims in their direct testimony about the alleged underwting discretion that agents and employees, as searchers and examiners, exercise in wrting tite reports or final policies. The cross-examination (33) of these same witnesses clearly demonstrated, however, that legally enforceable easements, mortgages, restrictive covenants, liens, assessments, and encroachments must be shown on Schedule B of the title report, and that this so-called discretion is narrowly limited to not showing minor, insignificant, and technical title defects ("glitches fly speks" or "units and bits ) such as ancient and patently unenforceable mortgages, easements, liens, or covenants, which if not cleaned up would in effect give an inaccurate picture of the true state of title.

78. That the discretion given to searchers and examiners is severely limited to title objections which are insignificant is demonstrated by the absence of credible evidence that respondent insurers have incurred any significant losses traceable to the exercise of discretion by searchers and examiners in eliminating minor title defects. 11 79, Moreover, in sharp contrast to testimony from company offcials and agents about searcher and examiner discretion, the insurer-agent agrments and company directives contain explicit requirements that the agent, without any discretion, must list all material title defects as exceptions on Schedule B of the title report. 80, Similarly, when a title report is to be issued on the basis of an approved attorney s certification, the approved attorney is required to list all valid mortgages, judgments, liens, and other material title defects in his certification. Ho But the (34) approved attorney, like the 11 Anito 279-80. As a matter of fonn, the minor "glitches" that may be dropped entirely frm the title report may be included in the attorney s opinion accompanied by an explantory discussion. Anita 305- 315- 16.

lppe! 639-40, 649- , 664- , Malaker 732- , 748, 792-800, Sinkhorn 867 74, 887, 906- , Frmhold 65- 1005- , Waiwoo 1060- , 1064-65, 1079- , 1084- , 1101-03, Arrong 1141- , 1167ll7l-72, Ferrro 1228- , Bonita 1280-86, 1291, 1295- 1300, 1302- , Everbach 1320, 1354-55, 1393-96. faines 3120- , 3130- , 3222, 3230- , 3233- , 3240- , Bowing 3286- , 3294- , 3339-44. Se also ;X 91Z-38. ex t6IZ- , ex 196Z- , Z-139 , ex 237N- , ex 342" M; RX 420-RX 420A. 117 &e Anito 342, Sinkhorn 906, 911. , Frmholcl 1007, 1011 , Annstrong 1174. 118 Sinkhorn 922-23; ex 13SB, ex 182G, ex 230A, ex 231A- , ex 232C, ex 320Z-157. 119 ex 160G-H, ex 196Z- 11 to Z- , ex 237Z.9 to Z-14; RX 4l0P. TICOR TILE INSURANCE COMPANY, ET AL. 369 344 Initial Decision attorney-agent, does not include in his certification clearly technical and immaterial title defects.

81. Independent abstractors, who may perform searches for title insurers or their agents prior to the issuance of a pre-policy report typically note all pertinent defects, encumbrances, and liens. They usually have no discretion to omit any outstanding interest, no matter how insignificant it may appear,1'1 82. These restrictions on the discretion of agents, approved attorneys, and abstractors reflect not only respondents' own basic philosophy of avoiding risk, but also proceed from respondents' legal obligation to inform the prospective owner of all outstanding defects in title, I" and the stringent disclosure requirements imposed by the federal guarantors-Government National Mortgage Association (GNM) and Federal National Mortgage Association (FNMA)-who I's dominate the secondary mortgage market.

83. Once enforceable or even doubtful title exceptions appear on Schedule B of the title report of the agent (or in the certifications of the approved attorney or abstractor) they are subject to strict legal review at the regional, divisional, or corporate level of respondents before being considered for either affrmative coverage or elimination from the final policy. I" (35) 84, In practice, a decision is rarely made at any level of respondent insurers by which affrmative coverage is extended over a significant disclosed defect, and the common rule in the title insurance industry is that enforceable title defects appearing on Schedule B of the title report will inevitably appear as specific exceptions on Schedule B of the final policy unless the insured takes corrective steps (for example payment of mortgage money or posting of bonds to satisfy existing tax or judgment liens) to cure them.

The Title Insurance Policy 85. The formal title policy continues the process begun in the 120 Sinkhorn 928, Haines 3235- , Bowling 3361-53, 3379-80; ex IGOR, ex 196Z-11 to Z- 12. 12.1 Coper 365- 370 Everbach 1341; ex 253Z- 122 Ippe1663, MaJaker 756- , Waiwoo 1103, Wilkie 2109- , Bowling 3339-40; ex 183, ex 184A- , ex 192, ex 198B, ex 221 , ex 222Z- , ex 251A- , ex 320Z-157 to Z-158. 123 Malaker 808, Boni 1300- , Everba.h 1398, Haines 3231, Bowling 3342-44; ex 155Ft ex 193A. ex 25$2.31 to Z-32, ex 303A- , ex 320Z-159. 12'4 Bowling 3278-79. 3294-95; ex 145B, ex 146B, ex 218, ex 220, ex 221 , ex 222Q, Z-25, ex 223B; RX 387, RX 396H. RX 410D, Z, Z- , RX 413M.

121 Anita 265- , Coper 372-73, Sinkhorn 887- , Waiwoo 1067, Annstrong 1172, Bonita 1302, Everbach 1396-97, Haines 3234-35; ex 30Z- , ex 87K, ex 160H, ex 196Z- 144, ex 237Z- , ex 247F, J ex 2528, ex 260G, ex 292G-H, ex 294e, ex 297 , ex 322Z-117; RX 102Z , RX 413D, RX 482B, RX 48S"

. .

370 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

preparation of the title report of identifying risks which are not to be insured. Thus the face page of the standard-form owner s policy (ALTA Form B-1970), which is used throughout the title insurance industry, 126 begins with the declaration that the policy does not cover the exclusions or the exceptions appearing on Schedule B of the policy. The standard terms are as follows:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS CONTAINED IN SCHEDULE B AND THE PROVISIONS OF THE CONDITIONS AND STIPULATIONS HEREOF, DC, Y, Z) TITLE INSURANCE COMPANY. herein called the Company, insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the amount of insurance stated in Schedule A, and costs, attorneys' fees and expenses which the Company may become obligated to pay hereunder, sustained or incurred by the insured by reason of: 1. Title to the estate or interest described in Schedule A being vested otherwse than as stated therein;

2. Any defect in or lien or encumbrance on such title; 3. Lack of a right of access to and frm the land; or (36) 4. Unmarketability of such title. 127 86. The standard exclusions, cited on the face page ofthe policy, are designed to reduce insurer risk by use of the following language: The following matters are expressly excluded from the coverage of this policy: L Any law, ordinance or governmental regulation (including but not limited to building and zoning ordinances) restricting or regulating or prohibiting the occupancy, use or enjoyment of the land, or regulating the character, dimensions or location of any improvement now or hereaftr ereted on the land, or prohibiting a separation in ownership or a reduction in the dimensions or area of the land, or the effect of any violation of any such law, ordinance or governmental regulation. 2. Rights of eminent domain or governmental rights of police power unless notice of the exercise of such rights appears in the public records at Date of Policy. 3. Defects, liens, encumbrances, adverse claims, or other matters (a) created suffered, assumed or agreed to by the insured claimant; (b) now known to the Company and now shown by the public records but known to the insured claimant either at Date of Policy or at the date such claimant acquired an estate or interest insured by this policy and not disclosed in writing by the insured claimant to the Company prior to the date such insured claimant became an insured hereunder; (c) 126 Cooper 360, Bonita 1302; CX 171; RX 102Z- 125, RX 428Z- 136, RX 431Y. 127 RX 389Z-387. The face amount of the standard owner s policy is the purchas price. Anito 273; ex 247V. The stndard mortgage s policy, which covers the face amount of the loan, has similar coverage except for the addition of provisions insuring the priority of the mortgagee s lien. The mortgage s policy also has provisions which are similar to the . standard exclusion as well as the standard exceptions appearing in Schedule B of the owner s policy. Ippel 626 , Haines 3179- , Bowling 3272; ex 182.-1, Z-90 to Z-95; RX 389Z-408, RX 405Z- 172. Owner s and lender s policies may be combined in one simultaneous policy. CX 182L , .

344 Initial Decision resulting in no loss or damage to the insured claimant; (d) attaching or created subseuent to Date of Policy; or (e) resulting iii loss or damage which would not have ben sustained if the insured claimant had paid value for the estate or interest insure by this policy. 128 (37) 87. Schedule B of the standard ALTA policy then lists five general exceptions- (1) Rights or claims of parties in possession not shown by the public records, (2) Encroachments, overlaps, boundary line disputes, and any mattrs which would be disclosed by an accurate survey and inspection of the premises. (3) Easements or claims of easements not shown by the public records. (4) Any lien, or right to a lien, for servces, labor, or material heretofore or hereaftr furnished, imposed by law and now shown by the public records. (5) Taxes or special assessments which are not shown as existing liens by the public records. 129 88. Some of the five "off-record" general exceptions (on either the final policy or the earlier report) may be removed, without creating significant risk to the insurer, by various off-record procedures such as a survey of the property, or by obtaining an indemnity, waiver release, or proof of payment of taxes. 130 The removal also requires the purchase of an extended coverage policy.l31 Moreover, if the offrecord inquiry discloses any significant title defect, that defect, too will inevitably appear in the special exception portion of Schedule B. 13 89. What are not eliminated from Schedule B of the policy are the special exceptions representing the enforceable easements, restrictive covenants, use restrictions, and liens which first appeared on Schedule B of the title report (see Finding 76) and which were not subsequently removed by the insured, As a matter of (38) strict rule, respondent insurers require that company agents and employees must show all enforceable title defects on Schedule B of the policy as special exceptions to coverage. 133 Risk Assumption By Title Insurers 90. As indicated in Finding 84, siguificant defects to title uncovered 128 RX 389Z-392.

129 RX 389Z-397.

130 Anito 276, Haines 3202-17; ex 182., L, ex 222Z- , Z-54 to Z- , ex 247J, ex 248N- , ex 295E; RX 480-RX 480A.

131 ex 247J, ex 298B, ex 302B; RX 15A- , RX 417Z-36 to Z-37. 132 ex 242B, ex 248N, ex 295E; RX 428Z-338. 133 Armstrong 1171- , Bonita 1302; ex 161Z-342, Z-382, ex 184A- , ex 214, ex 216, ex 219, ex 220 ex 221 , ex 240, ex 241 , ex 247J, ex 254Z- , ex 292Q- 372 FEDERAL TRE COMMISSION DECISIONS Initial Decision 112 F.

during the search and examination process are usually either cured by the insured or excepted frm coverage since the basic approach of respondent title insurers is to avoid risks and not to insure suspe titles.

91. Thus, like abstractors and independent attorneys, the most significant risk that title insurers face is whatever peril attaches to conducting a competent search and examination of the public records. 13' 92. The risk to insurers from negligence in the title search and examination process is reduced, however, by the contractual relationship between insurers and abstractors, independent attorneys, approved attorneys, and agents which expressly provides for negligence liabilty in conducting the search and examination. 35 In addition agents are commonly required to carr errors and omissions insurance '36 and approved attorneys are usually required to have professional liabilty coverage. 37 (39) 93. The risk frm hidden title defects-forgery (the main danger), false impersonation, or the execution of documents by minors-which cannot be addressed by the search and examination process, represents a relatively minor portion of the already small number of claims paid by title insurers. 138 94. In a rare number of instances, if an uncovered title defect is not cured, and if the risk is both calculable and low (and assuming further that indemnities or extra premiums have been received from the insured), respondent insurers may make a decision to give affrmative coverage by insuring "over" a known title defect appearing in Schedule B ofthe tite report or the policy, 13' Considering the severely restrictive conditions under which affrmative coverage is given, it naturally follows that losses due to such coverage are rare. 95, For the most part, agents and branch employees of respondent title insurers are prohibited from giving affrmative coverage for a 184 Anito 277- , Quadraia 505, Sinkhorn 919, Haines 3166-68; ex 156Z- , ex 172., ex 181G-H, ex 222Z- , ex 300A, ex B09Y, RX 397, RX 442A- 1B5 ex 13SC, ex HOB, ex 145C, ex 146D, ex 160G, ex 228C, ex 230B, ex 231C, ex 261" K; RX 41OJ. Se also ex IS6A- , ex 187A- , ex 309P, and RX 390A for references to the rornmon law negigence liability of abstrars and agents for errrs and omissions in preparing abst and report for title insurrs. 136 ex 180Z-62, ex 2318, ex 232E. err 1237; ex laBC, ex 1458, ex 146D, 131 ex 230C; RX 4101. RX 413J- , RX 444N. 138 ex 30Z-57 to Z- , ex 196Z-121 to Z-122; se also Finding 99. 139 ex 87K, ex 155C, ex 181H, ex 182M, ex 196Z-139 to Z- 140, ex 294D, ex 297, ex 322Z. 117; RX 413T RX 443M, RX 444Y. Even when a title insurer insures "over" a known defect, the common praice is stil to list the defec on Schedule E, and then issue affirmative covera as a way of limiting the insurer liability for unmarketability of title. Armstrong 1173, Everbach 1344- , Bowling 3273, 3299, 3344-45. 140 c;;"l.h",. Q1Q_9n Arm....nO" 117.t 344 Initial Decision known risk without the prior approval of respondents' supervsory regional, divisional, or home offce underwriting staffs. "1 There is no evidence that any tite insurer has incurred any loss by reason of (40) an agent's decision to insure over a known title defect without obtaining such prior approval. 142 96, Siguificant title defects are insured over (in those rare instances when it is done) on the basis of case-by-case legal analysis by respondents' underwriting staffs located in divisional or regional offces, and in the case of substantial risks by "risk committees located in the home offces. 143 97. Another factor taken into account by a title insurer in deciding whether to give affirmative coverage is competitive pressure from other title insurers. 144 98. There is no evidence that in those rare instances when uncovered risks are insured over, this somehow involves a pooling of the risk experience of a group of insurers, or even represents an actuarial assessment of risk by an individual insurer. 145 Claim Payments 99. That all risks assumed by respondent title insurers-whether from a negligent search and examination, or from hidden defects, or from insuring over uncovered defects-are minuscule is shown by the history of claim payments. Only about five to ten percent of a title insurer s gross premium income is used to pay actual losses while over 90 percent is absorbed by operating expenses, mainly the cost of 146 In contrast, the average loss ratio searching and examining title. for homeowner (41) multiple peril insurance is approximately 65 141 Malaker 777, Frmhold 946-47, 949- , 1010, Bonita 1302- , ex 145B, ex 14GB, ex 160H, ex 161Z. 43, Z- 136 to Z- 138, Z- 153 to Z- 154, ex 179L, ex 182M, ex 202L, ex 218, ex 220, ex 2228, Z-ll to Z- , Z- , Z- , Z-217 to Z-218, ex 223B, ex 230A, ex 237Z-8 to Z-9, ex 322Z-1l7, ex 342N- , Q; RX 387, RX 410Z to Z- , RX 413M, T, RX 444Y. TheexceptioDs to this genera role relate to a limited se of cireumsces tightly contrlled by the insurance companies such as mattrs with an estblished expiration date, claims that ca be satisfied by the payment of a Bum of money, legally unenforcable restctive covenants, and minor discrepancies in set-back lines. ex 161Z- I37 to 138 ex 222Z-65, Z-214 to Z-219, ex 237Z-8 to Z- 142 Frmhold 1011.

14S Bowling 3266- 3278-79, 3281, 3295-96 CX 160R, ex 182M, ex 218, ex 237Z-8 to Z- , CX 322Z- 117; RX 464E-F, RX 482B- 144 Waiwoo 1058, 1080, 1086, 1125, Anstng 1159- , Bonita 1294- , Bowling 3277-79; ex 189Z- 17, ex 237Z-6 to Z-7; RX 482B- , RX 483e, RX 484-484B. 145 Se Roltom 1505-06 and Finding 114.

14.6 CX aOZ-67 to Z- , ex 91Z-84 to Z-85, ex 116D, ex 156Z-3 to Z- , ex 166Y- , ex 262R; RX 92Y RX 102Z-95 to Z- , RX 364C. Se also Anto 277- , Ar8strong 1181 , Bethel 1952-53. 374 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

percent, and the ratio for other lines of casualty insurance is stil higher, l47 100, The one-time premium, which is based on the purchase price of the property or the amount of the mortgage, further distinguishes title from true risk insurance. 148 Thus in contrast to title insurance casualty insurance involves variable annual premiums that assumes a yearly review followed by a decision as to whether or not coverage is to be renewed or amended depending on risk assessment. 14' 101. The difference between title insurance and casualty insurance is also shown by the restrictions in most states preventing title insurers from engaging in any form of casualty insurance for the very 150reason that these states did not want title insurers to assume risks. G. TITLE INSURANCE RATES 102, Respondents and state insurance departments recognize that there is a sharp distinction between the two things that title insurance companies do-that is, first, provide a servce by informing buyers and lenders of the existence of title defects, and second, indemnify buyers and lenders for the small volume of claims that are paid either because of insuring over risks, or hidden risks, or errors in the search, l51 103. In the context of rate making, this two-faceted nature of their operations is reflected in the fact that respondents' rate manuals oftn separate out a small charge for indemnification (what is euphemistically called the "risk" rate for whatever risks are (42) assumed) from a large charge for conducting a search and examination. 152 The risk" rate is not challenged in this proceeding (except for Ohio, see Findings 158-61), which essentially involves those few states which have required title insurers to fie risk as well as search and examination rates, and have allowed both rates to be set by rating bureaus.

104. Prior to October 1983, Connecticut had both an "Approved Attorney Plan" as well as the much larger "All-Inclusive Rate Plan that included fees for search and examination performed by agents or 147 Bethel 1994-95; ex 91Z- , ex 116D.

148 ex 156Z- , ex 260H. The one-time premium is the only charge for title insurance so long a. the named insure retains an interest in the property. ex 182E. 149 ex 253Z- , ex 260B.

150 ex 260D; RX Ia2Z-99.

m Wirt 1808-09, Haines 3224- , Fraundorf 3442-43; JX, p. 89; ex 56B- , ex 91Z- , Z-38 to Zex 130G, ex 131B, ex I33F, ex 156Z-3 to Z- , ex 208A- , ex 261" , ex 293D; RX 167C- 152 Everbach 1377; ex 110B, E, ex 130A to Z- , ex 132F, ex I55C, ex 222Z- , ex 237Y to Z- , ex 273C, ex 311G; RX BE.

, .... .... . .......- u'''''''''''''-"" '-'-...n..u.. , LI.. L". u.u 344 Initial Decision employees. 153 The Approved Attorney Rate (in the special jargon of the title insurance industry) only covered the risk portion of the premium, the assumption being that approved attorneys would charge an additional and unregulated fee for search and examination. 15' Since October 1983, however, Connecticut has only had a risk rate. The change was intended to reflect the prevalence of the approved attorney system in Connecticut and the redundancy of an all-inclusive rate. 155 105. Pennsylvania, too, has an "approved attorney" rate representing the risk portion only of the total premium (the assumption again being that the approved attorney wil bil the consumer separately for an unregulated search and examination fee) as well as an inclusive rate, embracing risk as well as charges for search and examination. The inclusive rate applies when the servces are performed by IS. 143)insurance company employees or agents. 106. Unti September 1983, New Jersey had separate rate schedules for risk and search and examination. 157 The risk rate, as in Connecticut and Pennsylvania, was designated as the "Approved " 158Attorney Rates" and covered "title insurance underwriting only. Since September, 1983, New Jersey has only published an inclusive rate that simply combines the risk rate with the search and examination charge. 159 107. Montana has an inclusive rate, combining a discrete small charge for risk (designated as the "title insurance premium" and constituting 20% of the rate) and a much larger charge (representing 80% of the total fied rate) for search and examination.'.o 108. Idaho has an inclusive rate which combines a risk charge and a fee for performing the search and examination servce. The rates are described as "the total title insurance fees charged the applicant including both the risk portion and the servce or work portion.... 109. Arizona has an inclusive rate. It combines the "portion of the 153 CX 25B, CX 29B-C, CX 30Z-84 to Z-86, CX 35A-D; RX lola, RX I02" 154 DiSanto 2753-55. While putatively unregulate, in practice approved attorneys' charges for search and examination reflect the difference between the inclusive rate and the Approved Attorney Rate. DiSanto 2754. 155 DiSanto 2749-50; CX 32A-X; RX 103A- 156 CX 130A-CX 136D, ex 145E; RX 35J.

157 CX 276A-CX 283Z-15; RX 3 to RX 3Z-54.

158 RX 3E 159 CX 284A-CX 285W; RX 30-RX 30C.

160 ex 41K.

161 CX 56Q.

376 FEDERA TRE COMMISSION DECISIONS Initial Decision 112 F.

fee...for the assumption by the title insurer of risk" as well as search and examination fees. 162 110. Ohio has a "risk" rate, which applies only to risk assumption or underwting expense, and does "not include costs involved in the " 163production of title evidence.

111. Prior to 1984, Wisconsin had a so-called "original" rate, which was simply the addition of two discrete components-a small "risk fee " and a much larger search (44) and examination charge. 16. While the "original" rate has been published since 1984 without the two components, it clearly represents the simple addition of a risk fee and a search and examination charge. 165 Title Insurance Rating Bureaus 112. Title insurance rating bureaus are private organizations organized by respondents and other title insurers doing business in a particular state for the purpose of establishing uniform rates for their members. 166 Uniform rates are established by rating bureaus notwithstanding differences in effciencies among the members, especially differences in the cost of conducting search and examination. 167 113. Where a title insurance rating bureau establishes either an inclusive rate or a separate rate schedule for search and examination the rate making function of the bureau is usually supportd by profitability studies furnished by retained experts. These studies dwell mainly on the cost of carrng out the search and examination including the fixed costs of title plants, which must be maintained irrespective of fluctuations in the real estate market. 16B 114. There is no evidence that title insurance rates are set collectively through rating bureaus as a way of obtaining intraindustry cooperation in the pooling of risk information. As a matter of fact, there is no evidence that any title insurer, whether (45) operating through a rating bureau or otherwse, sets rates by referrng to 162 JX, p. 89; ex 9A to Z-52.

163 RX 290. Se also RX 289 for statement by the Ohio Deparment of Insurance that Ohio rate do not include a "work char.

16t ex 114K ex 124J 166 Wirt 1808- 9; ex 127J.

166 DiSanto 2727; ex 171 , p. 58, ex 222Z-76. 167 RX 325.

16B Plotkin 2457-66; ex 30A to 30Z-98. ex 56A to 56Z- ex 208A-C; RX 39 to 39Z- , RX 91 to 91Z- RX 102 to RX l02Z-126, RX 167-RX 167X, RX 364 to RX 364Z-7. Fluctuations in the real estate market responsible for the cyclical nature oftitle insurer earnings.Bethel 1969-70; ex 91Z-92 to Z-93; RX 3U- , RX lO2J- Huun. J.I. LL'....-_-.-- 344 Initial Decision 169actuarially determined loss experience. As the New Jersey Title Insurance Rating Bureau put it:

.it is not possible to set up an actuarial standard for risk assumption based on loss experience. Risks in the title insurance industry are of too low an incidence and random a character to justify this typ of rate determination. 170 115. There is also no evidence that title insurance rating bureaus are necessary in order for respondents to operate as profitable and reliable insurers. 17 Nor is there any evidence that rating bureaus are necessary in order for the states to regulate title insurers effectively.

H. STATE AUTHORIZATION AND AGTIVE SUPERVISION OF TITLE INSURANCE RATING BUREAUS Authorization 116. Complaint counsel concede that the joint rate making activity by rating bureaus in six of the eight states remaining in this proceeding was authorized by state law. The issue of state authorization only arises with respect to rating bureau activity in Pennsylvania and New Jersey, and pertains only to fees charged by attorney-agents (see Findings 117-123).

Pennsylvania 117. Complaint counsel' s case with respect to the authorization issue in Pennsylvania rests solely on Section 701(5) of the Pennsylvania Insurance Company Law, which broadly provides that fees for title insurance are subject to regulation but contains the following proviso: (46) Fee" for title insurance means and includes the premium, the examination and settlement or closing fees, and every other charge, whether denominated premium or otherwse, made by a title insurance company, agent of a title insurance company or an approved attorney of a title insurance company, or any of them, to an insured or to an applicant for insurance, for any policy or contract for the issuance of, or an application for any class or kind of, title insurance; but the, tenn "fee" shall not include any charges paid by an insured or by an applicant for insurance, for any policy or contract, to an attorney at law acting as an independent contractor and retained by 169 Se Wirt 1790-91; ex 568- , ex 82E, CX 91G, CX 156Z-3 to Z-4; RX 39B, RX 102Z- , RX 167C- RX 241-241A.

J70 RX 3Z.

17 Se Everbach 1410- , Wilkie 2130- , Bowling 3357-58. 172 Se Wirt 1769.

378 FEDERAL TRAE COMMISSION DECISIONS Initial Decision 112 F.

such attorney at law, whether or not he is acting as an agent of or an approved attorney of a title insurance company, or any charges made for special services not constituting title insurance, even though performed in connection with a title insurance policy or contract. 173 118. There is no dispute that when a Pennsylvania attorney-agent in connection with the issuance of a title policy, receives a premium from a client, a part of that premium is retained by the attorney-agent as his fee for conducting the search and examination. 174 The record also shows that the total premium including the portion retained by the attorney-agent was fixed by the Pennsylvania Title Insurance Rating Bureau when it set an inclusive rate. ' Complaint counsel argue, however, that since Section 701 excludes "any charges paid by an insured...to an attorney at law acting as an independent contractor and retained by such attorney at law" the Pennsylvania Rating Bureau had no statutory authority to set an inclusive rate embracing the search and examination charges of an attorney-agent. 119. The Pennsylvania Insurance Department has filed a brief (Amicus Curiae Brief of The Commonwealth of Pennsylvania Insurance Department, March 3, 1986) in which it argues for an interpretation of Section 701 that would make inclusive insurance (47) rates applicable to attorney-agents. In support of this position Pennsylvania essentially makes three points. First, the interpretation urged by complaint counsel is contrary to the actual practice of the !76 Second, complaint counsel'Pennsylvania Insurance Department. interpretation would leave an unintended void in state regulation based upon the totally irrelevant factor of professional affliation, and thus is contrary to the Pennsylvania practice of narrowly interpreting legislation that might create such a void. 17 And finally, the intention of the state legislature was not to give a blanket exception but only to exclude from Section 701 those aspects of an attorney-agent' s law practice that are unrelated to title insurance such as the issuance of an attorney s opinion (see Finding 46 for evidence that an attorney may function as an independent attorney issuing attorney s opinions as well as an attorney-agent or approved attorney) under the rationale , p. 15.

11 ex 138E, ex HOC, ex 143A- , ex 145A- , ex 146A- RX 38F.

176 Amicus Brief, p. 13.

17 Amicus Brief, pp. 15-16.

g., .. . TICUK TITLr ll""'UI\n",j: u..._.

344 Initial Decision that attorneys qua attorneys, may only be regulated by the judicial branch of the Pennsylvania government.

120. Complaint counsel concede that Pennsylvania actively supervises all aspects of title insurance, and the record shows that the state has a long history of aggressive regulation of title insurance.1 Moreover, no evidence was presented that anyone in Pennsylvaniainsurance regulators, consumers, bar, the real estate industry-have endorsed complaint counsel's reading of the statute. 121. Effective February 28, 1986, the Pennsylvania Title Insurance Rating Bureau surrendered its license to the insurance department. 180 (48) New Jersey 122. Complaint counsel argue that in New Jersey, as in Pennsylvan- , there is no statutory authorization for the fixing by the New Jersey Land Title Insurance Rating Bureau of an inclusive rate applicable to searches and examinations carried out by attorney-agents. The relevant statute N.J. Stat. Ann. 17:46B- l(f), which constitutes complaint counsel' s entire case on this point, reads in pertinent part- Fee" for title insurance means and includes the premium for the assumption of the insurance risk, charges for abstracting or searching, examination, determining insurability, and every other charge, whether denominated premium or otherwse made by any of them, but the tenn "fee" shall not include any charges paid to and retained by an attorney at law whether or not he is acting as an agent of 'a title insurance company or an approved attorney, 1S1 123. As in Pennsylvania, the history of title insurance rate regulation in New Jersey suggests that the state intended that 182 and while the Newinclusive rates should apply to attorney-agents Jersey statute is as ambiguous as Pennsylvania, complaint counsel offered no testimony, documentary evidence, or legislative history supportive of its interpretation. The only light shed on the statute in 17 Amicus Brief, pp. 10-13.

17 See, e. RX 35 to RX 35Z, RX 37 to RX 37" , RX 43. 180 Amicus Brief, p. 1, n. l.

181 , p. 3.

1HZ During the course ofthe insurance department's review of rating hureau submissions, no question was ever raised about inclusion of attorney-agents in the inclusive fee schedule. Claytn 1833-35, 1845- , 1852 1860. Morever, despite New Jersey's long history of vigorous opposition to title insurer ra increass and practices frm a coalition of real estate attorneys, bankers, builders, and notwithstanding the presence in New Jersey of an insurance ombudsman or public advocate, no one has ever suggeste that atWmey-agent. should be excluded from rate regulation by reason of the interpretation of the statute advanced by complaint counsel. See Clayton 1850" , 1860-63; ex 276A- 380 FEDERA TRE COMMISSION DECISIONS Initial Decision 112 F.

this record is that the proviso probably represented a legislative concession to the organized bar s insistence that the state insurance department not infringe on any non-insurance aspect of an attorney 18B (49)practice.

Active State Supervsion 124. New Jersey and Pennsylvania aside, 184 the state action issue in the six states remaining in this proceeding-Connecticut, Wisconsin Arizona, Ohio, Idaho, and Montana-turns on whether the joint rate making with respect to title insurance in general, and search and examination in particular, is actively supervised by these states. This determination, which must be made on a state-by-state basis, requires an examination of each state' s basic regulatory scheme for title insurance, and how that regulatory scheme responded to readily identifiable areas of concern in the rate making process (see Findings 125-179). 185 Connecticut 125. The Connecticut title insurance rating bureau (the Connecticut Board of Title Underwriters, hereinaftr the "Connecticut Rating Bureau ) was authorized to (50) establish joint rates for its members aftr receiving a license from the state's insurance commissioner in 1965. 186 126. The Connecticut Rating Bureau was subject to a wide array of latent powers possessed by the insurance commissioner including the authority to conduct audits, revoke the bureau s license, hold hearings 183 Se CJaytn 1832- , 1837-42.

184 On the question of state supervision in New Jersey and Pennsylvania, complaint counsel have entered into the following stipulation:

For purpses of this litigation, complaint counsel will not contest the is,me of the level of state supervsion under the state action doctrine in New Jersey and Pennsylvania. Complaint counsel has not conducted a detailed factual analysis of the level of state supervsion in these states but, solely for purpses of expeiting this litigation, ag with respondents to stipulate that there has ben acive state supervsion in New Jersey and Pennsylvania suffcient to satisfy the second prong of the state action doctrine as set forth inCaliforia &tail Liq Deales Ass n v. Mid Aluminum 445 U. S. 97, 102 (1980). RX 43- RX 43 A (Stipulation date 11-25-85).

185 The fact that state regulators participate in the proe€ings of the National Assoiation of Insurance Commissions (NAIC), including the drating of a Model Title Insurance Act, tens us nothing about how actively these state regulators acuaUy supervse in their own states. In short, while entmet of the NAIC Model Title Insurance Act may he indicative of a stte's det.nnination to supervse certn insurer praices (se note 269 infra), there is no convincing evidence that NAIC proings are a surrgate for supervsion nor is there any prof that NAlC mandate sttistical report are use or ar usful for supervsing insurers. See, e. Wilkie 2123- , DiSanto 2795- , Bowling 3358, Fraundorf 3445. IS6 DiSanto 2727-28; JX, pp. 142-45; RX 102C. TICOR TITLE INSURANCE COMPANY, ET AL.

344 Initial Decision respecting rates, and rescind previously filed rates. '87 In practice however, the insurance department neither audited the bureau nor di, it hold any hearings respecting a bureau rate filing. 188 127. Since 1982 Connecticut has used a "fie and use" approach under which insurers, including insurers operating through rating bureaus, must fie rates and wait 30 days before using them. If not disapproved by the insurance commissioner during the 30 days, the rates are "deemed" approved under a "deemer" provision. Prior to 1982, Connecticut allowed rates to be used as soon as they were filed, 18' 128. The basic policy of Connecticut is that there should be minimum state involvement in regulation of title insurance rates, the assumption being that rates should be set by the competitive market.

129, Notwithstanding its policy of encouraging competition, Connecticut authorized joint title insurance rate making by the Connecticut Rating Bureau on the further assumption that the bureau s noncompetitive rate making process would be (51) scrutinized under the state' s general statutory standard of review that the rates should not be excessive, inadequate, or unfairly discriminatory. 130. The Connecticut Rating Bureau filed only two major rate increases with the Connecticut Insurance Department-in 1966 and on December 3, 1981. '92 With the passage of time, the facts relating '93 but it is apparent that the mainto the 1966 filing are elusive concern of the insurance department centered on whether the 1966 rate should be for "risk" only or should also include search and examination. On April 3, 1966, the department wrote to the bureau- We feel that the filing should include insurance rates only and not the fees for the IS7 JX, pp. 145-58.

JliB Ferr 2341, DiSanto 2777- , 2793. Connecticut law does not reuire that insurance rate fiings be subjec to public notice, comment, and hearings, or that a wrttn decision, appealable to the stte court, be issued with respe to each rate filing. State insurance regulators ar opposed to any such strict proedural reuirements on the grounds of cost, and the inevitable dejay that such proedures would entail. DiSanto 2769- , Bell 2841-42.

189 DiSanto 2813- 18; JXA, p. 156.

19\ JXA, pp. 159.60.

191 DiSanto 2818; JX, pp. 141, 156. See also ex 293C. i92 Amendments and endorsments, including rate increas and rate reuctions, were filed throughout the period 1966 to 1983. ex 26A-CX 28C, ex 33A-CX 34G; RX 148, RX 152-RX 152A, RX 153-RX 15M, RX 154-RX 1548, RX 155F, RX 160-RX 164E. Apparently some were carefully reviewed while others were approved with minima! review; there was no showing, however, in the reord that even this minima! review was inadequate considering the subject matter of these minor ancilary filings. S Ferraro 2324-25, DiSanto 2757-69, 2772, 2779- , 2786-87, Bell 2835- , 2844-45. 193 Se DiSanto 2729; ex 25A-H; RX 104-RX Inc. FEDERA TRADE t;U1Vlcd.:.:1VH Initial Decision 112 F.

st of examination of title. We need justification for such rates as well as the eakdown of the premium dollar, How will statistics be kept for this line of surance? wm reserves be at least equal to those required under the New York law 'hat states have approved similar filings and what rates became effective?194 ,ftr an exchange of correspondence on the point, the insurance 195 lepartment approved the bureau s rate, effective August 15, 1966 litho ugh there is no evidence that the department's request for justification relating to this rate was ever answered satisfactorily. 196 As approved, the 1966 schedule contained both a risk rate (i. the socalled (52) "Approved Attorney Plan ) and an all-inclusive rate setting the charges for risk as well as search and examination. 197 131. The only other major rate filing of the Connecticut Rating Bureau was made on December 3, 1981. It contained a 20 percent increase in both the approved attorney (risk) rate, as well as the inclusive rate covering risk charges and search and examination fees. 198 132. In support of the 1981 rate increase, the Connecticut Rating Bureau submitted a profitabilty analysis by Arthur D. Little showing that on the basis of statistical reports received from the members the proposed increase would produce a projected 2. 78 percent return on capital.!99 While Dr. Plotkin of Arthur D. Litte defended the use of profitability data in connection with the rate submissions of the Connecticut Rating Bureau and other bureaus, he acknowledged that these reports were not intended for the purpose of ascertaining the reasonableness or propriety of insurer expenses. 200 He further conceded that a test of state supervsion is whether the state examines the extent to which unreasonable insurer expenses are contributing to the burden borne by the insurance buying public. 201 In Plotkin s view one expense in particular-excessive commissions paid to agents (i. agents' retention " see Finding 44)-tends to drive up the cost of 194 RX 104.

195 RX 105-RX Il1C.

196 See Ferraro 2334-35; RX 105-RX lIIC.

197 CX 25A- 198 DiSanto 2736 , Bell 2826; CX 30A to Z-98. On September 30, 1983, the Connecticut Rating Bureau fied an amended manual eliminating the inclusive Fdte entirely, and in addition making minor adjustments in rates (see .Finding 104 and DiSanto 2748- , Bel! 2834; CX 32A-X). 199 ex :'DA to Z-98; RX 102 to Z- 126.

uo Plotkin 2650- , 2704-09.

201 Plotkin 2650- , 2683-84, 2698- , 2707-09. See also Ferraro 2355- 56. ...

TICOR TITLE INSURANCE COMPANY, ET AL. 38: 344 Initial Decision title insurance while dangerously shrinking insurance company profits. 202 (53) 133. In order to show that the December 1981 increase (and its accompanying justification) were carefully reviewed by the Connecticut Insurance Department, respondents called Waldo R. DiSanto Chief of the department's Property and Casualty Division. DiSanto testified that his discussions with the Connecticut Rating Bureau centered around the expense component in the rates, more specifically the, in my terms, the disproportionate allowance for commissions paid in connection with title insurance. 203 DiSanto further testified that in his view the agent' s commission component of title insurer expenses was "very high "204 that it was the main problem area in title insurance 205 and that it was driving the cost of title insurance Up. 206 But having identified this crucial aspect of rate making, DiSanto immediately conceded that he was powerless to do anything about it. He testified as follows: Q. Did you address with the people with whom you met at this time possible methods of trying to control what you perceived to be these excessive commissions? A. Yes, commissions, in my view, commissions in the title insurallce system have kind of become a sour point, if I can describe it that way, and it has been kind of a constant item for discussion when I meet with or when I had met with title insurance people, the rating organization member representatives. And I had discussed alternative ideas to reflect or to limit a more appropriate, in my view more appropriate, commission expense.

Q. Were you ever successful in trying to achieve this goal? A. I guess not because the commissions are stil about where they were. (54) Q. Is there any reason why you have not been able at this point to address this problem A, Yes. The function of the Insurance Department, the Insurance Commissioners Offce, in connection with the review of rates is to require that the components in the rate making structure submitted by either an insurance company or by a rating organization on behalf of companies is, in fact, valid and supportd and accurate. However, our statutes do not provide the authority of the Insurance Commissioner to establish the amount or a minimum or maximum expense. It is only that if in the filing the companies or bureaus say the commission or company expenses or taxes are percent A, Band C, that they must specifically support that and they must be 202 Plotkin 2684, 2706-09.

20 DiSanto 2737. See also DiSanto 2756; RX 114- 114A. 204 DiSanto 2738.

205 DiSanto 2797.

20fi DiSanto 2738.

384 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

accurate, but the Commission does not have the authority to say it must be limited to a certain amount.

Now, in the commission area the discussions and the alternative suggestions, in my view, would have required statutory changes, which is not within the function of the Insurance Department or my division. We can suggest, well, that is all we could do. So that was one of the alternatives of me doing it from that standpoint. In balance, the commissions in those days are pretty much stil in effect. So I guess we have not been successful in changing them. Q. And just to follow up on that, is this a matter that you have made an effort to address in the course of your regulatory scrutiny of the title insurance industry? A. Yes, sir. 207 And at Tr. 2809, DiSanto added- JUDGE NEED ELM: Tell me whether this is a fair conclusion or not. You have recognized the importance in rate making of the commission paid by the insurer to the agent, correct? THE WITNESS: Yes.

JUDGE NEED ELM: But Connecticut in no way regulates the commission arrangement between the insurer and the agent? (55) THE WITNESS: That is corrct. It is my understanding, with the exception of a few states that have different arrangements, that this commission is not dissimilar from that paid in other states.

In fact, I believe in some states if may be higher. 208 134. DiSanto approved the December 1981 filing on January 15, 1982. 209 135. By the beginning of 1985, all respondents were no longer active in the Connecticut Rating Bureau. 210 Wisconsin 136. The Wisconsin title insurance rating bureau (The Wisconsin Title Insurance Rate Servce Organization, hereinafter "Wisconsin Rating Bureau ), was authorized under the state's insurance law to establish a joint rate schedule for its members after receiving a license from the Commissioner of Insurance in 1969. 211 137. The Wisconsin Rating Bureau was subject to a wide array of latent powers possessed by the insurance commissioner, but there is little evidence that these powers were used to influence bureau rate making. To ilustrate, while the insurance commissioner was required 207 DiSanto 2738.41.

208 DiSanto 2809. See also DiSanto 2793 , 2802.03; ex 1562. 209 RX 113.

210 Ferraro 2301 , DiSanto 2727.28.

211 Donohoe 1614; JX, pp. 243 , 253, 257.59; ex 107; RX 293.RX 295. TICOR TITLE INSURANCE COMPANY, ET AL. 385 344 Initial Decision to examine the Wisconsin Rating Bureau at regular intervals, no examination was ever made. Similarly, while the Wisconsin insurance statute gives the commissioner the authority to reject rates established by the bureau through a process of hearings, no hearing has ever been held in Wisconsin on any insurance rate filing, and no rate 212 suspension order has ever been issued. (56) 138. Rate filings by the Wisconsin Rating Bureau were made under a "use and fie" system. This system allows rates to become effective on a date determined by the insurers so long as the rates and any supporting data were fied with the insurance commissioner and made public within 30 days aftr the effective date. In actual practice however, the members of the Wisconsin Rating Bureau filed their rate manuals in advance of the effective date, and did not implement major new rate changes until aftr they were formally stamped as approved by the commissioner s offce. 213 139. The "use and file" approach of Wisconsin reflects a state policy of not interfering with private rate setting on the assumption that market competition would largely determine rates. 214 140. By authorizing rating bureaus, however, Wisconsin further assumes that since there has been a departure from its basic policy of relying on competition amongst insurers, the rate making process wil be closely reviewed. 215 141. The standard for review of title insurance rates in Wisconsin is that rates should not be excessive, inadequate, or unfairly discriminatory. 216 (57) 142. The Wisconsin Rating Bureau made major rate filings in 1971 1981 , and 1982. 217 In response to the 1971 filing, the Offce of the 212 Donohoe 1652- , 1666; Wirt 1779, 1784-85; JX, pp. 254, 275- , 279- , 296-97. Hearings ar only reuire if a . rate is disapproved. JX, p. 254. The burden of prof in such a hearng is on the insurance commissioner, and considering the limited resources of the insurance deparment, it is doubtful that he could prevail. According to an offcial of the stte insurance deparment "(t)he statute was set up, the stafers in the offce believe, this way to keep the commissioner and the department from interfering with the rate seting mechanism except in very unusual situations. " Wirt 1786. There is no requirement under Wisconsin law that each insurance rate filing be subject to public notice, comment, and hearng, or that a writtn decision appealable to the stte court, be issued with respet to each rate filing. 21S Donohoe 1621- , 1652, Wirtz 1749-50; JXA, p. 251; RX 301. 214 Donohoe 1666 , Wirt 1785-86, 1805-06. 216 Wirt 1806-08. Se also ex 293e and JX, p. 243 (i.e., it is Wisconsin policy "to regulate such coopcmtion in order to prevent practices that tend to bring about monopoly or to Icssen or destroy competition , p. 246.

217 In addition, throughout the period 1971-1984 , amendments, fonns, revisions, compilations, and endorsments were filed by the Wisconsin Rating Bureau. CX Ilia to ex 114Z- , ex I20A-GX 12ID, ex 125A-CX 126E; RX 312-RX 315, RX 342-RX 3448, RX 356-RX 356A, RX 359-RX 359B, RX 363-RX 363C RX 372, RX 373-RX 3730, RX 380-RX 380C, RX 384. The rate adjustments accompanying these filings were neither supportd by justifications nor for thc most par were they closely reviewed; in fact, the insumnce (fnntnntp ..nnt' Initial Decision 112 F.

Commissioner raised some questions about the bureau s reasons for limiting search and examination charges to the southeastern counties of the state only. The issue was eventually resolved by the publication of state-wide search and examination charges. The 1971 rates, which represented historical rates charged before the formation of the bureau, were approved although supporting justification was not 218provided until 1978.

143. Between the 1971 and the 1981 filing (and continuing to 1984), the Wisconsin Rating Bureau retained Arthur D. Little to draw up a statistical reporting system and income and expense plans to be used in justification of rates. The use of these plans is contemplated by the Wisconsin insurance statute which requires the Commissioner to promulgate reasonable rules for reporting loss and expense experience and authorizes the use of a rating bureau to assist the Commissioner in compiling these data. 219 The (58) Arthur D. Litte materials however, were never intended to be used for determining the reasonableness or propriety of the insurers' reported expenses. 220 144. The 1981 filing represented a substantial increase (11 percent) in title insurance rates including the rate for search and examination. While the filing and supporting Arthur D. Little data were checked for accuracy before the rate was allowed to go into effect (i. not disapproved), the Offce of the Commissioner of Insurance made no inquiry into insurer expenses, notwithstanding recognition by the state offce that title rates cannot be effectively regulated without such a scrutiny.22 A key official of the state's Office of the Commissioner of Insurance testified as follows: Q. Now, the department didn t have any idea what an effcient company s expenses would be for search and examination servces7 A. No.

Q. But it is your opinion that you would really have to study the search and department believed that the rating' bureau may have pulled the rates " out of the air." Wirtz 1793. See also Donohoe 1661 , Wirtz 1759-62, 1768- , 1771- , 1802- , 1807-08. 218 Donohoe 1618- , 1657- , Wirtz 1764, 1796 , 1810-11; ex llOA G; RX 348 to 348Z-81. The original grgraphical limitation reflected the fact that branches of the title insurers were concentrated in the Milwaukee area. In the remainder of the state, approved attorneys (whose search and examination charges were not regulated) were the predominant providers of search and examination services. See ex 262" 219 Donohoe 1627- , Grabski 1689- , Wirtz 1763- , Plotkin 2574-98, .JXA, p. 260; RX 334 to RX 334Z- 19, RX 348 to RX 348Z- , RX 351 , RX 353 to RX 353Z- , RX 355, RX 361 to RX 361Z- , RX 370 to RX 370Z-17, RX 375 to RX 375U , RX 383 to RX 383Z- , RX 496 to RX 496Z- , RX 498 to RX 498Z-32. Arthur D. Little also represented the Wisconsin Rating Bureau in successfully opposing statutory revisions reuiring speific justification data for each rate change and sctting maximum search and examination fees. Donohoe 1634- , 1653, Plotkin 2585-87; RX 320-RX 326A. 220 Plotkin 2650- , 2704-07. See also RX 336A. 221 Wirt 1750- , 1776-83.

, .

W:"-v.l VV1'-rJU'I I d AL.

344 Initial Decision examination expenses of the individual companies in order to effectively regulate the charges for search and examination expenses? 222 A. Yes.

The same offcial made the fonowing over-aU assessment of title insurance supervision in Wisconsin- Q. Now, for the most part, the people in the insurance department are not concerned with title insurance, is that right? (59) A. It was not a major line of insurance that we devoted a lot of staff discussion to. 223 145. Another rate increase (again including the charge for search and examination) was fied by the Wisconsin Rating Bureau in October 1982. The Office of the Commissioner gave this filing a cursory reading to the point that the supporting materials (statistical data and a pro forma analysis) were not even checked for accuracy before the rate increase was accepted. 224 146. The Wisconsin Rating Bureau was dissolved, effective December 31 , 1984. 225 Arizona 147. The Arizona title insurance rating bureau (Title Insurance Rating Bureau of Arizona, hereinaftr "Arizona Rating Bureau ) was authorized under the state s insurance statute to establish joint rates for its members aftr being licensed in 1968 by the director of the 226Department of Insurance.

148. The Arizona Rating Bureau was subject to a wide range of latent powers possessed by the state s insurance director including the power to audit the bureau s records and revoke its license, and broad authority to hold public hearings, promulgate rules, and issue orders discontinuing bureau practices found to be inconsistent with the insurance statute. 227 That actual use of these powers, however, is more hypothetical than real as shown by the fact that during the entire period 1968 to 1981 the insurance (60) department conducted no examination of the Arizona Rating Bureau although there is a 222 Wirt 1778-79. Se also Wirtz 1777- , 1826. See aso Plotkin 2577-78 for evidence that Wisconsin insurance offcials have acknowledged that excessive insurer expenses is a major concern. 223 Wirt 1782. See also Wirtz 1790-91.

224 Wirt 1775.

, 1816- , 1823- , Plotkin 2600-05; ex 123A to CX 124Z-25; RX 374-RX 378. 225 RX 385.

226 Wilkie 2107-08; JXA, pp. 87, 91- , 94, 101-10; ex 2-CX 5" ; RX 48-RX 50A. , pp. 93-110.

. . ..

388 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

statutory requirement for such an examination at least once every five years."28 149. The rate filings of the Arizona Rating Bureau were made pursuant to the "file and use" approach. Under this approach, the rating bureau filed rates and its members waited 15 days before using them. If no action was taken by the director during the 15 day waiting period, the rates were deemed approved under a "deemer" provision. Notwithstanding the "file and use" system, in actual practice the Arizona Rating Bureau s rate submissions were not put into effect until actually stamped "approved" by the director."2' 150. The general statutory standard for rate scrutiny in Arizona is that rates should not be inadequate, excessive, or unfairly discriminatory.""' In reviewing rates, the Department of Insurance is broadly directed to give due consideration to maintaining the stabilty of rate structures, assuring the financial solvency of title insurers during periods of economic depression, and attracting capital to the title insurance business."'! (61) 151. The Arizona insurance statute also mandates that rate filings should be accompanied by adequate justification, and the Director of the Insurance Department, with the assistance of the rating bureau, is required to promulgate rules relating to statistical plans for use by the rating bureau in reporting the expense experience of its members as justification for rate increases."'2 152. Against the background of the statutory scheme outlned in Findings 147-151, and putting aside minor rate amendments, adjustments, and endorsements filed throughout the period 1968 to 1980 233 228 Bethel 1992-93, Wilkie 2109; JX, p. 109; RX 93A. No public hearng was ever held in Arizona an joint raws filed by the Arzona Rating Bureau.

229 Wilkie 2108, Barbrich 2228- , 2265; JX, p. 92. If a rate filing was disapproved, a hearng had to be held. JXA, p. 93. A hearing could also be held at the reuest of a third pary who objec to a rate filing. In actual practice, however, no rate filing of the Arizona Rating Bureau was disapproved, and no hearngs on title insurance rates fied by the Arzona Rating Bureau was ever held. Wilkie 2128-29. Hearng were held on allegations that insurers or their agents had given ilegal inducements to realtors in order to obtain business. RX 45-RX 47H. There is no requirement under Arzona law that insurance rate filings mmrt be subjec to public notice, comment, and hearngs, or that a wrttn decision, appealable to the state court, be issued with respe to each rate fiing.

280 JXA, p. 91. In addition, the Arzona code elaborates on this broad statutory stndar by providing that due consideration should be given to rate stability, encouraging growth in assets of insurers during periods of high business activity, providing for financial insolvency in periods of depression, and the desirabilty of paying dividends to induce capital investment. JX, p. 91. JXA, p. 91.

232 JXA, pp. 92-94.

233 ex 10A.ex 18" . There is nothing in the reord indicating that justifications were submitted with these anciUar filings, and the reord is inconclusive as to the kind of review, if any, to which they were subject. See Wilkie 2118"20; Barrich 2230- , 2264-66. A 1968 rate fiing by the Arizona Rating Bureau, which remained the basic title insurance rates throughout the period 1968 to 1983, apparently represente the n.. n"' M"' before the bureau was formed, but these rates had not ben filed with ... _... VvuLrl\X , J.T AL. 38:

344 Initial Decision the Arizona Rating Bureau seemed to spend most of its time betweer 1977 and 1983 responding to a change in the insurance law that added settlement or escrow rates to the title insurance schedule. During this period, several rate consultants, including Arthur D. Little, put together financial reporting and statistical plans mainly intended to show that the bureau s collectively established escrow rates did not produce excess profits. 235 These efforts culminated in a September 18, 1980 submission from Arthur D. Little containing a detailed analysis of the economic performance of the title insurance industry from 1972 to 1979 , and designed to (62) show that title insurance and escrow rates were not excessive. 236 Following this submission, the Department of Insurance announced on November 3 1980, that an investigation of the Arizona Rating Bureau would be conducted along the following lines:

1) An examination of the rate-making procedures and methodology used by the (Arizona Rating Bureau) with respect to the development of title insurance and escrow rates for use in Arizona; 2) a determination as to whether the title insurance and escrow rates as fied by (Arizona Rating Bureau) are reasonable and not excessive, inadequate or unfairly discriminatory; 3) an analysis of the methodology used for measuring the profitabilty of title insurers ;tnd their agencies, including an analysis of the Arthur D. Little statistical plan which has been filed on behalf of (Arizona Rating Bureau);

4) an evaluation of the extent to which there is competition among title insurers doing business in Arizona; and 5) the identification of areas which the rate-making methodology, including any statistical plan, together with the level of competitive activity among insurers might be improved. 237 The Arizona Rating Bureau was also informed thatthe Department has not, as yet, approved the statistical plan prepared and filed behalf of (Arzona Rating Bureau) by Arthur D. Little. Hopefully, this examination the Deparment of Insurance prior to 1968. Bethel 1968, 1971 , Wilkie 2074- , 2107, 2112- , Barberich 2289; ex 8A to Z-12; RX 60A. While the 1968 rate filing brought an inquiry from the Department of Insurdnce as to how the "risk" component of the filed inclusive rate was derived (Wilkie 2080 , 2087-88; RX 69A), there is no convincing evdence that the rate was either justified by the bureau or reviewed by the state. Se Wilkie 2113- , Barbrich 2263- , 2289; RX 60A. Wilkie 2091- , 2121-23, Barberich 2243-44; RX 63-RX 63Z, RX 83-RX 83G. Z85 Wilkie 2092-99, 2121- , Plotkin2607- 16; ex 9A to Z-52; RX 63-RX 63Z, RX 67-RX 67E, RX 91 to RX 92Z- , RX 493 to RX 493Z- 17.

236 Plotkin 2617; RX 92 to Z-16- ZS1 RX 93-RX 93A.

190 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

Nill provide the Department with the necessary evaluation of this statistical plan so that the plan can be approved or modified as our needs require. 238 (63) 153. Before the Arizona investigation could be completed,"39 however, a federal civil complaint challenging the propriety of the joint fixing of escrow rates by the Arizona Rating Bureau was filed by the United States, followed shortly by a parents patriae federal suit brought by Arizona. 240 Aftr the entry of a final judgment in the Department of Justice s case on December 16 , 1981 , the Arizona Rating Bureau went out of business for all purposes (i. the fixing of title, search and examination, and escrow rates), and its corporate chartr was revoked on October 1 , 1983.

Ohio 154. The Ohio Title Insurance Rating Bureau (hereinafter "Ohio Rating Bureau ) was authorized to fie a joint rate manual for its members aftr being licensed by the Ohio Department of Insurance in 1972. 242 155. The practices of the Ohio Rating Bureau, including rate making, were subject to a wide array of latent powers possessed by the insurance superintendent including the right to review rates conduct audits, hold public hearings, suspend or revoke the bureau license, promulgate statistical plans, and issue orders directed at practices that were unfair, unreasonable, or inconsistent with the insurance statute. 243 (64) 156. The rate filings of the Ohio Rating Bureau were made pursuant to the "fie and use" approach-aftr a 15 day waiting period, which could be extended for an additional 15 days, the rate became effective unless it was disapproved by the Superintendent of Insurance. 244 238 RX 93A.RX 93B.

239 The Arizona Insurance Department investigation apparently did not get much beyond retaining an actuaral consulting firm, TiIingha.'\t, Nelson and Warren, to review the Arthur D. Little material. The TiUinghast fim agrd with Arthur D. Litte s conclusion that the rates were not excessive. Bethe! 1975, Barberich 2251 , 2270, 2281, 2289; UX 93-RX 93B, ItX 96 to RX 967.- 240 Wilkie 2102-06; RX 97" , RX 98C.

241 Wilkie 2106; RX 99.

242 Smith 2961- , JXA, pp. 219-20; RX 233. 243 JXA, pp. 218-25. That at least some of these powers are purely latent is shown by the fad that no audit was ever concluded by the Department of Insurance although the statute requires an audit at least once every five years. Smith 3033. There is no requirement under Ohio law that !nsurancc rate filings must be subject to public notice, comment, and hearings, or that a wrttn decision, appealable to the state court, be issued with each rate fiing.

244 JX, pp. 218- 19; Ratchford 3101-02. Rate filings arc only made public aftr the effective date. U"tf"hford 3087. While the Ohio sttute does not require explicit prior approval of rates 3935.04(D),(see Ohio nt;UR TITLE INSURANCE COMPANY, ET AL.

344 Initial Decision 157. The general statutory standard for rate review in Ohio is th, rates shall not be excessive, inadequate, or unfairly discriminatory. J considering whether this standard has been met, the insurance superintendent is directed to consider "(p Jast and prospective los experience " a "reasonable margin for underwriting profit all contingencies " dividends, past and prospective expenses, and " other relevant factors."2'.

158. Between 1972 and 1983, all rates filed by the Ohio Rating Bureau covered "risk" only. None of these filings purported to contain charges for search and examination servces or settlement servces. 2.. (65) 159. The Ohio Department of Insurance considered all filings of the Ohio Rating Bureau as covering risk only, and as specifically not including charges for search and examination and settlement services. 247 160. Respondents independently set and published charges for search and examination servces and settement servces. These charges were not submitted for review to the Ohio Department of Insurance. 248 Revise Coe, JX, p. 218), in practice the state apparently has acte under the assumption that prior approval is required. Compare Ising 3050 with Ising 3061. Se also Ratchford 3101-02. 245 JX, p. 217.

246 Smith 2966, 3036; ex 75F, ex 84F, ex lOlF, ex 238G. Major rate filingswere made in 1972, 1978 and 1981. Soon afr the 1972 filing, the Ohio Rating Bureau retained Dr. Irvng Plotkin of Arthur D. Litte to draw up sttistical and financial plans intended, essentially to show profit calculate on the basis of a return on total capita investe. Plotkin also did pro forma analyses of rate increass filed by the bureau. Plotkin testified that although he was compensate by the Ohio Rating Bureau for the work done on these rate mattrn, he was actually in an adversry position in dealing with the bureau since for all pratical purpses he was laing his direr.ion from a Deparment of Insurance which was hostile to the bureau. Plotkin 2508-10, 2511- 13. Plotkin s perception of an adversary relationship is not shard by his sponsors. A few months prior to the September 17, 1981 , Ohio fiing, an officer of respondent Lawyers Tite expressed the following thoughts about Arthur D. Litte s role in Ohio rate making: While Lawyers Title is certinly not the only company in Ohio, I wonder jf we would not find that many other companies would not fee! similarly about the suggest rate increases. Before asking Arthur D. Little to massage these suggeste revisions, I suggest that we try to determine if the suggestions would be palatable to the majority of (Ohio Rating Bureau) members. ex 335. See aso ex 330A in which Dr. Plotkin is describe by the Ohio Department of Insurance as an " advocate" of the Wisconsin Rating Bureau.

While the principal rate filings and supporting papers of the Ohio Rating Bureau, including the Arthur D. Little submissions, were reviewed by the insurance department (Smith 2963, 2986.90; ex 93A; RX 235- 235B, RX 239-RX 239A, RX 241-RX 2418, RX 249-RX 249B, RX 276, RX 277), the reord indicates that these rates were approved notwithstanding reservations within the departent about the adequacy of the justification, especially the use of the rate of return on total capital as a basis for rate making. Smith 3015; ex 330A- , ex 331. A minor endorsment fied in 1979 was rejected beause it lacked justfication (RX 259- 260) but other amendment. 'I and endorsments, which were filed during the period 1980 to 1983, apparently were approved with little or no accompanying justification. Smith 3030-31; ex 97A, ex 99A. 241 Ising 3060; RX 289. See also RX 290-RX 290B. 248 Malaker 825- , Sinkhorn 900, Smith 3036-37. 392 FEDERA TRAE COMMISSION DECISIONS Initial Deeision 112 F. 161. Complaint counsel' s entire case on the search and examination issue in Ohio rests on the supposition that beause rates were justified on the basis of rate of return on total capital they must of necessity be inflated to include such non-risk elements as the cost of conducting a search and examination and settlement.'" While the record (66) indicates that Ohio risk rates may be higher than risk rates elsewhere 250 there is no evidence to support the complaint allegation that respondents have used the rating buru to establish uniform charges for search and examination and settement servces. 162. Respondents are no lOJ1r members of the Ohio Rating Bureau. 251 Idaho 163. The establishment in 1974 of the Idaho title insurance rating bureau (Idaho Title Insurance 'Servce Organization, Inc., hereinafter Idaho Rating Bureau ) as a medium for joint rates, was esng authorized by the Idaho insurance statute which requires that a title insurance rating bureau obtain a license from the Director of the Department of Insurance, and that it have as its members at least six title insurers who together account for 50 percent of the title insurance premiums written in the stat. The license was granted aftr a hearing before the insurance department. 252 164. The Idaho Rating Bureau was subject to inspections by the Department of Insurance, and on thre occasions the department made an audit of the financial records OT ''' 10 bureau. 253 Other latent powers of the department included P authority to revoke the bureau s license, to issue orders condemning practices that were inconsistent (67) with the insurance statte, and to hold hearings on 249 See ex 91A to Z-154. Neither side 'In this litigaon pressed the argument that rates in rating bureau states are higher or lower than rates elsewhere, or tha sttes which acively supervse rating bureaus have lower or higher rates than states which have little supervon. As far as this reord will allow, comparisons cannot be made beause the cost of conducting the seh and examination diffe:- from state to stte. See Bethel 1914-15.

250 See ex 171. The reord also indicates that on some occasions an insurance company agent will not charge a large customer for search and examination. Waiwood 1109. 251 Smith 3033.

25Z JX, pp. 184-85; ex 46A-CX 49A.

253 Mitchel! 2907, Frundorf 3444-45; JX, pp. 168- , 175- , 180, 184- , 188; RX 194 to RX 195Z- 15, RX 201-RX 202, RX 204-RX 204A, RX 206-206N, RX 224-RX 2248. Afr its 1976 examination, the insurance department required the Idaho Rating Bureau to take steps to resolve an apparent confict of interest between the offcial duties of one of the bureau s offcers and the offcer s outside insurance business. RX 196-RX 200.

344 Initial Decision rates. Hearings, which are only required when a rate is disapproved were not held on any of the bureau s rate filings. '54 165. The joint rate filings of the Idaho Rating Bureau were made pursuant to Section 41-2706 of the Idaho Code which requires a 30 day waiting period and the affrmative prior approval of the Director of the Department of Insurance'55 (in contrast to the " fie and use" or use and file" approaches previously noted in Connecticut, Wisconsin Ohio, Arizona, and Montana).

166. Approval of rates, according to the Idaho insurance statute, is presumably based on a determination by the Director of the Department of Insurance that the proposed rates are not excessive inadequate, or unfairly discriminatory. The statute further provides that in reviewing title insurance rates the director should take into account the state's policy of maintaining stabilty in insurance rate structures, the necessity for protecting the financial solvency of title insurers and their agents in periods of economic depression by encouraging growth in periods of business expansion, and the desirability of inducing capital to be invested in the industry by assuring a reasonable margin of underwting profit. 256 167. The Idaho insurance statute further provides that all title insurance rate must be justified but insurers are given wide latitude as to the form of the justification- , experience, judgment, statistical data, the experience of other insurers or rating bureaus, and any other factors deemed relevant. 257 (68) 168. Under the statutory scheme outlined in Findings 163-167, the Idaho Rating Bureau filed its first major rate proposal on October 3 1975. Consideration of this filing was suspended as the Department of Insurance convened a public hearing to consider its Amended Regulation No. 25, which related to the use of inclusive rates and a variety of other matters-minimum rates, reissue rates, cancellation fees, the application of the basic rate schedule to special situations and the amount of insurance that could be purchased in a particular transaction, Following promulgation of Amended Regulation No. 25 the Idaho Rating Bureau refiled its manual and justification (including agent income tax returns) which the Department held open for public inspection for 30 days. During that time, the rate was referrd to the 264 Mitchell 2922, 2939; JX, pp. 173- , 180-81. There is no requirement under Idaho law that insurance rate filings must be subjec to public notice, comment, and hearngs, or that a wrttn decision, appealable to the stte court, be issued with each filing. 256 Fraundorf 3446; JX, pp. 180-82.

, p. 181.

, P. 181.

394 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

department' s outside title insurance consultant. The consultant provided his analysis, and on January 20 , 1976 the department approved the filing, effective March 1 , 1976. 258 169. The Idaho Rating Bureau filed its only other across-the-board rate increase with the Department of Insurance on December 15 1980. Aftr subpoenaing data from the members relating to insurer expenses, and on the recommendation of a retained consultant, the department approved the manual effective February 16 , 1981 contingent upon the receipt of stil additional material from two insurers explaining large increases in expenses in 1978,259 170, There is no convincing evidence that the Idaho Insurance Department has failed to consider any insurer expense which might impact on rates, including agent retention expense. 260 (69) 171. The Idaho Rating Bureau was dissolved, effective November , 1984,261 Montana 172. The Montana title insurance rating bureau (The Montana Title Insurance Service Organization, Inc., hereinafter "Montana Rating Bureau ) was authorized to establish joint rates for its members after being licensed by the Commissioner of Insurance on July 19, 1982,262 173. Under Montana insurance law, the activity of a rating bureau including joint rate making, is subject to the latent power of the insurance commissioner to inspect the bureau and if warranted revoke its license, hold hearings on rating bureau practices, and issue orders requiring compliance with the insurance statute. 263 174. The Montana Rating Bureau fied its jointly fixed rates under a fie and use" system whereby rates for title insurance become effective as soon as they are fied with the Department of Insurance.

175. The statutory standard for reviewing title insurance rates in 256 Mitchell 2883-91; ex 56A-58S; RX 167-RX 182Y. 259 Mitchell 2891-98, RX 183-RX 193. Miscellaneous rate adjustments, fonns, and endo!'menll were filed and approved throughout the period 1974- 1984 with apparently little or no review by the insurance deparment. Mitchell 2925- , B'raundorf 3434-42; ex 62A-71B; RX 207-RX 223. 260 Se€ Mitchell 2941- , l''raundorf 3447- 48, 3451-53. 261 Mitchell 2907-08; RX 203-RX 205.

262 Stattn 2855-57; JX, pp. 196- , 200-06; ex 3G-CX 40G. 263 JX, pp. 196- 200- , 210- 12. In practice, Montana held no hearings respecting title insurance rates filed by the Montana Rating Bureau. Stattn 2869. There is no requirement under Montana law that insurance rate filings must be subject to public notice, comment, and hearings, or that a written decision, appealable to the state court, he issued with respe to each rate filing. 264 Statton 2864; JXA, p. 200; ex 343B.

344 Initial Decision Montana is that the rates should not be excessive, inadequate or unfairly discriminatory."65 The (70) Montana insurance statute further provides that title insurance rate fiings must contain supporting data, and the insurance department is directed, with the aid of the rating bureau, to promulgate statistical plans that could be used to determine whether rates met the statutory standards. 266 176. Under the statutory scheme outlined in Findings 172-175, the Montana Rating Bureau made its only major rate filing, which included charges for search and examination, on February 22, 1983. Citing as justification for an increase, nationwide loss figures, a decline in operating profits, and reduced home sales, the bureau filing included a commitment to gather statistical data and undertake a profitabilty study for all underwriters and agents in Montana during the year 1984 in order to provide further support for the rate. 267 177. In connection with the February 22, 1983 filing, a representative of the Montana Rating Bureau met with offcials of the Montana insurance department, and apparently was told that while the increase would go into effect immediately, additional support would have to be provided in the form of financial data showing the profitability of agents and insurance companies for the past five years. There is no 268evidence that this material was ever provided. 178. As far as this record wil allow, Montana insurance offcials examined agent retention expenses both before and aftr the creation of the Montana Rating Bureau, and there is no evidence that the state' s method of dealing with the problem, (71) by giving the insurance commissioner specific authority to disapprove excessive fees, has been ineffectual. 269 266 JXA, pp. 199, 208 09. The broad statutory language is further refined by definitions of excessive unreasnably high for the insurance provided under circumstances where a reasonable degr of competition does not exist in the area with respe to the classification to which such rate is applicable ), and inadequate unreasnably low for the insurance provided such that the continued use of such rate either endangers the solvency of the insurer using the same or..the use of such fate by the insurer using same has, or if continued wil have, the effect of destroying-competition or creating a monopoly ). JXA, p. 199. 266 JX, pp. 200, 208-09.

267 Statton 2857-60; ex 41A-W. An October 14 1984 filing of the Montaa Rating Bureau was basically a clarification of the 1983 filing plus an increase in the charges for special endorsments. Statton 2860-63; ex 43A-ex 44E. By the time this filing went into effect on January 2, 1985, respondents had largely withdrawn from thc rating bureau. Statton 2856- 57, 2862-63; ex 45; RX 225-RX 226, RX 228-RX 230. 268 Statton 2862 , 2865-68; ex 41A- , ex 343A-D; RX 227. 269 Plotkin 2691 , 2714- 17. Section 33-25-302 of the Montana Title Insurance Ad of 1985 provides as follows:

25-302, Dipproval of agency contrcts. (1) The commissioner may disapprove a title agncy contract between a title agent and title insurer, upon appropriate notice to the parties to the contrac, if he finds that the contract, together with all amendment. and relate documents: (footnote cont' 396 FEDERA TRDE COMMISSION DECISIONS Initial Decision 112 F.

179. Between July 1 , 1983, and January 22 1985, respondents resigned from the Montana Rating Bureau. 27. 1. SETTMENT OR ESCROW SERVICES 180. Settlement servces, sometimes referrd to as closing or escrow servces, embrace the ministerial functions of carrng out the parties instructions respecting the execution, delivery, and recording of the deed and mortgage and payment of purchase money, The settlement clerk (also known as an "escrow offcer" or simply a "closer (72) may also be called on to pay taxes and fees and he may assist in the calculation or adjustment of prorated items such as utilty charges. 271 181. While the settlement date usually coincides with the date of issuance of the final title policy (the insurer having direted a "bring down" or "mini" record search and examination between the date of the binder and the date of the settlement in order to be certain that no new title defects have surfaced), there is no evidence that this minor extension of the search and examination process somehow transforms the ministerial functions of settlement or escrow into the business of insurance. 272 182. Respondents also claim that the settlement process functions to disclose title defects that do not appear on the public records. For example, the closing offcer in reviewing the papers may uncover additional encumbrances on the property, or the closing offcer also may require identification of the parties, a procedure which could disclose an attmpted forgery. In addition, the closing offcer reviews affdavits or other documents upon which the insurer will rely to remove what otherwse would be listed as "exceptions" on Schedule B (a) does not provide for adequate monitoring of the agent's financial trnsacions; or (b) provides for inadequate, unreasnable, or excessive amountsto be paid to or retained by the title agent. Factors the commi8lioner may consider in this determination include but ar not limited to the agent' duties under the contrac and the genera level of amounts paid to or retained by other title agents in the stte performing or assuming comparble duties. (2) No person may ac as a title agent under an agncy contract that has ben disapproved by the commissioner.

Section 33-25-302 is pattrned afr the NAIC Model Title Inurance Act. See RX 502Z-114. 210 RX 225-RX 230.

211 Frmhold 956- , Waiwoo 1047, Armstrong 1162-63; ex 155D, ex 196Z-60 to Z. , ex 238F- , ex 244Z-52 to Z- , ex 305; RX 4091. T, RX 421E, RX 427Z- 135, RX 431Z- 116 to Z- 118. Depending on local custms, settlement may be done by mail ("escrow closing ) or by the paries meeng and exchanging documents (' 'table closing ). Waiwo 1096, Everbach 1357-59. 272 Ippe! 657, Malaker 735, Arstrong 1155- , 1180, Ferr 1204, Bonita 1278- , 1284, Everbach 1330-31; ex 196Z- , ex 222Z-121; RX 389Z-221. 344 Initial Decision of the title insurance policy. 273 There is no evidence, however, that these functions need be carried out by title insurers. As far as this record will allow, all aspects of settlement or escrow are adequately performed by real estate brokers, attorneys, banks, independent escrow companies, and title insurers, all of whom (73) aggressively compete for settlement business on the grounds that each is more expert than the others in performing the clerical duties constituting 27'settement or escrow.

183. Settlement is treated by respondent insurers as a discrete 275servce which is ancilary to the title insurance business. 184. The costs which go into making up settement fees have nothing to do with risk assumption, risk spreading, or any other insurance consideration. These fees are based on such factors as whether the settlement is held in the closer s offce or not, how long the closing takes, travel time, highway tolls, the price of gasoline, and parking fees, 27.

185. Complaint counsel have pressed the issue of alleged ilegal fixing of settement servces through rating bureaus in five states- Arizona, Connecticut, Ohio, New Jersey and Pennsylvania (see Findings 186-189).

186. While the complaint alleges that the charges for settlement servces were fixed in Arizona (and there can be no question that beginning in 1977 the Arizona Rating Bureau set escrow rates collectively)"" this issue is not properly before the Federal Trade Commission. Settlement or escrow servces in Arizona were investigated by federal authorities, and until December 1991 are the subject comprehensive judgment (74) as well as the continuingof a jurisdiction of the United States District Court For The District of Arizona. 278 187. Complaint counsel argue that the "risk rate" which prevails in Ohio not only includes a hidden search and examination charge, but 213 Ippe1654, Sinkhorn 892- , Frmhold 956- , Waiwoo 1114- , Annstrong 1162- , Everbach 1356- , Bowling 3322- , 3349-51; ex 196Z-69 to Z- , ex 222Z-129 to Z- 130, ex 244Z-58; RX 399C- , RX 442H- 274 Se Sinkhom 899-900, Waiwoo 1113- , Arstrong 1176- , Everbach 1367 , 1372, 1401- , Bowling 3323, 3350-51, 3370-71; ex 196Z- , ex 31GB. 276 Everbach 1363; ex 87M, ex 23BC , ex 293D, ex SIO" ; RX 263., RX 327A. 276 ex 276P; RX 4N, RX BE, RX 9D, E, RX IOC, RX lid, RX 13A. 21 Wilkie 2095, 2122; RX 63-RX G3Z, RX 67-RX 67E. 278 Civ. 80-769 (Judgment of U.S. District Court For The District of Arzona, December 16, 1981). 398 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F. also an amount representing a jointly set settlement fee. There was a failure of proof on this issue. 279 188. Complaint counsel argue that both the approved attorney (risk) rates and inclusive rates filed in Connecticut were based in part on escrow expenses. While escrow expenses may have been used to justify rate increases 280 there is no evidence that respondents charged uniform settement or escrow fees in Connecticut. 189. Settement fees have been included in jointly established rates in Pennsylvania and New Jersey. 281 The only issue, however, in these states is the authorization question under Parker as it relates to attorney-agents. This is treated in Findings 117- 123. (75) J. MOOTNESS 190. Respondents participated in various state title insurance rating bureaus as follows:

Table 1: Participation By Respondents In Rating Bureaus Respondents (Including First American) Active Active Period Of State In Rating Bureau Ratin2" Bureaus Arizona Ticor, Chicago Title, SAFECO 1968 to 1981- First American, Lawyers Title Stewart Connecticut Ticor, Chicago Title, SAFECO 1965 to 1985 First American, Lawyers Title Stewart Idaho Ticor, Chicago Title, SAFECO 1974 to 1984 First American, Lawyers Title Montana Ticor, Chicago Title, SAFECO 1982 to 1984- First American, Lawyers Title Ohio Ticor, Chicago Title, SAFECO 1972 to 1984 First American, Lawyers Title Stewart 279 See Findings 158- 161.

280 ex 30Z- IS to Z-19.

281 Settement fees were taken out of New Jersey rating bureau schcdules as of August 2 1983. ex 284C. For inclusion of settement fees prior to 1983 see ex 277Z-3 to Z-5. Settlement fees were included on rates filed by the Pennsylvania Rating Bureau as of June 1 , 1984. ex 136A- TlCUH. TlTll UH.AN(Jr. CUMPANY , t.T AL. ,);1 344 Initial Decision Respondents (Including First American) Active Active Period Of State In Rating Bureau Rating Bureaus Wisconsin Ticor, Chicago Title, SAFECO 1969 to 1984 Lawyers Title, First American Stewart Pennsylvania Ticor, Chicago Title, SAFECO 1946 to 1983 First American, Lawyers Title Stewart New Jersey Ticor, Chicago Title, SAFECO 1975 to 1983 First American, Lawyers Title Stewart Sources: Arizona (CX 2, CX 6A, CX 7A, CX 8A; RX 99, RX 472), Connecticut (Ferraro 2300- , DiSanto 2727-28; CX 23, CX 24, CX 31A- , RX 102C), Idaho (Mitchell 2907-09; CX 46B, CX 49F, CX 50A, CX 51, CX 55; RX 166-166A, RX 203-203H, RX 205) Montana (Statton 2856-57; CX 40A- , CX 41H; RX 226, RX 228-230), Ohio (Smith 3033; CX 72A- , CX 74A-R), Wisconsin (CX 103-CX 109; RX 385), Pennsylvania (CX 128A-128B, CX 134A), New Jersey (CX 277D, CX 279E, CX 280E, 281D, CX 282E, CX 283E, CX 285D) (76) 191. While respondents are not presently members of any state rating bureaus which jointly .fix the rate for search and examination or settlement servces, there was no testimony from respondents offcers, or any other evidence that respondents have abandoned the notion of forming title insurance rating bureaus in the future. (77) II. DISCUSSION Respondents, who rank among the nation s largest title insurers have at one time or another been members of rating bureaus which establish uniform rates for title search and examination and settlement services. Participation by respondents in these rating bureaus raises two main questions: first, whether joint rate making respecting search and examination and settlement services relates to the business of insurance, and is therefore exempt from the antitrust laws under the McCarran-Ferguson Act ("McCarran Act"); and second, whether this joint rate making, even if it is not exempt under the McCarran Act, is nevertheless beyond the reach of the federal antitrust laws by reason of the "state action (Parker) doctrine since the rating bureau activities of respondents reflect a policy of the ), 400 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

relevant states to suspend competition and are actively supervised by these states.

The "Business of Insurance In 1945, Congress passed the McCarran Act for the purpose of removing the "business of insurance" from the reach of the federal antitrust laws to the extent that it is regulated by state law. 82 The act was passed in response to United States v. South-Easter Underters Association 322 U.S. 533 (1944) which held that insurance transactions were subject to federal regulation under the Commerce clause, and that the antitrust laws, in particular, were applicable to such transactions. In order to assure that South-Easter Undeters would not interfere with the traditional role of the states in regulating and taxing insurance, the McCarran Act provided that the business of (78) insurance (but not the business of insurance companies) would receive the following exemption: Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congrss shall not be construed to impose any barrer to the regulation or taxation of such business by the several States.

Sec. 2(a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several states which relate to the regulation or taxation of such business.

(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provd That aftr June 30 , 1948, the Act of July 2 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Claytn Act, and the Act of September 26, 1914 , known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law. Sec. 3(a) Until June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Claytn Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, and the Act of June) 9, 1936, known as the Robinson-Patman Anti-Discrimination Act, shall not apply to the business of insurance or to acts in the conduct thereof. (b) Nothing contained in this chapter shall render the said Sherman Act inapplicable 282 The complaint makes no charge that the subject rating bureaus were not "regulated" by slate law within the meaning of the McCaran Act. See RX 486C. While " regulate" in the McCarn Act sense has ben found when the general language of the regulatory statute provided for "enforcement through a scheme of administrative supervsion FTC v. Natiml Caslty Co. 357 U.S. 560, 564 (1958), or when the state specifically authorized the questioned activity,Ohw AFL-CIO v. Insraru Rating Board 451 F. 2d 1178 (6th Cir. ce. deied 409 U. S. 917 (1972), see the discussion herein understate Action Defene for the more stringent requirements of the Parke doctrine. ..&....& &.... _._ _._ . A_-'-- - 344 Initial Decision to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation. 283 As shown by the language cited above, whether the McCarran Act exemption applies to a particular practice engaged in by insurers (such as the joint setting of the rates for search and examination and settlement servces) turns on the meaning of the phrase the "business of insurance " an issue which the Supreme Court has recently addressed in two antitrust cases. (79) In Group Life Health Ins. Co. v. Royal Drg Co. 440 U.S. 205 (1979), an insurer (Blue Shield), as part of an effort to reduce the cost agree-of meeting prescription drugs claims, entered into "provider" ments with most of the pharmacies in San Antonio which stated that the prescriptions of policyholders would be filled at a flat rate of $2 plus a direct payment by the insurer to the pharmacies for the cost of acquiring the drugs. If an insured elected to use a nonparticipating pharmacy, the pharmacy s regular price had to be paid, but Blue Shield would then make reimbursement for 75 percent of the difference between the nonparticipating pharmacy s full price and the $2 flat fee. The discrepancy in benefits was obviously designed to discourage policyholders from patronizing nonparticipating pharmacies, with the result that a group of 18 pharmacies, who declined to participate in the $2 plan, challenged the arrangement under the Sherman Act as both a form of price fixing and as a group boycott of nonparticipating pharmacies.

The Court's analysis of the San Antonio plan begins with the caveat that all antitrust exceptions are to be narrwly read so as to cover no more than the objective targeted by Congress for the exemption. Consistent with this basic tenet of statutory construction, all that is exempt from the antitrust laws under the McCarran Act is the Id, at 211. business of insurance not the business of insurers. Whether a particular practice meets this restrictive standard is to be resolved by deciding whether the putatively exempt practice relates to the spreading of policyholders' risk or underwriting. The opinion further suggested that the questioned practice must be an integral part of the contractual relationship between the insurer and the insured, and that the practice must not involve entities outside of the insurance industry.

While Royal Drg does not indicate that all three elements must be 283 15 V. C. 1011- 1013.

Initial Decision 112 F.

present in each instance, it is plain from the opinion that no practice can be subsumed within the "business of insurance" rubric unless the first test is met-the activity must minimally relate to risk spreading amongst policyholders since, according to the Court, risk (80) spreading or "underwriting" is a "critical determinant in identifying insurance. Id. at 213. Having isolated risk spreading as the quiddity of insurance, the Court then held that the San Antonio prescription plan received no antitrust exemption because it only pertained to how risks are paid (i. how claims are satisfied) and not to risk spreading. On the way to this result, the Court sounded a cautionary note against ready acceptance of insurance company assessment of its own risk spreading function with the admonition that notwithstanding the trappings of insurance, insurance company activity does not constitute the "business of insurance" if upon close analysis it is found that there is no real risk to be spread. This was the clear meaning of the heavy reliance in Royal Drg on SEC v. Variable Annuity Life Ins. Co. 359 U.S. 65 (1959) in which self-styled "life insurance" companies offered variable annuity contracts that provided no fixed rate of return but only a pro rata participation in the investment portfolios of the companies. Although the contracts were regulated by state insurance commissions and involved some actuarial pred' ction of mortality, the Supreme Court there held that since by its terms the contract put all the risk on the annuitants and none on the so-called insurers " the contracts were not the "business of insurance " within the meaning of the McCarran Act.

In further support of its emphasis on risk spreading as the linchpin of the McCarran Act exemption, the Royal Drg Court stated that the primary purpose of the act was to allow for cooperation in insurance rate making because the actuarial uncertainty involved in spreading insurance risks dictated that a prudent insurer would only set its rates after considering the collective claims history of other similarly situated insurers rather than relying solely on its own experience. The Court found support for this presumed need for cooperation in the risk spreading process from the legislative history of the McCarran Act particularly in the draft bil and accompanying report of the National Association of Insurance Commissioners (NAIC) released on November 16, 1944 , in response to South-Eastern Underwriters. The NAIC Report, which (81) the Court describes as " particularly significant because the Act ultimately passed was based in large part on the NAIC bill." Royal Drg, 440 U.S. at 221 , was specifically directed at ), ), 344 Initial Decision the need for shared risk experience during the insurance rate making process. Contrasting the relative certainty of the mortality tables used in life insurance with the data that issuers of other forms of insurance (fires, casualty, surety, and inland marine) had to rely on, the NAIC report argued- The fire, casualty, surety, and inland marine aspects of the insurance business differ widely from life insurance. In life insurance the gross rates are based upon a number of factors, including mortality tables. Mortality tables are based upon the certainty that everyone must die; the time of death is the only uncertainty. In the other fields of insurance there is no guarantee that the contingency insured against wil occur at all. As a result rates in these other fields can be estimated with a lesser degree of certainty. Since rates in these other fields are based upon the law of averages it is manifest that the broader the statistical base the more accurate the average. The experience of individual companies is seldom a reliable guide for ratemaking purposes. The structure of the fields of insurance under discussion is based upon these facts of common knowledge. Furthermore, many States have by statutory enactment insisted that companies act in concert for the purpose of collecting statistical data for rate making in these other fields in order to utilize these established principles-principles, we may add, which arc wholly inconsistent with the unrestricted competition contemplated by Federal antitrust laws. 90 Congo Rec. A4405 (1944).

Contrary to the position advanced by respondents, however, neither Royal Drg nor the legislative history cited above suggests that all insurance company collective rate making is exempt. This is the clear holding of United States v. Title Ins. Rating Bureau of Ariz. TIRBA" 700 F.2d 1247 (9th Cir. cert. denied 104 S. Ct. 3509 (1984), which applied Royal Drg to deny an antitrust exemption when insurers used a rating bureau to set common rates for escrow servces. In TIRBA the fact that the case involved insurers who were engaged in joint rate making was the starting point, not the end of an inquiry which led ultimately to the conclusion that the escrow or settement services had nothing to do with risk spreading and therefore did not meet the "business of insurance" requirement. In reaching this result, the Ninth Circuit noted that there was (82) no real insurance function at stake since escrow servces, which essentially involves clerical transfers of papers and payment of consideration, are performed by separate departments in insurance companies or by separate but related companies, and are not only offered by insurance companies when no insurance is involved, but are offered by firms other than insurers.

It is also especially significant to this case that the TIRBA court 404 FEDERA TRE COMMISSION DECISIONS Initial Decision 112 F.

gave short shrift to the title insurers' argument that they should be allowed to fix jointly the rate for escrow servces because in the course of performing these servces the companies do some evaluation of title defects, and thus the escrow process may have the effect of reducing the risk to them as title insurers. In answer to this argument, the Ninth Circuit, again relying on Royal Drg, drew a distinction between risk reduction and risk spreading, and concluded that even if it can be shown that the settement process, which includes an updated search and examination of tite, helps to identify title defects and thereby reduces the risks of a title insurer, it is nevertheless not within the McCarran Act exemption because risk reduction is not synonymous with spreading risks more widely, and spreading risk, not risk reduction, is at the core of the cooperative risk allocation rationale of the McCarran Act. ' In other words TIRBA teaches that the McCarran Act should not be read broadly as exempting all rate making by insurers beause such an approach not only begs the question as to whether the collective rate making relates to the business of insurance, but it also ignores the clear admonition in Royal Dr that the risk spreading purpose of the exemption must be kept in the forefrnt in defining the "business of insurance . Certainly once this restricted purpose (83) of the McCarran exemption accepted, it necessarily follows (consistent with the basic tenet of narrowly applying antitrust exemptions) that the act cannot be interpreted so as to cover insurance company joint rate making that is unrelated to a pooling of risk experience.

Risk spreading and its central importance in defining the "business of insurance " was next taken up by the Supreme Court in Union Labor Life Ins. Co. v. Piren 458 U.S. 119 (1982), which involved stil another antitrust challenge to an insurer s attempt to reduce claims by a restrictive arangement. There the insurer refused to pay substantial claims for chiropractic services unless the case had been reviewed and approved by a peer review committe. Pireno, a chiropractor, challenged the peer review requirement as a conspiracy and attempt to boycott. The Court confirmed the three-prong test suggested by Royal Drg in holding that the arrangement between the insurance company and the chiropractors was not part of the 284 AB in TIRB respondents have argued here that during closing insurer-relate closers verify that onreord liens have ben removed and exercise special diligence in spotting off-reord risks such a. forgry. The TIRBA court did not consider these functions as constituting risk spreading or the business of insurance; morever, there is nothing in this reord to indicate that the zeal with which these non-insurance ministrial functions is cared out somehow depends on whether the closer is employed by a title immrer, bank, lawyer independent closing company, or real estate broker. Se Findings 180- 184. ), );

.L.L .L" .L"'",,, UH. JOVU.C"-UV-" VVIU.L.tH.L , .11 344 Initial Decision business of insurance since this practice, like the San Antonio prescription plan in Royal Drg, was aimed at reducing the cost of satisfyng claims rather than risk spreading. Piren added a gloss to the Royal Drg emphasis on risk spreading by saying that the practice must be "logically and temporally" connected to the spreading of risk, 458 U.S. at 130, but the result was the same as in Royal Drg-the review by the chiropractor peer committee was stricken beause it was simply an aid in the claims payment process and did not actually involve the spreading of risk. Given the emphasis in Royal Drg and Piren on risk spreading, respondents' insistence that Equifax Inc. 96 FTC 844 (1980) is dispositive is off the mark. The Commission held in Equifax that the McCarran Act exempts the deceptive gathering of medical histories because presumably the material was to be used in the process of spreading risk. The Commission s decision, however, has no bearing here since the record shows, as I wil indicate later, that neither search and examination in general, nor the joint setting and examination fees in particular, have anything to do with spreading risk (84) amongst an actuarially determined class of insureds. Equally misplaced is respondents' heavy reliance on Commander Leasing Co. v Transamea Title Ins. Co. 477 F. 2d 77 (10th Cir. 1973); Mcflhenny v. Amean Title Ins. Co. 418 F. Supp. 364 (E.D. Pa. 1976), and Schwartz v. Comrrwealth Land Title Insrance Co. 374 F.Supp. 564 (E.D. Pa. 1974) for the proposition that search and examination cannot be separated from the risk portion of title insurance. These cases, all decided before Royal Dr, have been distinguished as not having applied properly the crucial risk spreading test to discrete servces offered by title insurers. TIRBA 517 F. Supp. 1053, 1057, n. 2 afi'd 700 F.2d 1247, 1251 , n. 1. 285 In focusing on risk spreading, I also necessarily reject respondents argument that collusion by title insurers is exempt if not undertaken for the purpose of risk spreading, but rather to preserve their status as reliable insurers. The Court in Royal Drg specifically considered and dismissed the "reliable insurer" standard as too broad since every 2t6 PostRoal and Piren cass which have allowed the exemption have turned on a factual detennination that the questioned acvity relate to risk spreading.See Feinsten v. Nettlehip Co. of Los Angeles, 714 F. 928 932 (9th Cir. CE. deie 104 S. Ct. 2346 (1984) (exemption allowed beause "(t)he effec is to spread risk across a wide ara, and this is preisely what the Supreme Court describe when it fannulate the risk spreading criterion Klmath-Lal Pharm v. K/,mathMed. Sero Bureau, 701 F.2d 1276, 1286 (9th Cir. cet. deie 464 U.S. 822 (1983) (exemption allowed beause "(i)t is the actuaral uncertnty inherent in projecing risks and the insurance industry s corrsponding nee for cooperation that makes its exemption frm antitrust laws appropriate"

406 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

business decision made by a insurance company arguably has some impact on its status as a reliable insurer. 440 U.S. at 216-17. As for the legislative history, all that it wil allow on this point is that a secondary purpose behind the McCarran Act was to permit the collective sharing of risk experience in order to preserve the solvency of insurers. But this limited objective cannot be transformed into a blanket approval of all rate fixing by insurers irrespective of the connection to risk allocation.

Finally, respondents argue that even apart from any consideration of risk spreading, there should be an exception here because the states treat search and (85) examination and settement as part of the business of insurance . But what constitutes the "business of insurance" under the McCarran Act is a federal not a state question and all cases from Variable Annuity to Royal Drg and TIRBA have not resolved that question on the basis of the state s definition of insurance. See, e. , TIRBA 700 F. 2d 1249-50. Turning then to the crucial risk spreading issue raised by Royal Drg, and putting aside for the moment the question of escrow or settlement servces which was largely disposed of in TIRBA I look to what the record tells us about search and examination. To begin with, the record shows that historically search and examination were offered, and are stil offered, apart from any concept of insurance or insurance risk spreading, and while the servces have been engrafted onto an insurance framework as part of an overall marketing stratagem designed to win the business of assuring good title away from abstractors and conveyancers, this does not logically transform the basic nature of the servces, which are stil largely ministerial functions irrespective of the particular evidence of good title that is the ultimate objective of the search and examination. But having largely succeeded in winning this competitive struggle for the search and examination business, respondents would then crown their triumph with an antitrust exemption although in the past their competitors were turned down in a comparable attempt at consolidation of market power. Thus in Virginia, where examination for title insurance may only legally be performed by lawyers, the bar sought to protect its monopoly against price competition by use of a minimum fee schedule which was defended on the grounds that the servces were being performed by a learned profession. After paying due deference to the practice of law as a scholarly pursuit, the lawyers who sit on the Supreme Court had no difficulty in recognizing search 344 Initial Decision and examination as integral parts of the real estate business and held ( w Jhatever else it may be, the examination of a land title is a servce. Goldfarb v. Virginia State Bar 421 U.S. 773, 787 (1975). This easily identifiable servce does not undergo a sea change, as respondents argue, when independent attorneys, for example, who were the subject of (86) Goldfarb don attorney-agent or approved attorney hats, and along with their other wares-abstracts, certifications, and opinions now offer search and examination in an insurance package.

Second, the record shows that search and examination are regarded by respondents themselves as discrete services which are usually biled at a price that is entirely removed from any consideration of whatever risk element may be involved in title insurance. That is, even assuming that there is some small risk involved in title insurance (a point which will be taken up later) the risk has been isolated and assigned a dollar value for rate making purposes which is entirely apart from the nonrisk part of the premium represented by the cost of conducting the search and examination. While this separation of search and examination from the risk element of a title insurance premium is most clearly shown by the existence of separate " risk" rates, it is also seen in the promulgation of inclusive rates that simply combine separate risk and search elements. The existence of this risk component-which is not challenged by complaint counsel (except in Ohio where it is alleged that the risk rate is inflated to include search and examination as well as settlement servces)-is convincing evidence of a clear distinction between the search and examination function and whatever risk is assumed in the title insurance policy.

As for the joint setting of search and examination rates-the precise subject of this proceeding-this has no logical connection whatever to risk spreading since there is no evidence that joint rate making is undertaken by title insurers for the purpose of sharing their collective risk experience. To the contrary, the record evidence is overwhelming that both joint and individual rates for title insurance (i. apart from the "risk" rate) are set by looking to the cost of performing the search and examination service rather than the claims experience of insurers. This cost is not only easily ascertainable by each insurer, but is also within the control of the individual insurer and therefore the basic rationale of the McCarran Act-that is, the presumed need for (87) insurers to combine for the purpose of sharing their experience relating to an uncontrollable element (future claims) 408 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F. which is then spread among a large universe of insureds-is not present.

As it happens, the connection between any aspect of title insurance and the notion of risk spreading is tenuous in the extreme. Few risks are assumed by title insurers since the very purpose of the entire title insurance process-from search and examination to binder to issuance of a final policy-is to eliminate risks by making certain that any serious defects in title are identified for the very purpose of seeing to it that they are not insured. To the limited extent that some risks are assumed by the title insurer, this, too, has nothing to do with the concept of risk spreading by a group of insurers. Disclosed risks are covered on the basis of individual company s legal analysis of the seriousness of the recorded title defect as balanced against competitive pressure to insure over the risk or lose the business to another title insurer. Again, this is contrary to the very purpose of the McCarran Act since risks are not underwttn on the basis of a collective pooling of risk experience.

As for hidden risks, this modest extension of title insurance beyond the scope of the abstract and the attorney s opinion has nothing to do with either search and examination or risk spreading since by definition the service at issue here-search and examination of public records-cannot allocate amongst a universe of insureds what it could not uncover in the first place. In any event, there is not a whit of evidence that these hidden risks are somehow spread among policyholders during the rate making process on the basis of the shared risk experience of the insurer members of rating bureaus. In sum, since the central purpose of the McCarran Act is to allow for cooperation in the setting of rates so that insurers may take advantage of their collective experience in spreading risk, there clearly should be no exemption here because search and examination rates are not only unresponsive to collective risk experience, but do not (88) even reflect the risk experience of the individual insurer. Moreover, even apart from rates, the servces themselves are not logically connected to risk assumption since the standard practice in the title insurance business is to exclude all elements of uncovered risk from the policy?86 286 There is no basis on thisreorr for concluding that respondents' joint rate fixingpratices should be condemned under the remaining two Rau1 IJ-Pimr criteria, i.e., the pracice must not relate to entities outside of the insurance industry, and must be par of the insurer-insure relationship. There is no allegation in this complaint that respondents have extnded their price-fixing activities to approved attorneys, independent attorneys, abstrators, surveyors, or anyone else besides their own agents and employees. And while search and examination in general and joint rate making in particular have nothing to do with risk spreading, there . .

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344 Initial Decision The State Action Defense While I have concluded that the search and examination and closing servces (see discussion herein under Settlet Seres) are not the business of insurance under the McCarran Act, respondents' joint rate making activities through rating bureaus would stil be exempt from the federal antitrust laws if they met the requirements of the Parker doctrine as refined by Midal and Southe Motor Carrs. In Parker v. Brow 317 U.S. 341 (1943), the Supreme Court held that Congress did not intend to apply the antitrust laws to state action regulating economic activity within its own borders, and while some state action may be invalid, say, blanket authorization by a state that businesses may violate the federal antitrust laws without regard to state supervsion, the practices involved in Parker (a state-sponsored but grower-administered program for limiting raisin production) were held to be a proper exercise of state discretion. In its opinion, the Court indicated that the exemption was derived from the policy favoring a spirit of accommodation within our federal system in order to avoid unnecessary conflct between the mandates of national law governing interstate commerce and state regulation of intrastate activity that may have interstate (89) implications. According to the Court, the exemption was also derived from the Tenth Amendment reservation of state sovereignty, as well as the belief that the states performed the useful function of servng as economic laboratories where diverse forms of regulation may be tested without interference from the federal government.

The Parker doctrine lay largely dormant for some 40 years until there appeared a spate of cases, both private and public, challenging under the federal antitrust laws alleged anticompetitive actions by states and municipalities as well as the practices of private persons acting under the color of state law. In response to this wave of state action cases, there eventually evolved a restatement of Parker which provided that before any restrictive practice deparing from the competitive norm can qualify for the state action exemption, first, it must be demonstrated that the state' s intention to grant federal antitrust immunity is clearly articulated and affrmatively expressed as a matter of policy, and second, that the state actively supervises the process chosen to replace the competitive market. Califoria Liquo can be no question that these servees (and the charges for these servces) are part of the relationship between insurer and insured in the sense that the search and examination delcnnines what is excluded from the policy, and the joint rate making delcnnines how much the insured pays for the coverage reeived. 410 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

Dealers v. Midal Aluminum, 445 U.S. 97 (1980). As it happens, the second prong of Midal could not be met in Midal itself since there was no state involvement beyond a statute requiring liquor wholesalers to charge prices posted by producers. Despite the outcome in Midal prior to 1985, enforcement actions involving the claim of a state action exemption largely concentrated on the first Mil1cal test since it was assumed that the more complex issue of state supervsion presumably did not have to be faced unless the state compelled the anticompetitive conduct as proof of a clearly articulated and affrmatively expressed state policy to suspend the federal antitrust law. See , Mass. Furnilure and Piano Movers Ass n. ("Mass. Movers 102 FTC 1176 rev d and remanded 773 F.2d 391 (1st Cir. 1985). The Parker doctrine underwent a further revision, however, on the basis of the Supreme Court' s opinion in Southern Motor Carrs Rate Conferene v. United States 105 S.Ct. 1721 (1985) in which the Court rejected the notion that the first prong of the Milcal test requires compulsion, and held, instead (in a case involving joint rates filed by motor carrer rating bureaus) (90) that a state policy to suspend competition may be made manifest by the mere authorization of joint activity to the point that even a statutory reference to just and reasonable rates may be taken as an adequate indication that the state intended that rates were not to be set by the competitive market. Because of the dramatic impact of Southern Motor Carrs even before the first witness was heard in this case, complaint counsel conceded that it would not contest certain key aspects of respondents state action defense. Thus complaint counsel acknowledged in its pretrial brief that respondents' alleged price fixing activities in Arizona Connecticut, Idaho, Montana, Ohio, and Wisconsin "are undertaken pursuant to a clearly articulated and affrmatively expressed state policy and satisfy the first prong of the Midcal test." Complaint Counsel' s Trial Brief (Legal Analysis) at p. 24 (Sept. 16, 1985). As for these six states, the only aspect of the state action defense which complaint counsel challenge is whether there is active state supervision. Respecting New Jersey and Pennsylvania, complaint counsel stipulated that there was active state supervsion. Stipulation dated 11-25-85. Complaint counsel also conceded that it did not intend challenge under any theory "price fixing in New Jersey or Pennsylvania on charges for search and examination and settlement services that do not involve attorney-agents." Complaint Counsel's Trial Brief (Legal Analysis) at p. 24, n.58 (Sept. 16, 1985). Finally. with respect , 344 Initial Deeision to the five other states cited in the complaint (Louisiana, New Mexico New York, Oregon, and Wyoming), these were dropped entirely from complaint counsel' s case because "the quantum of proof necessary to resolve the question whether a state action defense is available appear to be greater than we originally anticipated" (Complaint Counsel's Trial Brief at p. 2 Sept. 16 , 1985), an obvious concession to Souther Motor Carrrs.

As a result of complaint counsel's stipulations and concessions, the Midal issues remaining under the state action point are first whether there had been state authorization for joint fixing of charges paid to attorney-agents in New Jersey and (91) Pennsylvania, and second, whether in Connecticut, Wisconsin, Arizona, Idaho, and Montana the rating bureau activities came under active state supervsion. Ohio presents a special problem of determining whether search and examination rates were fixed at all. The "authorization" issue in New Jersey and Pennsylvania is a question of statutory interpretation. Both states have authorized the joint fiing of rates by the respective bureaus, and the only remaining issue is whether these states intend to include in the jointly fixed rates charges for search and examination and settlement when these servces are performed by attorney-agents. While the statutes are ambiguous, New Jersey and Pennsylvania insurance regulators have clearly interpreted them to mean that the fees charged by all agents including attorney-agents, should be regulated by the state insurance departments and may properly be fixed by the joint activity of the rating bureaus. The contrary view urged by complaint counsel may have been more creditable had it been shared up with testimony, documentary evidence, or citation to legislative history indicative of special circumstances (say, a successful campaign by the legal lobby in support of the parochial view that everyhing an attorney does should only be regulated by the bar or the judiciary), which might have justified an interpretation of the statute representing an extreme departure from the basic policy of these two states to regulate (and concededly to supervise actively) all aspects of the title insurance business.

The other prong of the Mukai test- active supervsion is an emerging concept that the Supreme Court has yet to flesh out. Midcal itself, the only Court case to address the point directly, California required liquor wholesalers to post retail prices, which in turn had to be charged retailers. The Court observed that The State ... , 412 FEDER TRAE COMMISSION DECISIONS Initial Decision 112 F.

neither establishes prices nor reviews the reasonableness of the price schedule; nor does it regulate the terms of fair trade contracts. The State does not monitor market conditions or engage in any 'pointed reexamination' of the program. " 445 U.S. at 105-06. All that the state did in Midal was simply to issue a directive that wholesalers must either file (92) fair trade contracts or if they did not have fair trade contracts, they must post a resale price schedule which the retailers had to charge. From these facts the Court concluded that California exercised only a "gauzy cloak of state involvement over what is essentially a private price-fixing arrangement. ld. at 106. Southe Moto Carrs did not add significantly to Midal. only contained a passing reference to the active supervsion concept since the case was disposed of on the "authorization" basis. At several points in the decision, however, the Court touched on the issue. The Court noted Here the Court of Appeals found, and the Government concedes, that the State Public Service Commissioners actively supervse the collective ratemaking activities of the rate bureaus 105 S. Ct. at 1730, and in n. 23 id. at 1729, the Court said- Contrary to the Governent' s arguments, our holding here does not suggest that a State may "give immunity to those who violate the Shennan Act by authorizing them violate it. Parker v. Brow 317 U.S. at 351 , 63. S.Ct. , at 313-314; see Schwegmnn Bros. v. Calver Ditilles Cor. 341 U.S. 384, 71 S.Ct. 745, 95 L.Ed. 1035 (1951). A clearly ariculated perissive policy wiil satisfy the first prong of the Midal test. The second prong, however, prevents States from "casting...a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement." Midl 445 U. , at 106, 100 S.Ct. at 943. This active supervsion requirement ensures that a state' s acions win immunize the anticompetitive conduct of private paries only when the " state has demonstrated its commitment to a program through its exercise of regulatory oversight." See I P. Areda & D. Turner Antitrut Law 213a, p. 73 (1978).

From the fragments in Midal and Souther Moto Carrs and from the Supreme Court' s favorable citation to Areeda and Turner complaint counsel urge the adoption of a strict procedural test for active supervsion, which they claim finds support in the following discussion in that authoritative treatise- (state) agency inaction fails to satisfy the requirement of this Paragraph that there be adequate public supervision. Such inaction evades statutory approval procedures de.signed (1) accord opponents the opportunity present facts and arguments against the challenge act, (2) to assure conscious consideration by those particular state offcials charged with the power and responsibilty for approval. and (3) to allow TICOR TITLE INSURANCE COMPANY, ET AL. 413 344 Initial Decision (93) judicial review of the agency record. Therefore, the general view is correct that offcial inaction does not constitute suffcient " state action" to justify an antitrust exemption. I P. Areed. & D. Turner Antitrut Law '\ 213f, pp. 78-79 (1978). These comments by Areeda and Turner cannot be fairly transformed, as complaint counsel argue, into a hard and fast rule that for each rate change there must be a notice, opportunity for comment (preferably through a hearing), and a written decision appealable to the courts. I believe that what Areeda and Turner were suggesting instead is that state inaction obviously does not show conscious review as would be evidenced, for example, by a hearing, argument, and a record. This does not mean that these procedures are the only ways of showing state review or are even the preferred way. For one thing, it could be argued that the adoption of such strict procedural requirements, which complaint counsel acknowledge are modeled on the federal Administrative Procedure Act, may be inconsistent with the Parker doctrine s underlying rationale of allowing the states to experiment with alternative means of regulation. Moreover, by making procedural fastidiousness the focus of the active state supervsion inquiry, this may have the adverse effect of diverting public attention away from the dilgence of state insurance commissioners, which in the real world may be the only effective protection for consumers whenever non-competitive pricing norms are adopted. Besides, insistence on strict procedural conformity can quickly degenerate into meaningless exercises in bureaucratic rubber-stamping of boiler-plate rulings. In some instances, of course, the dilgent regulator may choose one of the procedures advocated by complaint counsel, Le., a public hearing, as the appropriate response to a particular regulatory problem. To take one example, in Southern Moto Carrers, the Fifth Circuit was obviously impressed by just such a showing ("the record evidence that the commissions routinely suspend the effectiveness of proposed tariffs and conduct hearings satisfies us that the second prong of the Midal test has been met. 672 F.2d at 474 , n. 5) but the (94) conscientious insurance commissioner might have chosen just as readily some alternative way of determining the reasonableness of rates.

That Parker put the state s choice of procedure beyond the scope of federal review does not translate, as respondents argue, into a requirement that there be a docile acceptance of any regime that the states may set up as long as there exists an impressive array of latent supervsory power. Rather, what Mulcal says is that in the context of ), Initial Decision 112 F.

an application for a federal antitrust exemption, the proper function of a court or administrative agency is to look at the state s regulatory machinery and make a determination as to whether there was, in fact a review, monitoring, and an examination of critical aspects of the rate-making process. At trial what this comes down to is that since the "state action" exemption is a matter of affrmative defense, the initial burden rests with respondents to come forward with evidence showing that the state has a regulatory system that is capable, at least on its face, of examining critical aspects of the rate making process. Once this capabilty is demonstrated, I believe that the burden then shifts to the government which has to prove that in actual practice the regulators did not make such an examination with respect to some crucial aspect of rate making. This allocation of proof is grounded on the assumption of offcial regularity and the concomitant notion that respondents should have no burden of proving that state offcials do what they are supposed to do under their own statutes. Or to put it somewhat differently, if the claim is made that a facially plausible supervsory. regime is demonstrably inadequate then the burden to prove this should be on the party-complaint counsel here-challenging state supervsion. Such a challenge, however should not be allowed to lapse over into a qualitative evaluation of the performance of state offcials-for example, whether they put enough time or effort into reviewing a particular rate submission-since an inquiry along these lines would not only be contrary to the public policy expressed in Parker of due deference to state sovereignty, but from a practical standpoint "(tJhere simply is no way to tell if the state has 'looked' hard enough at the (95) data. " I P. Areeda & D. Turner Antitrust Law 213c, p. 75 (1978). 287 On the other hand Midcal would have no meaning at all if the exemption were granted when the regulatory machinery is patently inadequate on its face, or when the evidence is incontrovertible, say, an acknowledgment by the state itself that its latent powers are simply not being used (or cannot be used) to review, monitor, and examine crucial aspects of rate making. 288 287 See alsoFergwan v. Skrpa 372 U.S. 726 (1963) for requirement of similar federal restraint before invoking the Due Press Clause to second-guess the economic programs adopted by state legislatures. 288 Post-Midl cases have allowed the exemption when the regulatory agency had broad regulatory powers and there was evidence the powers were used. The exemption has been denied notwithstanding the presence of latent regulatory power when the reord revealed that the powers were not used.Cvmpare Capital Telephv Co. v. N.Y. TeleJw Co. 750 F.2d 1154 (2d Cir. cert. deied 105 S. Ct. 2325 (1985) (active supervsion found where Public Servce Commission not only had broad latent powers to supervse telephone companies through hearings and examination of books, but also actually used the powers to investigate rates)wi.th State of N.C. Ex Rei. Edmisten v. P.1A. Ashville 740 F. 2d 274 (4th Cir.),cert. denwd 105 S. Ct. 1865 (1985) (footnote cont'd) ), 344 Initial Decision Applying the standard outlined above to the six states in question the record shows that in Idaho, there is a specific requirement for prior approval of rates which at least creates a presumption that there had been a scrutiny of bureau filings. I would not second-guess the intensity of that scrutiny when there is no evidence that any aspect of rate making, including insurer expenses, was excluded from that review. (96) In Arizona, where no major increase in search and examination rates was even proposed during the entire life of the Arizona Rating Bureau, again I do not believe there are adequate grounds for questioning state supervision, notwithstanding Arizona s apparent wilingness to accept with little or no justification (under its "deemer statute) prevailng rates that were simply adopted by the rating bureau. The record shows that the state was involved in what it considered to be a more immediate problem-the rating bureau attempt to raise and then engraft jointly set escrow fees onto the existing rate structure-and it is unseemly for a federal agency to second-guess Arizona s supervision priorities when the federal government's own investigation of title insurance in Arizona in 1980 zeroed in on escrow rates.

Ohio, of course, is a special problem: complaint counsel simply failed to prove that the rate schedule filed by the Ohio Rating Bureau resulted in uniform charges for search and examination and settlement, as alleged in the complaint.

In Montana, Connecticut, and Wisconsin the states have adopted fie and use " or "use and fie" statutes that reflect a basic policy of diminishing the role of state regulators in favor of reliance on competition as the market regulator. At the same time, these three states have authorized rating bureaus on the assumption that contrary to their basic policy of relying on the market to discipline sellers, the rating bureaus, as a medium for non-competitive, collective action by the insurers, wil be closely scrutinized. The issue in these states then (finding of no active supervsion on a reord showing that although the state's grant of a certificate of need for a hospital acquisition was bas on extensive review of the application, and the certificate could be revoked for failure to satisfy the conditions on which it was granted, the state did not monitor post-acquisition prices). Marr. e v. IntefJl, 1m. 748 F.2d 373 (7th Cir. cet. deied, 105 S. Ct. 3501 (1985), and Patrik v. Burget 5 Trae Reg. Rep. (CCH) '1 67,299 (9th Cir. Sept. 30, 1986) represent the deference (grunded on concern for the quality of medical care) extended to state authorized per review of doctors. This special treatment for the professions, which was suggested in Goldfarb v. Virginia State Bar 421 U.S. 773, 788-89, n. 17 ("(t)he public servce aspe, and other features of the professions, may require that a particular practice which could properly be viewed as a violation of the Shennan Aet in another context, be treated differently has no application to fixing the price for a commonplace commercial service such as the search and examination of rea! estate title. Id. at 787. 416 FEDERA TRE COMMISSION DECISIONS Initial Deision 112 F.

is whether there was a critical examination of the crucial aspects of joint rate making, a scrutiny which is inherent not only in the states own regulatory policies, but also in the "active supervsion" standard of Mulcal.

In Montana, where there has been a history of state involvement in the controlled business and agent commission problems (culminating in speific legislation giving the insurance commissioner authority to review and reject excessive commissions), there is inadequate basis on this record for questioning state supervsion during the brief existence of the rating bureau. (97) As for Connecticut and Wisconsin, there is no need to dwell on the likelihood that because of complaint counsel' s obsession with notice hearing, and a wrtten decision, their attention may have been divertd away from showing during their own case-in-chief that the regulatory scheme was an empty shell. Respondents' defense witnesses-the state insurance offcials-readily identified aspects of joint rate making that they themselves considered crucial but which clearly were not being supervsed at all. Thus the record shows that in Connecticut jointly fixed rate increases were filed with generalized justifications relating mainly to the profits of the insurers. The rates were "deemed" effective aftr a brief period because the state had taken no action. At most, during the "deemer" period, the state merely reviewed for accuracy what the rating bureau gave it in the way of insurance company profitabilty. There was no critical examination whatever of what lay behind those profit figures. Most significantly, there was no showing that Connecticut even had the wherewithal to probe into the critical area of insurer expenses especially the impact on the level of rates of the so-called agent retention or "commission" expense and the cozy relationship between insurers and attorney-agents that fuels this expense. In other words even though the Connecticut Insurance Department was convinced of the overrding contribution of the agent commission factor in increasing the cost of title insurance to consumers, it believed that it was statutorily barrd from doing anything about it, and indeed that it would take new legislation for it even to acquire the power to look behind the reported insurer expenses. Thus by the state' s own account (and irrespective of the broad arry of latent powers it possessed in the insurance field or the elaborate supervsory regime it had established), it cannot and did not, review, monitor, or examine in any meaningfl sense the very factor that its insurance regulators had identified as crucial in rate making.

TICOR TITLE INSURANCE COMPANY, ET AL. 417 344 Initial Decision Similarly, Wisconsin followed a hands-off policy in dealing with title insurers. And again, it was a state offcial called by respondents who readily acknowledged that (98) insurer expenses were simply not examined although the state recognized how critical these expenses were in rate making.

It must be emphasized that to require that these two states put into place and use a means for examining crucial aspects of joint rate making does not impose an onerous burden on them. Basic rates are not changed that often in the title insurance business, and I am not suggesting that a state may not adopt a sampling approach whereby only across-the-board rate increases rather than adjustments or special endorsements are closely examined. But when the states themselves have identified a critical area, such as the agent retention expense, there must be a showing that the problem was addressed either before rates were increased or at least sometime during the period between major rate increases. And while I would also allow the states practically unlimited flexibilty in how they chose to approach the problem, the point is that there is no proof in this record that these two states have taken any steps to deal with the agent-insurer relationship, or for that matter any other expense element factor impacting on title insurance rates.

Of course if the two states choose not to supervse actively by establishing and using a mechanism for scrutinizing the rate making process and especially the crucial expense component of that process there is no federal requirement that they do so. But then insurers in those states should not be asking for a federal antitrust exemption and instead the market should be allowed to accomplish what the states are either unwillng to do or are only wiling to cover over with Midcal says is not acceptable.the " gauzy cloak" of supervsion that Settlement Servces The record fully supports the conclusion reached by the United States District Court For The District of Arizona and the Ninth Circuit in TIRBA that settlement or escrow servces are clearly not the business of insurance. " However, in the only states where respondents, through title insurance rating bureaus, were allegedly fixing (99) settement or escrow rates, and the issue is properly before the Commission 289 the complaint allegations cannot be sustained. In 269 As indicated in Finding 186, the issue of settement services in Arizona is not properly befcre the Federal Trade Commission.

), ), 418 FEDERA TRADE COMMISSION DECISIONS Initial Decision 112 F.

Pennsylvania and New Jersey, where the rating bureau activity concededly was actively supervised by the states, the Parker exemption applies to search and examination as well as settlement servces since the states authorized the alleged ilegal joint activity relating to attorney-agents. In Ohio and Connecticut, there was a failure of proof that either the " risk" rates or the inclusive rates set in those states by the rating bureaus resulted in uniform settement fees. N oerr- Pennington In addition to a claim of immunized state action, respondents have argued that their joint rate making consists of nothing more than petitioning" of a state agency which is protected by the Noerr- Pennington doctrine. In EJastern R. Con! v. Noerr Motors 365 U. 127 (1961), Mine Workers v. Pennington 381 U.S. 657 (1965), and Califoria Transport v. Truking Unlimited 404 U. S. 508 (1972) the Supreme Court held that political advocacy-broadly interpreted as attempts to influence the legislature, the executive, or an administrative agency in the making of policy-was protected under the First Amendment right to petition as well as the public policy of encouraging the free flow of ideas to policy makers. To argue, as respondents do, that the joint fixing of rates by competitors somehow interferes with their right of political advocacy, is analogous to saying that contractors should be allowed to conspire to rig bids on government projects so long as the results of the conspiracy are wrapped in the trappings of a "petition" or proposal which may be said to convey policy information to offcial decision-makers. Nothing said before or after Noerr, Pennington or California Transport allows for such a distortion of the concept of political advocacy, and the Supreme Court, the lower courts, and the Commission have emphatically rejected similar attempts at such a misuse of the doctrine. Cantor v. Detroit Edison Co. 428 U. S. 579, 601- , (1976); United States v. (100) Southern Motor Carrers Rate Corierence Inc. 672 F. 2d 409, 476-77 (5th Cir. rev d on other grounds, 105 Ct. 1721 (1985); TIRBA 517 F. Supp. 1053 , 1059-60 (D. Ariz. affd, 700 F.2d 1247 (9th Cir. cert. denied 104 S. Ct. 3509 (1984); Mass. Movers 102 FTC 1176, 1222- rev d and remanded on other grounds 773 F.2d 391 (1st Cir. 1985).

Rule of Reason The Commission held in Mass. Movers 102 FTC at 1224, that if 344 Initial Decision there were no state action exemption, the collective rate. making activities of a rating bureau are not governed by the rule of reason beause "it is clear beyond cavil that agreements among competitors to set price levels or price ranges are per se ilegal under the antitrust laws. United States v. Socony-Vacum Oil Co. 310 U. S. 150, 222 (1940); see also Arizona v. Mariopa County Med. Soc. 457 U,S. 332 102 S.Ct. 2466, 73 L.Ed. 2d 48 1982); Catalano, Inc. v. Target Sales, Inc. 446 U. S. 643, 647 (1980) (per curiam). Commerce The search and examination and settlement servces offered by respondents are part and parcel of the interstate sale !lnd financing of real estate. Goldfarb v. Virginia State Bar 421 U.S. 773 (1975). Mootness There can be no mootness defense in this case since respondents insist. that search and examination servces, as part of the "business of insurance " ire beyond the jurisdictional reach of the Commission and they reSfJrve the right to rejoin rating bureaus whenever they desire to fix collectively the rates for these servces. In short, none of the conditions for preventing any future violation would be eliminated unless an order is issued. On this basis alone, this case is diametrically opposite to these instances (see, e.g., United States v. W. T. Grant 345 U. S. 629 (1953); Borg-Warn Cor. v. FTC 746 F.2d 108 (2d Cir. 1984)) in which the abandonment or mootness defenses were given limited recognition. (101) Scope of The Order Complaint counsel insist that they are entitled to an "all-states order although it is obvious that is takes a state-by-state analysis to determine where. the Parker defense applies. Complaint counsel' argument that they are entitled to a broad order is unpersuasive considering the fact that the complaint cites respondents' activities in only 13 states and complaint counsel's post-complaint investigation apparently revealed that the state action defense would probably prevail in at least seven of those states. As complaint counsel would now have it, an order should be entered, which not only would retrieve the seven states they themselves dropped from the case, but also would add 37 more that were never in the case to begin with. Not only is an "all-states" order unsupportable, but on a record in which there 420 FEDERA TRAE COMMISSION DECISIONS Initial Decision 112 F.

is not a hint of any collusive rate making activity outside of the rating bureaus, a broad order covering all other possible forms of ilegal combination cannot be justified. (102) IV. CONCLUSIONS 1. The Federal Trade Commission has jurisdiction in this matter beause respondents are engaged in commerce, as "commerce" is defined in the Federal Trade Commission Act. 2. Providing search and examination servces and settlement servces is not the "business of insurance" as that term is used in the McCarran-Ferguson Act.

3. Respondents combined to fix the rate for search and examination servces in the states of Connecticut, Wisconsin, Arizona, Idaho, and Montana.

4. The joint fixing of the rates for search and examination servces described in Paragraph 3 above, while authorized by the aforementioned states, was not actively supervised in Connecticut and Wisconsin.

5. Respondents joint rate making activity respecting search and examination servces and settlement or escrow servces performed by attorney-agents in Pennsylvania and New Jersey was authorized by the states.

6. There was a failure of proof that respondents have fixed uniform search and examination and settlement or escrow charges in Ohio. 7. There was failure of proof that respondents have fixed uniform settlement or escrow charges in Connecticut. 8. The issue of joint rate making activity by respondents respecting settlement or escrow charges in Arizona is not properly before the Commission.

Accordingly, the following order should be issued: ORDER For the purposes of this order Search and examinatio serves neans all activities which are designed to identify and describe the wnership of a particular (103) parcel of real property as well as any ther actual or potential rights to, encumbrances on, or interests in Ie property.

344 Opinion II.

It is ordeed That respondents, their successors and assigns, and , directly or indirectly,their offcers, representatives, and employees through any corporation, subsidiary, division or other device shall cease and desist in Connecticut and Wisconsin from discussing, proposing, setting, or filing any rates for title search and examination servces through a rating bureau.

II.

It is further ordered That respondents shall within thirty days aftr servce of this order deliver a copy of this order to all their present offcers, directors, and personnel having any responsibilty in determining rates as well as to the state insurance departments in Connecticut and Wisconsin.

IV.

It is further ordered That respondents notify the Commission at least thirty days prior to any change in tbe corporate respondents such as dissolution, assignment or sale resulting in the emergence of successor corporations, the creation or dissolution of subsidiaries or any other change in the corporations which may affect compliance obligations arising out of this order.

It is further ordered That respondents shall, within ninety days in aftr the order becomes final, file with the Commission a report, wrting, setting forth in detail the manner and form in which they have complied with this order.

OPINION OF THE COMMISSION BY STRENIO Commissio:

1 The abbreviations use in this opinion are as follows: AL: Administrative Law Judg cc: Complaint Counsel Gear: Complaint Counsel's Answering Brief ceRB: Complaint Counsel's Rebutt Brief : AI's Findings ID: Initial Decision RA: Respondents' Appeal Brief RRB: Repondents' Reply Brief 422 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

1. STATEMENT OF THE CASE On January 7, 1985, the Federal Trade Commission (Commission) issued a complaint charging respondent title insurers with a violation of Section 5 of the Federal Trade Commission Act (FTC Act), 15 C. 45. More specifically, the Commission charged that the respondents, operating through rating bureaus, had restrained competition in setting rates for title search and examination servces and settlement services.

The gravamen of the complaint appears in paragraph 11: Respondents have agrd on the price to be charged for title search and examination servces or settement servces through rating bureaus in various states. Examples of states in which one or more of the 121 respondents have fixed prices with other respondents or other competitors for all or part of their search and examination servces or settement servces are Arizona, Connecticut, Idaho, Louisiana, Montana New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Wisconsin and Wyoming.

Respondents, in turn, challenged the Commission s subject matter jurisdiction on the grounds that their activity was part of the business of insurance and therefore exempt from the FTC Act by reason of the McCarran-Ferguson Act. Respondents' answers also assert that the alleged anti competitive practices are immune from antitrust prosecution by reason of the "state action" doctrine. Additional defenses raised on appeal are described below.

On December 26, 1986 , Administrative Law Judge (AU) Needelman issued his initial decision, finding a law violation for activity in Connecticut and Wisconsin. The AU further found that search and examination by title insurers in connection with the issuance of a title insurance policy was not the "business of insurance. This matter is now before the Commission on respondents' appeal brief, to which complaint counsel has filed an answering brief. Additionally, respondents have filed a reply brief and (3) complaint counsel has fied a rebuttal brief. In their appeal brief, respondents argue that the AU erred in finding that Connecticut and Wisconsin did not "actively supervise" rating bureau filings. Further, respondents argued that the AU erred in ruling that respondents' rating bureau activities are not the "business of insurance. " Additionally, 2 Complaint counsel reuestd leave to file a brief discussing the impact on this case of the Supreme Court' decision inPairok v. Burget 108 S. Ct. 1658 (1988). Respondents did not oppose this motion and requested leave to fie a supplementary brief. The Commission granted the parties' requests and said briefs were fied. 344 Opinion respondents argued that the AU erred in failng to apply the Noerr- Pennington doctrine to respondents' collective petitioning of state regulators; that respondents' rating bureau activities should be evaluated under a "rule-of-reason" analysis; and that the terms of the relief ordered by the decision were improper. Complaint counsel disagreed with the AU to the extent that he found "active supervision" existed in several states. Complaint counsel also argued that respondents failed to meet the first prong of the Midcal test (that there be a clearly articulated and affrmatively expressed state policy to displace competition) as to Pennsylvania and New Jersey. Complaint counsel also would have fashioned differently the scope of the order proposed by the AU. (4) For the reasons set forth below, we affrm the AU in part and reverse in part.

In brief, we find that respondents' activities in New Jersey, Pennsylvania, Connecticut, Wisconsin, Arizona 3 and Montana are not beyond the purvew of the federal antitrust laws. Respondents' attempt to invoke the state action defense fails as to New Jersey and Pennsylvania because the statutes do not clearly articulate a state policy permitting a displacement of competition for charges to and retained by an attorney. Indeed, attorneys are specifically exempted from the statutory provisions invoked by respondents.

The attempt fails as to Connecticut, Wisconsin, Arizona, and Montana because respondents' private conduct was not actively supervsed by the state. The active supervsion prong of the state action defense requires that state offcials have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy. Absent such a program of supervsion, there is no realistic assurance that a private party s anticompetitive conduct promotes state policy rather than merely the party s individual interests. We dismiss the complaint however, as it (5) relates to settement or escrow servces . because the record as to those services was not developed. Further, we find that respondents' search and examination servces are not the "business of insurance" and therefore are not exempt from antitrust challenge. These services, commonly provided by noninsurance entities, do not have the indispensable element of risk a We also find that the doctrine of res juifata does not bar Commission action as to Arizona. ), 424 FEDERA TRDE COMMISSION DECISIONS Opinion 112 F.

spreading or transfer necessary to qualify as the business of insurance.

Moreover, we hold that respondents' activities are not protected antitrust challenge under the Noer-Pennington doctrine.frm Rather, because of the "context and nature" of this activity, we conclude that it is commercial activity of the type that traditionally has had its validity determined by the antitrust laws. This is merely private activity to set rates collectively-the equivalent of horizontal price-fixing-not a collective attmpt to persuade the state to require such ratemaking. We also find this activity inherently suspect and an appropriate candidate for per se analysis, under the reasoning we employed previously in Massachusetts Board of Registration in Optomtry, infra. (6) II. DESCRIPON OF RESPONDENTS' ACTMTS Respondent insurers are engaged in the business of insuring the ownership of real estate for buyers and those lenders (mortgagees) who rely on real estate as security for their loans. As part of the package of servces they offer, respondents provide search and examination and settlement or escrow services. ' We adopt the AL' factual description of these activities. See ID at 12-45 and further discussion infra.

III. STATE ACTION DEFENSE One critical issue on appeal is whether the ratemaking activities here are beyond the purvew of the federal antitrust laws by virtue of the state action docrine. As we stated in our decision in New England Motor Rate Bureau, Inc. 112 FTC 200, Docket No. 9170 slip op. at 10- 11 (Aug. 18 , 1989) New England" the state action doctrine attempts to resolve any conflicts that arise between the national economic policy in favor of competition, as embodied in the federal antitrust laws, (7) and the principle of federalism. Under this doctrine, restraints on competition are protected from antitrust attack if they constitute "state action or offcial action directed by a state. Parker v. Brown 317 U. S. 341 , 351 (1943). The Supreme Court has stated that a "gauzy cloak of state 4 We with the assessment of the AU that the complaint allegation respecting settlement or escrow ag servces was an ancilary issue, barely addressed in this proeeding. The complaint is dismissed as to those servces. See discussion infra Our opinion therefore focuses on the search and examination issue. D The state action doctrine is available in Section 5 cases applying Sherman Act standards.E.g., Ashelle Tobw:o Board of Trad, Inc., v. ftc, 263 F.2d 502 (4th Cir. 1959). 344 Opinion involvement" in private anticompetitive conduct is not suffcient confer antitrust immunity. Califoria Retail LiqWJ Deales Assn. v. Midal Aluminum, Inc. 445 U.S. 97 , 106 (1980). In Midal the Supreme Court spelled out criteria that anticompetitive conduct underten by private entities must satisfy in order to qualify as exempt " state action: (i) the challenged conduct must be undertaken pursuant to a "clearly articulated and affrmatively expressed state policy" to displace competition with regulation; and (ii) the conduct must be " actively supervsed" by the state itself. Id. at 105-06; see also Patrik v. Burget 108 S. Ct. 1658 (1988); Southe Motor Carrs Rate Conferene v. United States, 471 U.S. 48 (1985). A. Clear Articlatio (The First Midal Prong) The only issue for determination as to respondents' conduct in New Jersey and Pennsylvania is whether the state statutes give state action protetion under the "clear articulation " prong of Midal collectively fixed rates charged for search and (8) examination servces when performed by attorney-agents. 6 Complaint counsel argues that the statutes in Pennsylvania specifically exclude from the statutory definition of "fees" that are to be filed with the state insurance deparments any charges that are paid to and retained by an attorney at law, whether such attorney is acting as an agent of a title insurance company or as an approved attorney of a title insurance company. Complaint counsel asserts that in both states respondents have fixed prices for charges paid to and retained by their attorney agents.

Respondents argue, in turn, that special deference should be given to a state administrative agency s interpretation of its own regulatory statute, citing Midal and other cases. RRB at 68 , n.55. They thus rely on an amicus brief fied by the Pennsylvania insurance departent and testimony by the New Jersey insurance department favoring their interpretation of the statute-that attorney agent fees are not excluded from the statutory definitions of fees. Respondents criticize complaint cuunsel' s argument that the statute is "perfectly clear on its face." RRB at 70. They admit that the statutes "are susceptible to multiple interpret:!ticns." RRB at 70. But respondents further argue that the meaning of the sbtutes cannot be discerned "without resort to the larger purpose and structu." cf the state statutes." RRB (9) at 6 The paries have stipulate, for the purpses of this litigation, t!:at there has ben active supervsion in Pennsylvania and New Jersey sufcient to satisfy the second prong of the Midal !.st for a state action defense.

426 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

71. In both states, there is comprehensive regulation of the title insurance industry. RRB at 71-72. The "fee" definition which gives rise to complaint counsel's argument is said to be merely " accommodation to members of the state bar who were concerned that legislation governing title insurance might be construed as regulating the legal fees of real estate attorneys." RRB at 72. The AL found that the statutes were "ambiguous " ID at 91 , but rested his holding that the first Midal prong protected the activities of respondents in these two states on the interpretation given the relevant statutes by state officials. He stated that complaint counsel' contrary assertion may have been more credible had it been supportd by other evidence.

Crucial to complaint counsel's argument as to New Jersey and Pennsylvania are the following statutes. In New Jersey, the statute in controversy, N.J. Stat. Ann. 17:46B-1(f), reads in relevant part: Fee for title insurance means and includes the premium for the assumption of the insurance risk, charges for abstracing or searching, examination, determining insurability, and every other charge, whether denominated premium Of otherwse made by any of them, but the tenn "lee shal/not inclwt any (10) charges paid to and retained by an attoey at law whether or rwt he is acting as an agent of a title insrance company or an appoved atto. (emphasis supplied) In Pennsylvania, Section 701(5) of the Pennsylvania Insurance Company Law broadly provides that fees for title insurance are subject to regulation but contains the following proviso: Fee for title insurance means and includes the premium, the examination and settlement or closing fees, and every other charge, whether denominated premium Of otherwse, made by a title insurance company, agent of a title insurance company or an approved attorney of a title insurance company, or any of them, to an insured or to an applicant for insurance, for any policy or contract for the issuance of, or an application for any class or kind of, title insurance; but the term "fee shall not include any charges paid by an insred or by an applicant for insrance, for any policy or contract, to an attor at law acting as an indent contracto andretained by suh atto at law, whether or not he is acting as an agent of or an appoved att() oj a title insurance company, or any charges made for special (11 J services not constituting title insurance, even though performed in connection with a title insurance policy or contract. (emphasis supplied) We find that the statutes in New Jersey and Pennsylvania do not clearly articulate a state policy permitting a displacement of competition regarding these charges. Indeed, the statutes appear to do the 344 Opinion opposite-attorney agents are singled out of the statutory scheme. Both statutes unambiguously exclude from their definition of "fees that are regulated "any charges" paid to and retained by an attorney. Despite this, in both states respondents have fixed prices for charges paid to and retained by their attorney agents. Since the statutes are clear on their face, the "plain meaning" rule of statutory construction must prevail. (We note in passing that no evidence of contrary legislative intent has been entered into the record. Further, deference to an agency s interpretation comes into play only when the statute is ambiguous SEC v. Sloan 436 U. S. 103 117 -19. Deference is not appropriate merely because an interpretation is long standing, since an agency "may not bootstrap itself into an area in which it has no jurisdiction by (12) repeatedly violating its statutory mandate. Sloan 436 U.S. at 117-19 (1978). B. Active Superion (The Second Midcal Prong) To qualify for state action immunity, private conduct also must have been actively supervsed by the state. Midal 445 U.S. at 105. The Supreme Court in Town of Hallie v. City of Eau Claire 471 U. S. 34 46 (1986), stated that the active supervsion requirement "serves essentially an evidentiary function; it is one way of ensuring that the actor is engaging in the challenged conduct pursuant to state policy. . . . Where a private party is engaging in the anticompetitive activity, there is a real danger that he is acting to further his own interests rather than the governmental interest of the State. The Supreme Court recently elaborated on the requirement of active state supervsion in Patrik v. Burget 108 S. Ct. at 1658. There, a physician in Oregon alleged that competing physicians conspired to terminate his surgical privileges at the one hospital in a community. Plaintiff alleged that the defendants had initiated and participated in proceedings before (13) the hospital's peer-review committe that culminated in a recommendation to terminate the plaintiffs staff privileges. These proceedings allegedly were undertaken for the sole purpose of reducing competition from plaintiff. The Court held that the state action doctrine did not apply to the challenged conduct because Oregon did not actively supervse the decisions of hospital peer review committees.

7 We note further that the Pennsylvania insurance agency s interpretation is relatively reent. In Pennsylvania between 1921 and 1975, rates fied by the rating bureau did not include attorney-agent chargs. Pror to 1975, the Pennsylvania insurance department obviously did not believe that chargs made atrmey agents. . . . were within the department's regulatory control." CCAB at J 33. . . . . .

428 FEDERA TRAE COMMSSION DECISIONS Opinion 112 F.

(TJhe acive supervsion requirement mandates that the State exercise ultimate control over the challenged anticompetitive conduct. The active supervsion prong of the Midal test requires that state offcials have and exercise power to review particular anticompetitive acts of private paries and disapprove those that fail to acord with state policy. Absent such a program of supervsion, there is no realistic assurance that a private party s anticompetitive conduct promotes stte policy, rather than merely the party s individual interest. The mere presence of BOrne state involvement or monitoring does not suffce.

108 S. Ct. at 1663.

To establish active state supervsion, it is not enough merely to show, as respondents contend, that the state statute (14) governing the anticompetitive activity provides some mechanism for regulatory oversight. There must be a showing that the state actually exercised its authority. Patrik v. Burget 108 S. Ct. at 1663. It is only through such an affrmative exercise that the state' s intent can be discerned. Moreover, there must be a "program of supervsion. Id. The mere presence of some state involvement or monitoring does not suffce." Id. We understand this to mean that isolated instances of reviewsuch as reviewing rate proposals submitted in 1990 and 1995 but not reviewing those submitted in the intervening years-will not suffce. Otherwise, a single instance of review ilogically could shield anticompetitive behavior from antitrust challenge in perpetuity. Thus, it is necessary to look at the entire program of supervsion. We recognize that it would not be incumbent upon a respondent to show that every single piece of data filed with a rate commission was reviewed. Certainly, the use of sound sampling techniques would be permissible. It is reasonable to require, however, that the review activity be continuous. Consequently, our assessment of the regulatory activity in each state below will look at the review activity as a whole and seek to determine whether there was a general "program of supervsion -not whether each and every rate was reviewed. (15) On the other hand, isolated instances of review will not suffceotherwise there could be no "program of supervsion." The state' involvement in the challenged activity must be more than peripheral to qualify as active supervsion. In Midal for example, the Supreme Court emphasized that the state had not established prices, reviewed the reasonableness of price schedules, regulated the terms of fair trade contracts, monitored market conditions, or engaged in a pointed reexamination" of the program. 445 U.S. at 105-106. Rather, the state's enforcement activities merely had cast a "cloak of ; q J.U.lV.n J.. J." U.n"'-.I '-VlYrlU'II .Il l\. 344 Opinion state involvement over what (was) essentially a private price-fixing " 8 Id. at 106. arrangement.

These decisions demonstrate that a state offcial or agency must engage in an affrmative, substantive review of the challenged conduct before active supervsion can be found. Such review ensures that the state agency has consciously considered the anticompetitive consequences of the activity for which private parties seek approval. As we stated in (16) New England 112 F. C. at 200, slip op. at 15 (n)o clear inference of conscious state approval of the product of private collective ratemaking can be drawn from a state agency passive acceptance of nonsubstantive review of rate filings." Thus, we hold that the active supervsion requirement is satisfied only where the state agency has acted affrmatively to review and approve the proposed tariff or rate. Moreover, there must be a program of supervsion, not merely isolated instances of review. This case also raises the question of who has the burden of proving active supervsion. Complaint counsel argues that although the recognized that the state action doctrine is a matter of affrmative defense, he impermissibly shiftd the burden of proof to the government once respondents demonstrated that "the state has a regulatory system that is capable, at least on its face, of examining critical aspects of the rate making process." CCAB at 78, quoting ID at 94. Complaint counsel complains that this standard forces it prove a negative, a diffcult task given the dearth of documentation that intrinsically exists in states that do not actively supervise. The Supreme Court' s decision in Patrik v. Burget holds that the proponent of the state action defense has the burden of demonstrating the actual exercise of regulatory authority by state offcials. 108 S. Ct. at 1663 ("respondents. . . have ( not) succeeded in showing that any of these actors reviews-or (17) even could review-private decisions regarding hospital privileges respondents have not shown that the (Board of Medical Examiners) in practice reviews privilege decisions ). We therefore conclude that the AL' s evidentiary ruling was in error, and that respondents, as the proponents of the state s Similarly, inPatri v. Burget the Court, observng that "(t)he mere presence of some stte involvement or monitoring does not suffce " held that state action immunity could not be preicated upon a showing that Oregon health offcials had licensing authority over the defendant physicians and that Oregon court.. had some authority to review private per group decisions on proedural grounds. 108 S. Ct. at 1663. Rather, a per group decision would have ben "acively supervse" by the state only if a state official or state court had and ha exed authority to review the merits of the per group decision at issue.Id. (emphasis supplied). Of course, this reasning is consistent with the earlier cited language that there must be a pr:grm of supervsion.

430 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

action defense, failed to meet the burden of demonstrating that state offcials engaged in an affrmative, substantive review of their rate proposals. We think that respondents' defense was not prejudiced by the ALJ's erroneous ruling. Both parties' introduction of evidence and examination of the witnesses at the administrative trial elicited more than adequate testimony upon which to base our decision. We now turn to an examination of the individual states' supervision of the activity at issue.

C. Individual States and Active Supervision 1. Connecticut The ALJ found no active supervsion in Connecticut. He based his decision on a finding that the state offcials had readily identified aspects of collective ratemaking that they themselves considered crucial but which were not being supervised at all. The AL found that collectively-fied rate increases were submitted with general justifications that related merely to (18j insurer profits. There was no critical examination of what lay behind those profit figures. "Most significantly, there was no showing that Connecticut even had the wherewithal to probe into the critical area of insurer expenses especially the impact on the level of rates of the so-called agent retention or 'commission expense' and the cozy relationship between insurers and attorney-agents that fuels this expense. " ID at 97. In fact, the state insurance commission believed it was statutorily barred from doing anything about this. Thus, the state regulators "cannot and did not, review, monitor, or examine in any meaningful sense the very factor that its insurance regulators had identified as crucial in ratemaking. " ID at 97.

Respondents argue that the ALJ's "critical aspects" standard impermissibly and inappropriately second-guesses the qualities of supervision. RAB at 7. (The same argument is made as to Wisconsin discussed infra. Respondents state that a central goal of the state action doctrine "is to preserve for the states maximum flexibilty in economic regulation." RAB at 8. Respondents admit, however, that " state cannot simply authorize private parties to violate the federal antitrust Jaws. . . " RAB at 8. But respondents argue that Southern Motor Carrers cited with approval the Areeda- Turner treatise which pointed out, in part, that " (tJhe federalism concerns at the heart of Parker cannot be reconciled with federal court probing of the ' true motives of state legislatures and agencies." RAB at 9. "There (19) , HvV.n .l.l.l.L lil"UlL'lv.r LrV1ViU'lI , .rT l\. 'iih 344 Opinion simply is no way to tell if the state has 'looked' hard enough at the data. . ." RAB at 10.

Respondents assert that the record demonstrates that there was an appropriate regulatory mechanism in place in Connecticut. RAB at 16. Even if any federal scrutiny of state supervsion beyond ascertaining the existence of a regulatory mechanism is permissible that scrutiny should be limited to a 'quick look' by the federal agency or court. . . RAE at 19. A "quick look" in Connecticut assertdly demonstrates active involvement. Respondents then recite various facts that they believe show active supervsion under the "quick look" test. RAB at 19-30.

Complaint counsel argues, on the other hand, that when the rating bureau fied its first rate manual in 1966, it did not file statistical data to support the collectively-set rates. CCAB at 109. Requests for clarification by the state regulators were not fulfilled. Nonetheless this rate filing was effective until 1981.

Complaint counsel asserts that the 1981 rate filing did not contain information from which the department could assess the reasonableness of insurer expenses. A 1983 filing was approved (20) immediately, despite the fact that it lacked the supporting data required by statute.

Moreover, numerous endorsements and amendments were fied without supporting cost justifications. CCAB at 11 O. Although agreeing with the ultimate finding of liability by the AL, complaint counsel disagrees with his finding that minimal review was sufficient for "ancilary" filings such as these. F. 130 n.192. Complaint counsel contends that the department did not consider these endorsement filings to be minor or ancilary. CCAB at 111 n. 137. Charges of over $100 per endorsement were not uncommon. Respondents even allegedly characterized one of the endorsement filings as "significant." RAB at 22. A minimal review standard is insuffcient according to complaint counsel. Finally, complaint counsel argues that the state did not have the "wherewithal" to examine insurer expenses, citing DiSanto Testimony 2739-40 and 2793. In reply, respondents argue that the 1966 rate filing was examined and the rating bureau responded to all inquiries. RRB at 39. RX 104 through 110. Respondents also contend that the other filings similarly were examined and proper justifications were filed. 9 We preface our examination of complaint counsel's argument by rejecting complaint counsel's proposed method for analysis as to all states insofar as it relies on it. standard loosely basd upon the Administrative Predure Act. See our discussion in New England 112 FTC at 200, slip op. at 15- 16 n. 14. 432 FEDERA TRE COMMISSION DECISIONS Opinion 112 F.

The Commission finds that Connecticut did not meaningflly examine the rates submitted because it did not have the (21) wherewithal" to examine the critical area of insurer expenses. ID at 97, ID at 53-55. We adopt the AL' s findings that the state insurance department suffered from a dearth of information that would have enabled it to assess the appropriateness of the filed rates. F. 130, 132- 33. For example, the AL found "no evidence that the department' request for justification relating to (the 1966 rate filings was ever answered satisfactorily. " F. 130. Further, the AL found that the state insurance offcial conceded that the department lacked the authority to control insurer expenses they knew were excessive. ID at 53-55.

The fact that the state regulators could not meaningflly regulate a critical component of the ratemaking process is fatal in and of itself to respondents' state action defense. As the Supreme Court stated in Patrik v. Burget the "mere presence of some state involvement or monitoring does not suffce. " 108 S. Ct. at 1663. The Court' concurrent citation of 324 Liquo Cor. v. Duffy, 479 U.S. 335, 345, n. 7, is instructive. In Duffy, the Court held that certain forms of state scrutiny of a restraint established by a private party did not constitute active state supervsion because they did not "exer(tJ any significant control over" the terms of the restraint. Id. Accordingly, when the state regulator responsible for implementing the statutory scheme admits a lack of significant control over the restraint in question, the rates are the product of private action and the state action defense is inapplicable. (22) However, we disagre with the AL that so-called" ancilary filings receive some sort of exemption or lower standard under the Midal test. Since there is no de minimis exception to the antitrust laws for price-fixing, the AU' s minimal review standard for endorsements and amendments is contrary to the law. These were separate filings that should have been accorded state review. Although the use of scientifically sound sampling techniques to examine a rate filing might be reasonable, simply ignoring some filings because they do not involve generalized rate increases is impermissible. There must be a program of supervsion " not hit-and-miss review. In sum, we conclude that the state of Connecticut did not actively supervse the rate filings at issue, and the state action defense does not apply. Respondents' arguments that in order to find a state action defense we should take merely a "quick look" at the state s regulatory , ....... ... ...._ , ....vv.... ........

344 Opinion supervsion or be satisfied merely that any regulatory mechanism is in Burget. As discussed generallyplace, are put to rest by Patrik v. above, we must determine whether the state actually exercised its authority. The state did not do so here. (23) 2. Wisconsin The AL found no acive supervsion in Wisconsin. He stated that there "is little evidence that these (latent powers possessed by the insurance commissioner J were used to infuence bureau rate making. ID at 55. "To ilustrate, while the insurance commissioner was reuired to examine the Wisconsin Rating Bureau at regular intervals no examination was ever made." ID at 55. Further no hearing has ever ben held in Wisconsin on any insurance rate filing, and no rate suspension order has ever been issued." ID at 55. Essentially, Wisconsin followed a hands-off policy in dealing with title insurers. ID at 97.

The 1971 rates, which represented historical rates charged before the formation of the bureau, were approved although supporting justifications were not filed until 1978. ID at 57. The 1981 filing, which represented a substantial rate increase of 11 percent, was accompanied by supporting data that was checked only for accuracy. The Offce of the Commissioner of Insurance made no inquiry into insurer expenses notwithstanding recognition by the state offce that title rates cannot be effecively regulated without such a (sic scrutiny." ID at 58. A 1982 filing was given a "cursory reading," and the supporting materials "were not even checked for accuracy before the rate increas was accepted." ID at 59. (24) Respondents assert that as to the 1971 filing, the insurance departent stated it would accept the filing contingent upon submission of a statistical rate justification when the rating bureau 32. The stateganed more experience in title insurance. RA at questioned the rating bureau "fruently" about its rate justification methods. RA at 33. Eventually, the rating bureau hired an economic consultant. RA at 33. As to the 1981 rate filing, respondents contend that rating bureau and state insurance offcials discussed the filing extnsively. RAE at 36. The 1981 filing was "checked for mathematica accuracy," the proposed rates were compared with rates in neighboring sttes, and the effec on total revenues was analyzed. RA at 36. Respondents argue that insurer expenses were examined. RAB at 38. For example, expense data was looked at. Transcript at 1777.

434 FEDERAL TRAE COMMISSION DECISIONS Opinion 112 F.

Complaint counsel argues, in turn, that the first rate filing was in effect for over seven years without any supporting justification being provided. CCAB at 117. The department's review of the 1981 filing merely looked for mathematical accuracy. Mr. Wirtz of the insurance department admitted that the department did not have the resources to conduct reviews of rates to determine whether they were reasonable. F. 144. Wirtz Testimony at 1785-86. (25) The rating bureau also filed numerous endorsements and amendments between 1976 and 1984. CCAB at 121. No supporting cost information was provided for any of these amendment and endorsement filings. Nor was there any review of these filings. F. 142 n.217. The Commission concludes that a law violation finding as to Wisconsin rests on several grounds. As with Connecticut, the state insurance department did not examine insurer expenses. A key offcial of the state testified as follows:

Q. Now, the department didn t have any idea what an effcient company s expenses would be for search and examination services? A. No.

Q. But it is your opinion that you would really have to study the search and examination expenses of the individual companies in order to effectively regulate the charges for search and examination expenses? A. Yes. 10 (26) Respondents' generalized assertions of review do not withstand scrutiny. We adopt the AL' s evaluation that Wisconsin followed a hands-off policy in dealing with title insurers. " ID at 97. For example, the 1971 filing was in effect for seven years prior to the filing of any justification.

Inherent in the active supervsion criterion is the notion that the review be meaningfl. If review is not meaningful because a state regulator fails or is unable to evaluate whether rates are "reasonable as required by statute, then the rates are the product of private and not state action:

And again, it was a state offcial (in Wisconsin) called by respondents who readily acknowledged that insurer expenses were simply not examined although the state recognized how critical those expenses were in rate making. ID at 97-98. For example, checking rates merely for mathematical accuracy under a statute that provides that rates must be reasonable is insufficient 10 Wirtz Testimony at 1778- 1779. See ID at 58. . . . . , .

344 Opinion supervsion. Further, nearly two dozen endorsements and amendments went into effect without being examined at all. However, even if the economic effects of these changes were not substantial, there is no de minimis exception to the antitrust laws. (27) 3. Arizona The AU found that while the state insurance department had a wide range of latent regulatory powers, the actual use of these powers was more hypothetical than real. F. 147-48. Between 1968 and 1981 the insurance department conducted no examination of the rating bureau although there is a statutory requirement for such an examination at least once every five years. F. 148. The AU found that there were "minor rate amendments, adjustments, and endorsements filed throughout the period 1968 to 1980 . . ." F. 152. He advised that (tJhere is nothing in the record indicating that justifications were submitted with these ancilary filings, and the record is inconclusive as to the kind of review, if any, to which they were subject. " ID at 61 233.

A 1968 rate filing brought an inquiry from the state as to how the risk component of the filed rate was derived, but there was " convincing evidence that the rate was either justified by the bureau or reviewed by the state. " ID at 61 , n.233. It appears that the 1968 rate used from 1968 to 1983, apparently represented the rates charged by some members before the bureau was formed. Id. However, on November 3 , 1980, the Arizona Department of Insurance announced that a broad investigation of the rating bureau would be conducted. Before the investigation could be (28) completed a federal civil complaint challenging the propriety of the collective fixing of escrow rates was filed by the United States. The AL did not believe there were adequate grounds for questioning state supervsion notwithstanding Arizona s apparent wilingness to accept with litte or no justification (under its "deemer" statute) prevailng rates that were simply adopted by the rating bureau. He thought that the state validly was involved in what it considered to be a more immediate problemthe rating bureau s attempt to raise and then engraft collectively-set escrow fees onto the existing rate structure. He also believed it unseemly for a federal agency to second-guess Arizona s supervsion priorities when the federal government's own investigation of title insurance in Arizona in 1980 zeroed in on escrow rates. ID at 96. Consequently, the AL accepted the state action defense in Arizona. ), 436 FEDERA TRE COMMISSION DECISIONS Opinion 112 F.

Respondents agree with the AL that active supervsion was present in Arizona. Disputing complaint counsel's chronology of events, respondents state that the 1968 rate filing was "supportble under express statutory language permitting rates to be justified on the basis of the experience of the filing title insurer or rating organization or other title insurers " RRB at 29, citing Ariz. Rev. Stat. Ann Section 20-377. Respondents note that the rating bureau hired an accounting firm to compile industry statistics beginning in 1971; the state insurance department requested these report in 1977. RRB at 30. The (29) rating bureau hired a rate consultant in 1977 and consulted with the Director of Insurance "and developed financial and statistical reporting plans for TIRBA members and subscribers." RRB at 30. "By the end of 1978, ADL (consultant Arthur D. Little) had draft its first profitabilty analysis of the Arizona title insurance industry, covering the years 1972-77 . . . and had submitted to the Directr complete financial and statistical reporting plans, and financial report for the years 1972 through 1977. RRB at 31. Other reporting and review processes are detailed by Respondents. RRB at 32-35.

Respondents also argue that the doctrine of res judicata bars the requested relief. In 1980, the Department of Justice filed a complaint alleging that filing of rates for escrow servce by Title Insurance Rating Bureau of Arizona, Inc., (TIRBA) violated Section 1 of the Sherman Act. See Uniwd Staws v. Title Insrance Rating Bureau of Arion, Inc., ("TIRBA" 700 F.2d. 1247 (9th Cir. 1983). Respondents that the respondents in the instant proeeing were aremembers of TIRBA and subject to the judgment finding liabilty in that case. The United States is also a party to both acions. The res judicata doctrine prohibits splitting a cause of action: pa seeking to enforce a cause of acon must present to the court, either by pleang or prof, or both, all the grounds upon which such cause of acion (30) is preicate. He is not at liberty to split up his demand and proseute it hy piecemeal or to present a part of the grounds upon which such cause of acon is founded and leave the rest to be presented in a suhseuent suit. . .n RRB at 36. Respondents thus argue that the United States has initiated a second lawsuit under the same price-fixing theory used in TIRBA. The government may not now attmpt to enlarg the relief it obtained in the original action or subject the insurers to additional claims that it could have pursued then. RRB at 36.

, ...

J..lt.vn "....LU 344 Opinion Complaint counsel argues that there was no active supervsion in Arizona. The March 1968 filing was filed without any supporting data. From 1968 to 1981 the rating bureau submitted numerous rate changes and endorsement filings, none of which contained any cost or expense data. Complaint counsel states that in Arizona title insurance rates become effective 15 days aftr they are filed if the insurance department takes no action-they are "deemed" to meet the requirements of the statute. The 1968 filing was allowed to become effective in this manner. CCAB at 83. The president of the rating bureau recognized that the department of insurance, which was then in a transition period accepted the filing without any question and without any justification thereof." CCRB at 29. The state insurance offcial admittd that no review was conducted between (31)1973 and 1982. Barberich Testimony at 2289. The department head also could not recall any specific department review of various amendments. Accepting prevailng rates is not permissible, complaint counsel argues, for it is no excuse that the prices fixed are themselves reasonable, citing Catalano Inc. v. Target Sales, Inc. 446 U.S. 643 647 (1980). See also United States v. Trenton Potteries Co. 273 U. 392, 397-98 (1927).

Complaint counsel also contends that whatever supervsion occurrd with regard to collectively-set escrow fees does not, as a matter of law, remedy the lack of active supervision over price-fixing for search and examination servces. CCAB at 86. Further, complaint counsel argues that, as in Wisconsin and Connecticut, the state did not examine crucial aspects of the ratemaking process insurer expenses. CCAB at 87.

Complaint counsel also asserts that res judicata does not bar relief in Arzona. "Respondents interpret the doctrine of res judicata and its rule against splitting a cause of action to mean that once defendants have been found guilty of price-fixing for one product or servce, they become insulated from attack with respect to any other contemporaneous price-fixing that could have been raised in the first action. This contention is wrong." CCRB at 32. Complaint counsel believes that the doctrine against splitting a cause of action prevents bringing multiple lawsuits using different legal theories to remedy the same wrong. (32) CCRB at 33. This case assertedly does not involve use of a different legal theory to remedy the same wrong, price-fixing on escrow servces. This is a different wrong-price-fixing on search and examination servces.

438 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

The Commission finds a violation of Section 5 of the FTC Act as to Arizona because there was no active supervsion. The Commission also finds that the doctrine of res juicata does not bar this lawsuit. First between 1968 and 1981 the insurance department conducted no examination of the rating bureau although there is a statutory requirement for such an examination at least once every five years. F. 148. No active supervision can be said to exist when a state agency does not even carr out the bare minimum of statutory duties entrusted to it. The AU found that there were "minor rate amendments, adjustments, and endorsements fied throughout the period 1968 to 1980 . . . " F. 152. He advised that "(tJhere is nothing in the record indicating that justifications were submitted with these ancilary filings, and the record is inconclusive as to the kind of review, if any, to which they were subject." ID 61 , n.233. As stated above, there is no de minimis exception to the antitrust laws. While the record is said to be inconclusive on the kind of review, if any, that occurred, the burden of establishing this defense was on respondents. See discussion of proponent' s burden supra as set forth in Patrnk v. Burget, 108 S. Ct. at 1663. (33) Although a 1968 rate filing brought an inquiry from the state as to how the risk component of the filed rate was derived, there was " convincing evidence that the rate was either justified by the bureau or reviewed by the state. " ID at 61, n.233. It appears that this rate, used from 1968 to 1983, represented the rates charged by some members before the bureau was formed. Id. Even if one assumes the historical rates were reasonable, this is not a defense under Catalano and related cases. A state may not merely allow private parties to fix prices without active state supervsion. When a state allows a historical rate to go into effect unexamined, it has done just that. Nonetheless, the AU accepted the state action defense because the state was involved in the rating bureau s attempt to raise and then engraft collectively set escrow fees onto the existing rate structure. ID at 61-63, 96. We disagree. A state may not pick and choose which classifications of rates it is going to supervse actively and which wil ignore. There must be a "program of supervsion " under which the state actively supervses all types of rates. "The mere presence of some state involvement or monitoring does not suffce. Patrnk v. Burget 108 S. Ct. at 1663. (34) The lack of active supervision can be seen in a variety of instances. For example, respondents state that the rating- bureau hired an ._ ._ .. . , 344 Opinion accounting firm to compile industry statistics beginning in 1971. Yet the fact remains that the state insurance department requested these reports only in 1977. RRB at 30. The rating bureau hired a rate consultant in 1977. But it was not until the end of 1978 that the consultant had draftd the first profitability analysis of the Arizona title insurance industry, covering the years 1972-77. Thus, there was a substantial time during which there could not have been active supervsion. For example, while the original rates were filed in 1968 the rating bureau did not even begin to initiate a submittal process unti hiring outside help in 1971.

Further, in Arzona title insurance rates become effective 15 days aftr they are filed if the insurance department takes no action-they are "deemed" to meet the requirements of the statute. The 1968 filing was allowed to become effective in this manner. CCAB at 83. The president of the rating bureau recognized that the Department of Insurance, which was then in a transition period accepted the filing without any question and without any justification thereof." CCRB at 29. This lack of substantive review does not comport with the Midcal active supervsion requirement. (35) We hold also that the doctrine of res judicata does not bar the Commission s action as to respondents' activities in Arizona. Respondents argue that "the United States has initiated a second lawsuit under the same price-fixing theory relied upon in TIRBA premised upon the same rate filing activity by the same rating bureau during the same period." RRB at 37. This argument is based on an erroneous recitation of the facts.

In general, the doctrine of res judicata serves the interest of judicial economy and finality in disposition of disputes by precluding parties to a judgment and their privies (footnote omitted) from relitigating the same ' cause of action.''' Durhan v. Neopolitan No. 88-2108, slip op. at 5 (7th Cir. April 20, 1989). In order to determine whether res judicata applies because of the final TIRBA order concerning escrow fees, we must decide if the cause of action which is asserted in the instant case is the same cause of action that was advanced in TIRBA.

Federal courts increasingly have adopted a "transactional" analyti- 11cal approach to res judicata. Durhan v. Neopolitan slip op. at 6. In 11 This is in comparison with the "prof' or " evidence" approach, under which a second action is barrd where there is identity of facts essential to the maintenance of both cass. "Under most factual settings, the transactional approach will result in broader prelusive effec since several theories of reovery may emanate from the same transaction without complete identity of the evidence necessary to sustain each theory. Durhan v. Neapolitan, slip op. at 6.

440 FEDER TRE COMMISSION DECISIONS Opinion 112 F.

the Restatement (Second) of (36) Judgments 24 (1982), causes of acion are the same if they arise from the same "transaction" or common nucleus of operative facts. Id. 24 at 199. 12 "Among the facrs relevant to a determination whether the facts are so woven together as to constitute a single claim are their relatedness in time space, origin, or motivation, and whether, taken together, they form a convenient unit for trial purposes. Id.

The reord shows that the activity at issue here is separate in time TIRBA.space, origin and motivation from the activity at issue in to the instant case, the 1968 rate filing involving search and examination rates was in effect from 1968 to 1983. Wilkie 2074- ID at 61, n.233. The 1968 rate filing for search and examination rates had as its basis "a meeting or series of meetings" (prior to the 1968 filing) involving all the companies issuing title insurance policies. Wilkie 2113. Yet, there was no convincing evidence that the 1968 rate filing was either justified by the rate bureau or reviewed by the state See also Wilkie 2112.before it went into effect. ID at 61 , n. 233. In comparison, it was not until 1977 that the title insurance code of Arizona was amended to include escrow services, the type of servces at issue in TIRBA. Wilkie at 2090-91. The (37) escrow rates were first filed in 1977 in reaction to that legislative change. Wilkie 2107 2121; Barberich 2266. By then, the search and examination rates at issue herein had been in effect for almost a decade. When the 1977 escrow filing was submitted, it was a separate schedule from the search and examination schedule. Wilkie 2132. And when the escrow schedule was refiled as amended in 1978, the search and examination rate structure stayed the same. Wilkie 2099. These facts show that the respondents' activities as to escrow fees and search and examination fees are not so related in time, space origin or motivation as to justify preclusion of the Commission lawsuit. For example, the period during which the respondents agreed to submit collective search and examination rates predated the filing of escrow rates by about a decade. The search and examination rates were permitted to go into effect and remained in effect in the absence of active supervsion for many years prior to the legislative change that led to the collective filing of escrow rates. And when the escrow rates were filed, there was no effect on the search and examination rate structure. We conclude, therefore, that the doctrine of res 12 Th Supreme Court, among others, has referrd with approval to the conceptual framework of the Resttement (Second) of Judgments 24 (1982). See Nev v. United State 463 U.S. 110, 130, n. 12. 344 Opinion judicata does not bar the Commission s lawsuit in Arizona as to search and examination fees. (38) 4. Idaho The AL found active supervsion in Idaho. He stated that the rating bureau was financially audited by the state insurance department. F. 164. A 1975 rate filing was referred to the department' s outside consultant, who provided an analysis. F. 168. The state insurance department also held a public hearing on a variety of matters such as minimum rates. F. 168. A 1980 across-the-board rate increase resulted in the department subpoenaing data from the bureau members relating to insurer expenses and the outside consultant analyzing data. F. 168. The ALl found that there was "no convincing evidence that the Idaho Insurance Department has failed to consider any insurer expense which might impact on rates, including agent retention expense." F. 169. We note, however, that the AL found that " (mJiscellaneous rate adjustments, forms, and endorsements were filed and approved throughout the period 1974-84 with apparently little or no review by the insurance department." ID at 68 n. 259, citing Mitchell Testimony at 2925- , Fraundorf Testimony at 3434- , CX 62A-71B and RX 207-223.

Respondents generally agree with the ALl' s analysis. Respondents state that complaint counsel's "preoccupation with the Bureau filings of miscellaneous forms and endorsements and specialized policies is . . . misguided. Complaint counsel' s implication that lack of recall, years after the fact, suggests (39) lack of regulatory supervision, is specious. Moreover, complaint counsel have made no showing that these endorsements had any real economic impact on title insurance consumers or companies." RRB at 51. Complaint counsel argues, however, that "an official of the rating bureau conceded at trial that the department had not conducted any inquiry into the reasonableness of the title insurers' expenses which were used as the basis for filing the rate increase." CCAB at 104 citing Mitchell Testimony at 2924. Complaint counsel also argues that numerous endorsements and amendments were fied, CCAB at 104 and were approved almost as soon as they were filed, in violation of the statutory 30-day waiting period, and despite the fact that they were unsupportd by any justification data. "The department' analyst who approved the rates testified that he was unaware of what work a title insurer had to perform before the various endorsements 442 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

could be issued. In addition, he was unaware of the costs or revenues associated with issuing any particular endorsement." CCAB at 104- 05. Thus, complaint counsel argues, a $25 charge for issuance of a variable rate mortgage endorsement (which had been rejected in Connecticut because it represented a 25 percent increase in the cost of a $50 000 mortgage title insurance policy, without providing any apparent additional coverage) was accepted in Idaho "without any justification and without any questions or review by the department." CCAB at 106. (40) Commissioners Strenio and Calvani would find that liabilty exists in Idaho because of the state' s failure to actively supervse the filing of endorsements and amendments. Complaint counsel argues persuasively that there was no review of these filngs and, as held above there is no de minimis exception to the Sherman Act. While sampling techniques used within rate filings may be permissible, a state reviewing agency may not unilaterally exempt an entire category of filings from its scrutiny. In effect, the state here was saying that it would actively supervse rates for apples but not for oranges. Perhaps its rationale was that the endorsements were less significant economically. However, when a per se violation of the antitrust laws for price-fixing is involved, one need not judge economic import whether the fixed rate is reasonable. See United States v. Trenton Potteres Co. 273 U.S. 392, 397-98 (1927). One is not required to evaluate whether a fixed price on what may be a small item crosses some threshold of economic concern. There is no necessity to make a minute inquiry" into the substantial nature of a fixed price. Id. (41) 5. Montana The AU found that the Montana Rating Bureau made only one major rate fiing, in 1983. " (The J bureau s fiing included a commitment to gather statistical data and undertake a profitability study for all underwriters and agents in Montana during the year 1984 in order to provide further support for the rate." F. 176. "In connection with the February 22, 1983 filing, a representative of the Montana Rating Bureau met with officials of the Montana insurance department, and apparently was told that while the increase would go into effect immediately, additional support would have to be provided in the form 13 The Commission was evenly divided on the finding of liability as to Idaho. Under the cireumstanees, the Commission has determined to dismiss the complaint allegations as to Idaho. The reasoning in this paragaph is adopted only by Commissioners Strenio and Calvani. See the separate statement of Commissioner Azcuenaga.

, _._ , '1lt;Utt lll.u U'U'- 344 Opinion of financial data showing the profitability of agents and insurance companies for the past six years. There is no evidence that this material was ever provided." F. 177. The ALl found, however, that Montana insurance offcials examined agent retention expenses both before and after the creation of the Montana Rating Bureau, and there is no evidence that the state s method of dealing with the problem by giving the insurance commissioner specific authority to disapprove excessive rates, has been ineffectual." F. 178. Montana also had a statutory provision permitting "file and use" rates. F. 174. The AL found also that in Montana where there has been a history of state involvement in the controlled business and agent commission problems (culminating in specific legislation giving (42) the insurance commissioner authority to review and reject excessive commissions), there is inadequate basis on this record for questioning state supervision during the brief existence of the rating bureau. " ID at 96.

Respondents state that the 1983 rate filing, upon which complaint counsel focuses was personally reviewed and accepted for filing by a Department offcial in charge of title insurance rate fiings." RRB at 52. "The Department concurred in MTISO's (the rating bureau) plan to supply additional financial data on title insurance industry profitabilty to supplement the information presented in the rate filing." RRB at 53. Respondents argue that the 1983 rate filing "was in fact, supported by information discussing the declining profitabilty of the title insurance industry." RRB at 53. "The fiing conveyed MTISO' s plan for developing additional data that would allow the Department to reexamine the rates filed. Id. Complaint counsel states that in Montana, title insurance rates can be used as soon as they are fied.

In line with this hands-off approach to regulation, from 1974 to November, 1984 the insurance department had only one full-time employee in the Rates and Forms Section of the Property and Casualty Division, and that employee was responsible for aU rate and form filings in all property (43) and casualty lines of insurance as well as in miscellaneous other lines, such as title insurance. As the evidence ilustrates, that employee s duties did not involve substantive rate review; only insurance forms had to be approved. CCAB 89.

The 1983 rate filng "was stamped approved in Mr. Stratton (director of the title insurance rating bureau) presence without any discussion of the rates it contained." CCAB at 89. Complaint counsel 444 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

also argues that the "filing on its face acknowledged that it did not contain the support material required by statute. . ." CCAB at 89. The supporting material was never provided." CCAB at 90. Complaint counsel argues that the controlled business hearings and the enactment of a new statute, relied upon by the ALJ, cannot support a finding of active supervsion. Controlled business hearings, which were held three years before the formation of the rating bureau, involved hearings on restrictive legislation designed to keep controllers of business-attorneys, real estate brokers, and lending institutions-out of the title insurance business. Complaint counsel argues that such hearings cannot substitute for supervsion of the price-fixing in question. (44) The Commission concludes that complaint counsel has the better the argument and finds no active supervsion in Montana. For example, the record demonstrates that rates from the 1983 filing went into effect without being examined. F. 177. There is no evidence that the additional data requested by the state was ever provided. Id. This does not constitute a "program of supervsion." The state' subsequent enactment of legislation cannot cure the legal violation that occurred earlier. Otherwse, states would have cart blanche to enact laws retroactively immunizing entities from liabilty after they had violated a federal statute.

6. Ohio In Ohio, the AL found that complaint counsel failed to prove the complaint allegation that respondents used the rating bureau to establish uniform charges for search and examination servces. Between 1972 and 1983, all rates filed by the Ohio rating bureau covered "risk" only. None of the filings purported to contain charges for search and examination services or settlement servces. F. 158. Respondents independently set and published charges for the latter and they were not submitted to the Ohio Department of Insurance. F. 160. Complaint counsel' s entire case on the search and examination issue rested on the supposition that because " risk" rates were justified on the basis of rate of return on total capital they must of necessity be (45) inflated to include such non-risk elements as the cost of conducting search and examination and settement servces. Respondents argue that if the settlement charges and the search and examination charges assessed independently by respondents actually covered the expenses associated with delivering such servces . , 344 Opinion then the subsidization theory urged by complaint counsel "disintegrates." RRB at 57. "Since complaint counsel did not even attempt to prove that the revenues from search/examination and settlement persistently failed to cover the expenses of providing such servces their theoretical argument about the multi-faceted role of the risk rate in Ohio has no record support." RRB at 58.

Complaint counsel' s challenge to respondents' conduct is that respondents used the collectively-set risk rate as a vehicle to obtain their desired level of profit on all their activities. The collectively-set risk rates filed with the insurance department were established by the rating bureau through a rate of return on total capital method of accounting. Under this method, the capital, revenues and expenses used to compute the risk rate include capital, revenues, and expenses attributable to "nonrisk" activities by far the most important of which are search and examination servces and settlement servces. CCAB at 94. Thus, the rating bureau determined what increases to file in the collectively-set risk rates by calculating how much (46) additional revenue was necessary to achieve a targeted rate of return on total capital for all of its members' Ohio operations. "The 1981 rate filing was designed to assure the title insurance industry a rate of return on total capital of 7.52%. Although this price-fixing agreement did not result in uniform charges for search and examination and settlement servces, the agreement clearly had a substantial impact on competition in those markets." CCAB at 96. The Commission finds that there is no liability in Ohio. Although complaint counsel' s argument has theoretical appeal, complaint counsel failed to establish a nexus, other than on a theoretical basis between the collective filing of risk rates and the fees for search and examination and settlement servces.

D. Escrow and Settlement Services The AU stated that it "became apparent at the outset of this proceeding that the complaint allegation respecting settlement or escrow servces was an ancilary issue." ID at 3. " (BJoth sides directed their efforts almost exclusively to the search and examination issue.

We hold that the complaint should be dismissed in its entirety as it relates to settlement or escrow servces. The AU is correct that litte attention was paid to this aspect of the (47) complaint. Indeed complaint counsel did not clearly appeal the AU' s adverse rulings in 446 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

this area. Thus, we conclude that no case has been made as to these servces.

IV. BUSINESS OF INSURANCE Broadly stated, the Commission also must determine whether respondents' business was the " business of insurance" and therefore exempt from antitrust challenge under 2(b) of the McCarran- Ferguson Act, 59 Stat. 34, as amended, 61 Stat. 448 , 15 U. 1013(b). The initial decision describes respondents insurance activities in full detail and also analyzes the general activities of the title insurance industry. We adopt this description by the AI and also conclude that respondents' collective rate setting for search and examination services is not exempt from antitrust challenge. We highlight some of the more pertinent facts below. Preliminarily, it is important to understand the nature of the antitrust exemption at issue. The statutory exemption itself has been discussed in detail by the Supreme Court in Group Life Health Ins. Co. v. Royal Drg Co. 440 U.S. 205 (1979), and also has been applied by the Supreme Court in Union Labor Life Ins. Co. v. Pireno, 458 S. 119 (1982). (48) In Group Life Health Ins. Co. v. Royal Drg Co. the Supreme Court, after noting that antitrust exemptions are to be construed narrowly, stated that the exemption is for the "business of insurance " not the "business of insurers. " Referring to SEC v. National Securities, Inc. the Court noted;

The statute did not purport to make the States supreme in regulating all the activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to laws ' regulating the business of insurance. Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the 'business of insurance' does the statute apply. SEC v. Natioal Securities 393 U. S. 453 , 459-60 (emphasis in original.) In Royal Drg, the Supreme Court adopted a three-pronged test. Whether a particular practice is the business of insurance depends first on whether the practice has the effect of transferring or spreading a policyholders' risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry. See also Pireno 458 U. S. at 129. (49) The Supreme Court noted, with reg-ard to the first prong, that the . . !/. TICOR TITLE INSURANCE COMPANY. ET AL.

344 Opinion primary elements of an insurance contract are the spreading and Royal Drg, 440 U. S. at 211.underwriting of a policyholder s risk. It is characteristic of insurance that a number of risks are accepted some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability upon it." Id. (citation omitted). Underwriting or spreading of risk was said to be " an indispensable Id. at 212.characteristic of insurance. . . The Pharmacy Agreements in Royal Drg were not part of the business of insurance because they did not "involve any underwting or spreading of risk, but are merely arrangements for the purchase of Id. at 214. The Court, agreeinggoods and services by Blue Shield. with the United States position that "there is an important distinction Id. at 214, n.between risk underwriting and risk reduction. . . noted that the cost savings arrangements at issue "may well be sound business practice, and may well inure ultimately to the benefit of policyholders in the form of lower premiums, but they are not the business of insurance.''' Id. at 214. Thus, the Pharmacy Agreements were held to be legally indistinguishable from "countless other business arrangements that may be made by insurance companies to keep their costs low" such as a contract between the insurance company and a drug chain whereby its (50) policyholders could obtain drugs under their policies only from stores operated by the chain. Id. at 215.

As to the second prong, regarding the policy relationship between the insurer and the insured, the Court noted that Congress, in enacting the McCarran-Ferguson Act, had been concerned with the relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation and enforcement-these business of insurance." Id. at 215- , quoting were the core of the " SECv. National Securities, Inc. 393 U.S. 453, 460 (1969). As to the Pharmacy Agreements in question, the Court stated: At the most, the petitioners have demonstrated that the Phannacy Agreements result in cost savings to Blue Shield which may be reflected in lower premiums if the cost savings are passed on to policyholders. But in that sense, every business decision made by an insurance company has some impact upon its reliability, its ratemaking, and its status as a reliable insurer. Id. at 216- 17. As to the third prong, whether the practice was limited to entities within the insurance industry, the Court referred extensively to the ), ), 448 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

Act' s legislative history, noting that in enacting McCarran-Ferguson the primary concern of both (51) representatives of the insurance industry and the Congress was that cooperative ratemaking efforts be exempt from the antitrust laws. Id. at 221. This was attributed to the "widespread view that it (was J very diffcult to underwrite risks in an informed and responsible way without intra-industry cooperation. Id. The Court adopted the explanation from one of the early House Reports that "(tJhe theory of insurance is the distribution of risk according to hazard, experience, and the laws of averages. These factors are not within the control of insuring companies in the sense that the producer or manufacturer may control cost factors. Id. 221, quoting H.R. Rep. No. 873 , 78th Cong., 1st Sess. 8-9 (1943). Further, the Court noted an underlying rationale for the exemption was that to "prohibit combined efforts for statistical and rate-making purposes would be a backward step. . . Id. at 221-22 (citation omitted).

In Union Labor Life Ins. Co. v. Pireno, supra the Supreme Court reconfirmed the three- pronged test from Royal Drg. The Court held that the arrangement in question between an insurance company and a number of chiropractors was not part of the business of insurance since the practice was aimed at reducing the cost of satisfyng claims not spreading risk. Also, the Court explained that the practice must be logically and (52) temporally" connected to the spreading of risk. 458 U.S. at 130.

Turning now to respondents' arguments, they assert that the AU improperly relied upon just the first "risk spreading Royal Drg criterion in ruling on the business of insurance exemption issue. RAB at 45. They cite Pireno for the proposition that" (n lone of these criteria is necessarily determinative in itself. " 458 U.S. at 129. Respondents argue that the McCarran Act exemption may apply where the second and third criteria are satisfied but the first is not. Respondents then argue that in any event, the search and examination process in title insurance satisfies the first "risk spreading" criterion. They cite Pireno for the proposition that the fundamental principle of insurance (is J that the insurance policy defines the scope of the risk assumed by the insurer from the 14 In addition to these Supreme Court decisions, a Court of Appeals addressed the conduct of respondents herein in a similar context inUnitEd States v. Title Ins. Rating Bureau of Ari. (" TIRBA" 700 F.2d 1247 (9th Cir. cert. deie 104 S. Ct. 3509 (1984). 16 A recitation of complaint counsel' s arguments would be superfuous given our substantial agreement with , , . . . . u ---- --.-----.-- -_.u__._ 344 Opinion insured. " 458 U.S. at 131. In title insurance, this role of identifying the risk to be insured is performed through the search examination. Since every real estate title is unique, an (53) insurer cannot reliably assess on an actuarial or statistical basis whether the purchaser will be vested with a fee simple. . . . RAB at 48. Thus, respondents think there is a "logical and temporal" relationship between title search and examination and the underwriting of title insurance risk, because the search has to precede the issuance of the insurance. The process of checking and perfecting title is a substitute for the risk; it eliminates or at least minimizes it. RAB at 53, n.44. Respondents would thus conclude that the fees for performing this risk assessment can be set collectively.

Respondents also think the AU too narrowly interpreted the legislative history of McCarran. Although the Supreme Court in Royal Drg stated that the primary purpose of the McCarran Act was to permit cooperation in insurance ratemaking, the AU concluded that the Act "cannot be interpreted so as to cover insurance company ratemaking that is unrelated to a pooling of risk experience" among insurance companies. ID at 83. Respondents dispute this by citing SEC v. National Securities 393 U.S. 453 (1969) for the proposition that "the fixing of rates is part of this (insurance) business." 393 U. at 459.

Respondents then assert that Royal Drg, following National Securities stated that there was a dual purpose behind McCarran: the primary purpose was to protect the states' power to tax and regulate insurance against Commerce Clause attack, while the (54) secondary purpose was to carve out a limited antitrust exemption for insurance company activities. RAB at 55-56. Thus, quoting the Supreme Court in Royal Drg, the Act "should be read as protecting the right of the States to regulate what they traditionally regulated. " 440 U. S. at 218-219, n.18. Further (b)ecause of the widespread view that it is very diffcult to underwrite risks in an informed and responsible way without intra-industry cooperation, the primary concern of (Congress) . . . was that cooperative ratemaking efforts be exempt from the antitrust laws. Id. at 221. Respondents assert this language means that insurance ratemaking was an exempt category of conduct wholly apart from the question of risk spreading. RAB at 56, and n.45.

Respondents take the position, however, that they "need not and do not base their McCarran Act arguments on any assertion that the Act !;..

450 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

constitutes ' a blanket approval of all rate fixing by insurers irrespective of the connection to risk allocation.''' RAB at 58 , n.4 7. The activity challenged is ratemaking with respect to an insurance function that is directly related to the insurer s decision concerning what risks will be assumed under its policies." ld. We now discuss some of the more pertinent facts in the proceeding. We agree with the AL' s assessment that title insurance policies basically are assurances to the buyer or (55) lender that defects in title discoverable from examining the public record have been brought to the attention of the buyer or lender so they can cure the defect or decide not to go ahead with the deal. ID at 18. A secondary purpose of title insurance, going beyond the scope of an abstract or attorney opinion 16 is to protect the buyer or lender from hidden or "offrecord" risks not discoverable from examination of public records (such as missing heirs, etc.). ID at 18. But the fees for such protection are separate from the search and examination fees involved herein. A title insurance policy may be based on a search and examination conducted by an independent abstractor or an unaffiliated independent attorney. ID at 19. Most title insurance policies, though, involve searches and examinations (56) made by attorney-agents, approved attorneys '8 or employees of the title insurers. ID at 19. A person may wear more than one hat in this business an approved attorney may also function as an unaffiliated independent attorney. Regardless of the form in which the buyer or lender is assured of good title (e. through attorneys' opinion, or title "insurance ) the condition of the title is determined by essentially the same search and examination process. Further, the objective is the same under all forms or processes-to uncover significant impediments to ownership. ID at 23. The nature of the search and examination servce, then, is to provide a statement of the status or condition of title and to call to the attention of the buyer or lender defects discoverable from the public records. ID at 24. In respondent's view, this process determines what risks they are willng to "insure." ID at 24. 16 An attorney s opinion is a substitute in many slates for title insurance, especially in New England and the Southeastern U. S. lD at 18, n.53. The attorney s opinion, like title insurance, involves a critical review of the public records and an interpretation of the legal significance of documents uncovered in the search. ID at 15. 17 An exceptions schedule to the title report or title policy will contain "off-record" exceptions, meaning the insure wil not be covered under those conditions. For example, excepted from coverage will be " (r)rights or claims of parties in possession not shown by the public records" or "Ce)atScmcnts or claims of easements not shown by the public records." F. 87. Some of these exceptions may be removed by off-record procedures. F. 88. But removal of these off-reord exceptions also requires the purchase of extended coverage. 1-'.88. The charges for extended coverage are not covered by the search and examination fees at issue. 18 Approved attorneys are independent attorneys who have been formally designated by respondent insurers "g no", " tn ,.n..""'." """..h "n" "v"min"t;nn In,, !!! .I!VV!\. o.un.M V.I VV!Ur.M , Ic.d i'. 344 Opinion Respondents' basic argument is that the search and examination undertaken prior to the issuance of the title insurance policy is underwriting" because it is on the basis of the search and examination that risk is identified and a decision is made whether to accept or reject it. ID at 28. We agree with the ALJ's assessment that this open-ended definition of (57) underwriting is ilogical because the search and examination conducted for title insurance purposes is virtually the same as the process used for the purposes of rendering abstracts and attorneys' opinions. Further, regardless of the purpose search and examination is carried out by a corps of searchers abstractors, conveyancers, attorney-agents, and approved attorneys who move freely from one form of title work to another, without a perceptible difference in what they do. ID at 29. Respondents' effort to expand the definition of underwriting is unpersuasive because the record evidence is that this is an industry in which standard forms predominate, company manuals prescribe a set routine, and the basic approach of the title insurance business is not to assume any significant risks uncovered by searchers and examiners. ID at 29. The search and examination undertaken prior to the issuance of insurance is intended to provide an accurate search of the public records for title defects, which are to be cured by the insured or excepted from coverage. ID at 30. Thus, we conclude that the search and examination function is not underwriting in the sense of assuming and spreading risk among a universe of insureds. ID at 30. Cf Royal Drg, 440 U.S. at 205.

Instead, the guiding principle of title insurers is to avoid risk. Operating manuals throughout the industry are replete with admonitions that risks are to be excepted from coverage. (58) ID at 30. These operating manuals instruct agents that they must be followed or the agents may be liable for damages. ID at 30 , n. 109. Standard title reports contain standard limitations in the form of a general notice that the policy wil not insure against loss from any title defects listed in an exceptions schedule attached to the report, or any new title defect arising between the date of the report and satisfaction of the standard requirements. ID at 32. 19 The title insurers strictly require their agents and employees to list all enforceable or even doubtful title defects, liens, and encumbrances in the exceptions schedule (called Schedule B). ID at 32.

19 The "standard requirements" are the payment of the purchase price for the property, reordation of the deid, and payment of the title insurance premium. .,. , Opinion 112 F.

Respondents claim, though, that agents and employees, as searchers and examiners, exercise underwriting discretion in writing tite reports or final policies. However, the testimony revealed such discretion" is limited to insignificant defects such as ancient and patently unenforceable mortgages. ID at 33. This is consistent with the finding that there is no credible evidence that respondents have incurred any significant losses traceable to the exercise of discretion by searchers and examiners in eliminating minor title defects. ID at 33. Additionally, the insurer-agent agreements and company directives contain explicit requirements that the agent, without discretion must include all material title defects as exceptions to the (59) policy. ID at 33. The "common rule in the title insurance industry is that enforceable title defects appearing on Schedule B of the title report will inevitably appear as specific exceptions on Schedule B of the final policy unless the insured takes specific steps (for example, payment of mortgage money or posting of bonds to satisfy existing tax or judgment liens) to cure them. " ID at 35. See also ID at 36-38. It follows, then, that the most significant "risk" that title insurers face is whatever peril attaches to conducting a competent search and examination of the public records. ID at 38. But this "risk" has nothing to do with the notion of risk as it is commonly encountered in casualty insurance. In the latter, there is a risk that an unforeseen or uncontrollable event will affect the insured. In search and examination work, the risk is that the title searcher wil not perform competently. Thus, the event triggering compensation here is something caused by 20 Even this "risk" ofor under the control of the title insurer. incompetence (a "risk" indistinguishable from that incurred by all employers in all lines of enterprise) is reduced, though, by the contractual relationship between insurers on the one hand, and abstractors, independent attorneys, etc. on the other, which (60) places upon the latter liabilty for negligence in conducting the search and examination. ID at 38.

It is only in a rare number of cases that respondents may give affrmative coverage if an uncovered title defect is not cured. The risk must be calculable and low, and indemnities or extra premiums are required. Agents and branch employees of title insurers are prohibited from giving such affirmative coverage without prior approval from 20 Cf the Roal Dr Court' s definition of insurance: "The theory of insurance is the distribution of risk according to hazard, experience, and the laws of averages. These factors are not within the control of insuring companies in the sense that the producer or manufacturer may control cost facrs. Roal Dr, 440 D. .:_- u u D_ "'T- 070) '7QH, ('nn 1.. D 0_0 (1QA , 344 Opinion supervsory or home offce staff (and we emphasize that this relates only to a limited set of circumstances). ID at 39, and n. 141 at 39. Again, we stress that these rare circumstances properly cannot be subsumed under the search and examination ratemaking at issue since additional fees are charged for such affrmative coverage. Given these herculean efforts to eliminate risk, it is not surprising that the trial elicited no evidence that any title insurer has incurred any loss by reason of an agent's decision to issue insurance without obtaining prior approval despite the presence of a known title defect. F. 95. Similarly, there is no evidence on the record that in those rare instances when an insurer decides to issue insurance despite the existence of some uncovered risk that this involves a pooling of risk experience or (61) represents an actuarial assessment of risk by an individual insurer. ID at 40 , F. 114.

Consequently, there is a sharp distinction between the two things title insurance companies do: (1) provide a service informing buyers and lenders about known title defects, and (2) in a small number of cases indemnify buyers or lenders under separately charged "risk rates." The bifurcated nature of the business is evident from industry rate manuals that separate out a relatively small charge (the "risk rate") for indemnification. ID at 41. The separate risk rate is not challenged in this proceeding (except in Ohio, as discussed supra). The risk rate stands in marked contrast to the relatively substantial charge for providing information based on the search and examination. ID at 42.

Significantly, title insurance rates are not set collectively through rate bureaus in order to facilitate intra-industry cooperation in the pooling of risk information. ID at 44. The evidence shows that where a title insurance rating (62) bureau establishes either an inclusive rate or a separate rate schedule for search and examination, the cost studies used to support these rates dwell mainly on the cost of carrng out the search and examination, including the fixed costs of title plants and employee staffs. ID at 44; Plotkin Testimony at 2462. This cost is not only easily ascertainable by each insurer, but is also within the control of the individual insurer, and therefore the basic 21 Compare Roal Dr, 440 U.S. at 221 ("(tJhe theory of insurance is the distribution of risk according to hazar, experience, and the lawlI of averages. with F. 114: "there is no evidence that any title insurer whether operating through a rating bureau or otherwse, sets rates by referrng to actuarially determined loss experience. " According to the New Jersey Title Insurance Rating Bureau it is not possible to set up an acuaral stadar for risk assumption bas on loss experience. Risks in the title insurance industry ar of Iowan incidence and to random II characr to justify this typ of rate determination." Respondents' Exhibit 3Z- 454 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

tenet of the McCarran Act-that is, the presumed need for insurers to combine for the purpose of sharing their experience relating to an uncontrollable element (future claims) which is then spread among a large universe of insureds-is not present." ID at 86-87. Uniform rates are established that apply to all members despite any cost differences the members individually face when conducting searches and examinations. ID at 44.

The Commission finds that respondents' search and examination servces are not the "business of insurance." Accordingly, the cooperative rate setting in which they engaged regarding those servces is not properly exempt from the application of the antitrust laws. We agree with the AL' s evaluation that search and examination services essentially are non-insurance services oftn performed by other entities (such as independent attorneys) outside of an "insurance" context. ID at 85. The industry itself separates out the concept of risk by having separate " risk" rates (not at issue herein). Search and (63) examination servces "are regarded by respondents themselves as discrete servces which are usually biled at a price that is entirely removed from any consideration of whatever risk element may be involved in title insurance. " ID at 86. Our only substantive disagreement with the ALJ is with some of his analysis under the Royal Drg standard. The ALJ confined his analysis of the second and third Royal Drg criteria to a fOvtnote. ID at 88 , n.286. He found that there is no evidence that respondents extended their price-fixing beyond their own agents and employees. He also ruled that these services (and the charges for these services) are part of the relationship between the insurer and the insured in the sense that the search and examination determines what is excluded from the policy and the collective rate-making determines how much the insured pays for the coverage received. ID at 88 , n.286. Although our application of the Royal Drg criteria to the facts differs from the ALJ' , our conclusion is the same-the antitrust exemption is inapplicable.

The Supreme Court' s analyses in Royal Drg and Pireno each begin with the admonition that antitrust exemptions are to be narrowly construed. As noted previously, the exemption here is limited to the business of insurance, not the business of insurers. An indispensable characteristic of the business of (64) insurance is the spreading and underwriting of a policyholder s risk. Royal Drg, 440 S. at 211- 212; Pireno 458 U. S. at 127. VV.l. 11.u IH'-U.ld'1..HvCl vVnU:.t'!I , Cll .t. 344 Opinion The parties expended considerable energy arguing about the relative importance of the three criteria set forth in Royal Drg. Our analysis proceeds from the Supreme Court' s statement in Pireno that ( n Jone of these criteria is necessarily determinative in itself, . . . 458 S. at 129." Support for the contention that none of the criteria is determinative is found in the fact that the court examined all three criteria in both Pireno and Royal Drg. An alternative contention stresses the "necessarily" in the Court' s language in Pireno suggesting that in a particular case one criterion might be determinative. Under this view, the Court's review of all three factors in both cases may have been undertaken for the purpose of ilustrating how the criteria should be interpreted. We find both contentions plausible. Given this conundrum, we could choose a method of analysis that utilzes a balancing test while examining all three criteria. Such a balancing approach could flow from the statement in Pireno that (wJe may assume the challenged peer review practices need not be denied the 2(b) exemption solely because they involve parties outside the insurance industry. But the involvement of such parties, even if not dispositive, constitutes part of the inquiry mandated by the Royal Drg (65) analysis. " 458 U.S. at 133 (emphasis in original). This is consistent with the Court's language in the same opinion that " ( n Jone of these criteria is necessarily determinative in itself. " 458 U. S. at 129. (Note, again, the use of the word "necessarily" in this last statement-it may mean that in an individual case a single criterion could be determinative.) We need not engage in any balancing of the Royal Drg criteria here, though, since our examination reveals that the activity in question fails to meet all three criteria. A second, parallel method of analysis would be to treat underwriting and risk spreading as the essence of all three criteria. This is suggested by the Court's statement that underwriting and risk spreading is an "indispensable" element of insurance. Further, when the Pireno court examined the second criterion, it focused on the fact that the peer review under scrutiny occurred only after the risk had been transferred- "the challenged peer review arrangement logically and temporally unconnected to the transfer of risk accomplished by ULL's insurance policies. " 458 U.S. at 130. The Court also noted that the third criterion arose out of the need to protect "intraindustry cooperation" in the underwriting of risks- (aJrrangements between insurance companies and parties outside the insurance industry can hardly be said to lie at the center of that legislative 456 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

concern. " 458 U.S. at 133. Under this second method of analysis, we conclude that respondents ' search and (66) examination servces are not the business of insurance. We now elaborate upon the basis for this conclusion.

As to the first Royal Drg criterion, we hold that the practice under scrutiny here does not underwrite or spread risk. Separate risk rates are not at issue. The complaint challenged collectively set rates that have as their foundation the noninsurance servce of informing buyers and lenders of the existence of title defects on properties. FF. 102- 103. The costs of performing these servces (including the fixed costs of the title plants)-and not claims from losses incurred by insuring against risks-largely drive the rates charged. F. 99. Thus, we are not convinced by respondents' argument that the search and examination defines the risk that is transferred. Rather, respondents' search and examination activities, in addition to informing buyers and lenders about the status of the title, also serve to reduce respondents expenses by excluding risk (e. liens, etc) from coverage. Search and examination servces, like the Pharmacy Agreements in Royal Drg, are indistinguishable "from countless other business arrangements that may be made by insurance companies to keep their costs low. Royal Drg, 440 U.S. at 215. As the Supreme Court noted in Royal Drg, there is an important distinction between risk underwriting and risk reduction. By reducing the total amount it must pay to policyholders, an (67) insurer reduces its liability and therefore its risk. But unless there is some element of spreading risk more widely, there is no underwriting of risk. Royal Drg, 440 U.S. at 214-15 n. 12.

The record shows that this is an industry in which there is little, if any, real discretion during the search and examination process precisely because the title insurers want to eliminate risk coverage from the contract with the insured. FF. 72, 75- , ID at 85. Risks in fact are excluded routinely from coverage (with the limited exceptions noted in the record for which an additional "risk" fee is charged). Indeed, the rates charged to the insured are not based on the risk associated with that particular property but rather on the purchase price of the property. F. 100.

Our finding is consistent with the decision by the ninth circuit in TIRBA which held that the provision of escrow services by title immranr.p omnanip nop.R not. fall wit.hin the hllf=inp.RR of immranr. , 11\.V.n 111 U'IOU.I\J'I"""- ""v '.....n..... . "".. H. 344 Opinion exemption. 22 The escrow servces at issue are similar to those under scrutiny here in that "the escrow agent reviews documents demonstrating the removal of encumbrances which would otherwse have to be excluded from insurance coverage. " (68) 700 F.2d at 1251. As noted above, the purpose of search and examination is to find defects which then are excepted from coverage. The TIRBA court accepted the government's argument that the escrow agent performed "merely ministerial functions" and determined that the escrow process itself does not spread or underwte risk. Id. The court rejected the argument that "mechanisms that merely reduce costs to the insurer are part of the business of insurance. Id. The second criterion involves the policy relationship between the insurer and the insured and focuses on "the type of policy which could be issued, its reliabilty, interpretation, and enforcement." Piren, 458 S. at 128. We are convinced that the risk spreading or underwriting concept applies to this criterion. CCAB at 27. The title examiner s search and examination does not involve the spreading or underwriting of risks. Instead, a search and examination only provides information to the insured and the lender as to the status of title. The insurance company separately determines what must be excluded from the policy that is later issued. FF. 59 and 74. The genera) rule of title insurers is that all identified liens and encumbrances must be (69) listed on the policy as exceptions to coverage. The title examiner does not decide to provide coverage; the title insurer has already decided, as a matter of company policy, not to assume the risk of loss from existing liens and encumbrances. CCAB at 29.

We agree with complaint counsel that correctly applied to title insurance, the "insurer-insured" relationship only extends to the decision of whether a particular defect should be given coverage, such as whether or not to provide coverage for mechanics liens. CCAB at 29. "The legal examination of title that merely reports, in a given case, whether a mechanics' lien has been fied, is a legal determination that is unrelated to insurance company decisions regarding the coverage of policies." CCAB at 29-30. We thus hold that the search 22 The TIRBA court note also that the pre-Roal Drg cass cite hy TIRBA were not helpful to TIRBA' position. See 700 F.2d at 1251 , n. 1. We agr. Pror to Roal Dr, there existed "an expansive interpretation of the 'business of insurance' requirement. . . Id. We thus decline to rely upon those same pre-Roal cass now cite by respondents.

2S In accord isTIRBA 700 F. 2d at 1252, where, in analyzing the second criterion, the ninth circuit rejecd TIRBA' s argument that the escrow proess is essential in detennining what risks wil be accepted by the title insurer.

, , Opinion 112 F.

and examination, as properly interpreted, is not a part of the "insurerinsured" relationship.

The third criterion concerns whether the practice is limited to entities within the industry. In Pireno the Court stated that the involvement of outside parties need not result in a denial of the exemption (b Jut the involvement of such parties, even if not dispositive, constitutes part of the inquiry mandated by the Royal Dr analysis." 458 U. S. at 133. Referrng to Royal Drg, the Pireno court then noted that " 2(b) (of McCarran-FergusonJ was intended primarily to protect 'intra-industry (70) cooperation' in the underwriting of risks. Id. Arrangements between insurance companies and parties outside the industry can hardly be said to lie at the center of that legislative concern. Id. More importantly, such arrangements may prove contrary to the spirit as well as the letter of 2(b), because they have the potential to restrain competition in noninsurance markets. Id.

In its examination of the third criterion, the TIRBA court granted that the fixing of escrow servce prices took place among members of the industry. "Thus, TIRBA's activity would seem at first glance to satisfy the third requirement. TIRBA 700 F.2d at 1252. The complication " as the TIRBA court termed it, was that entities other than insurance companies perform escrow servces so that immunizing price-setting by insurance companies who perform escrow servces would distort competition by those who are not insurance companies. Id. As a consequence, the TIRBA court ruled that the escrow service price fixing did not satisfy the third criterion. This result seems compatible with the concern expressed in Pireno about avoiding the restraint of competition in noninsurance markets. Our reasoning is in accord with that of the ninth circuit in TIRBA. Both the escrow servces at issue in TIRBA and the search and examination services at issue here are ministerial and noninsurance in nature. TIRBA 700 F.2d at 1251. Further, both escrow and search and examination services are commonly provided (71) apart from any insurance " trappings. The escrow servces in TIRBA could be bought apart from buying title insurance. Id. at 1252. In the instant case attorneys' opinions can be a substitute for title insurance. Thus immunizing price-setting by insurance companies who perform search and examination servces may distort competition in non-insurance markets in states where the use of an attorney s opinion is stil commanol"".. F :\fi 344 Opinion There is an additional reason why respondents' activities do not meet the third criterion. As we read Pireno 8 discussion of the third criterion, the Supreme Court was concerned with protecting the legitimate "intra-industry cooperation" needs of the insurance industry for the purpose of underwriting risks. 458 U.S. at 133. Yet, the industry itself believes that it is not possible to set up an actuarial standard for risk assumption based on loss experience. F. 114. As the Al found, there "is no evidence that title insurance rates are set collectively through rating bureaus as a way of obtaining intraindustry cooperation in the pooling of risk information. " F. 114. See FF. 112- 115 generally. It is noteworthy that the search and examination services are provided by both insurance companies and persons that do not participate in the insurance business (such as independent attorneys providing opinions), indicating the lack of need for intra-industry cooperation. While the price-fixing encountered here encompasses charges for tasks performed by the (72) employees and agents of the title insurers, we conclude that those employees and agents are not performing an insurance function at the time. Respondents assert, however, that one Court of Appeals has expressly rejected the view that only ratemaking arrangements limited to the risk or loss portion of insurer s expenses are exempt citing the pre-Pireno case of Proctor v. State Farm 675 F.2d 308 323 (D. C. Cir. 1982), cert. denied 459 U.S. 839 (1982): Risk probability is only one element of the ratemaking formula, however. Insurers must also factor in the magnitude of the loss. . the cost of repairing (or replacing) the damaged vehicle. . . . In this case, insurers have allegedly collected and shared data on the cost of repair. . . such activity is closely akin to cooperative ratemaking since it involves a necessary part of the ratemaking process. The reasoning of this case does not help respondents. ' Clearly, a single insurer s ability to predict costs of repair on a car may be improved by examining industry average data (73) by surveying 1000 cases to determine what garages charge to repair a fender on a particular car. Obviously, it would be easier to do this by sharing data among insurance companies. This type of actuarial assessment however, does not take place in the title insurance industry for search and examination rates. Respondents state that the title history of each transaction is unique and consequently "an insurer cannot reliably 24 There is serious question whether Procto has continuing vitality in light ofPirer. The Procto court expressly disagrd with the second circuit' s decision inPiren 650 F.2d 387, 394-95 (2d Cir. 1981). The Supreme Court, however, affnner the second circuit' s decision. Pirf! 458 U. S. at 134. , , 460 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

assess on an actuarial or statistical basis whether the purchaser will be vested with fee simple title or whether any defects or encumbrances exist with respect to the particular property to be insured. RAB at 48. See also F. 114. Instead, search and examination rates are set essentially by looking at the costs of bureaucratic operations rather than claims experience. Such costs are individually ascertainable by each insurer. ID at 86-87. 25 (74) We conclude, then, that the activities under scrutiny are not protected by the "business of insurance" exemption. The activities fail to meet all three of the Royal Dr criteria. In addition search and examination" servces, performed by noninsurers and insurance companies alike, do not have the indispensable element of risk spreading or underwriting necessary to qualify as the business of insurance.

V. THE NOERR-PENNGTON DEFENSE Respondents argue that the activities in question are protected from antitrust challenge under the Noer-Pennington doctrine. 26 That doctrine, generally speaking, establishes that concertd private efforts to persuade governmental authorities to take action to restrain competition are not subject to the Sherman Act, absent circumstances where such concertd petitioning constitutes a "sham " or an abuse of process.

The AI held that arguing that forbidding the collective fixing of rates by competitors somehow interferes with their right of political advocacy is analogous to saying that contractors should be allowed to conspire to rig bids on government projects so long as the results of the conspiracy (75) are wrapped in the trappings of a ' petition' or proposal which may be said to convey policy information to offcial decision-makers." ID at 99. The AU thus denied use of the defense. 25 Respondents also rely upon In re Equifax 1m. 96 FTC 844 (1980). Complaint counsel counters that in Equifa: the Commission found exempt the collecion of medical information frm doctors by a consumer reporting agncy for use by insurance companies in deciding whether to accept insurance applications and pay claim. (footnote omitt) In Pire. the district court found exempt the collection of medical information by insurance companies frm a per review committe of chiropractors for the purpse of deciding what would constitute reasnable claim payments. (footnote omitt) The Second Circuit and the Supreme Court, however held that the acivity (in PireJ was not part of the 'business of insurance.' (footnote omitted) The information gathering function in Equifax did not even provide as strong an argument for an exemption as was the cas in Pirer beause in Equifa: the information gathering was done by an independent company, not by the insurer." CCAB 37. We with the assessment of complaint counsel that Equifax is no longer ag law in light of Pirer. CCAB at 36-40.go26 This docne is bas upon: Ea;te R. Presits CCfj v. Noe Mawr Freiht, 1m. 365 U.S. 127 (1961); Unite Mine Workes v. Penningto 381 U.S. 657 (1965); and Califoria Mawr 'Iansor Co. Trking, Unlimited 404 U.S. 508 (1971).

344 Opinion Respondents argue inte alia that the AL' s ruling conflicts with Horsem s Benvolent and Protective Associtio, Inc. v. Pennsylvania Horse Racng Commissi 530 F. Supp' 1098 (E.D. Pa. affd that case, a jockeys' guildme. 688 F.2d 821 (3d Cir. 1982). "In allegedly conspired to restrain trade by petitioning the state racing commission to increase jockey fees. The jockeys allegedly agred among themselves on a proposed schedule of fees, then urged the commission to adopt the schedule. " RAE at 74. In Horsem the court held that the jockeys' guild' s successful attmpt to influence a state commission to increase the jockeys' pay was protected by Noer and thus did not violate the antitrust laws, 530 F. Supp. at 1109. Respondents further argue that they were reuired to fie rates with the state and could not legally charge rates that the state disapproved. Respondents, moreover, disagree with the AL' s bid rigging analogy. Bid rigging is not "joint petitioning," but " a furtive, fraudulent effort to deprive the state' s purchasing agents of the benefits of competition. Bidriggers make no effort to provide relevant information to state respondents (76) sought topolicymakers." RA at 76. "By contrast, influence state policy. . ." RA at 77. "Unlike bidriggers, respondents engaged in this activity openly and above-board. They responded, in fact, to explicit invitations by the state to petition collectively. RA at 77 Respondents also state that the AL' s reliance on United States v. Inc. 672 F.2d 469 (5thSouthe Motor Carrs Rate Conferene, Cir. 1982), rev 471 U.S. 48 (1985), is misplaced. Respondents assert that although the Supr me Court granted certiorari Southe Moto Carrs on the Noer issue the Court did not rule on it. The Court of Appeals decision in that case is said to be "ilogical." RA at 78.

Complaint counsel argues that respondents Noer standard would mean in effec that a group of competitors could collectively file and use rates without any active state supervsion and yet stil be exempt frm the antitrust laws. Labeling that argument as "clearly wrong, complaint counsel asserts that Noer merely protects collective action. It does not protect petitioning to induce lawfl government agreements to use collectively determined rates that mayor may not be adopted by the government. CCAE at 138. 27 (77) 27 Complaint rounsel propose the following Noe stndar. CCAB at 140. Noe should complement the sttea.on docrie. Noe deals solely with collective proposas to infuence and obtain anticompetitive governent acon. The state liion docrine explains that the stte must clearly ariculate and acvely supervse before the paries to the proposal can implement their propols. Thus if a stte permits a collecve proposal to beome effecive without acive supervsion then implementation of the proposal is unlawfl. The (footnote cont' , 462 FEDERA TRADE COMMISSION DECISIONS Opinion 112 F.

We find the Noer defense inapplicable here. First, we are not being asked to consider the legitimacy of collective attempts to lobby the state to require concerted rate-making. 28 Rather, respondents merely agreed on what rates should be submitted to the state for consideration, aftr which they implemented the collectively-set rates. If respondents had instead agreed on a political advocacy campaign to convince the state to adopt or change a ratemaking policy, such activity would be protected. The agreements in this case, however were not coincident to the formulation of positions on the desirabilty of collective (78) rates. 30 We thus think respondents mischaracterized the evidence when they stated that they "sought to influence state policy. . . . RAB at 77.

The Supreme Court' s recent pronouncement on Noerr in Allied Tube Conduit Cor. v. Indian Head, Inc. 108 S. Ct. 1931 (1988), is directly relevant here. The Court stated that Noerr immunity of anticompetitive activity intended to influence the government depends not only on its impact, but also on the context and nature of the activity." 108 S. Ct. at 1939. The context and nature of the defendant's activity in Allied made it "the type of commercial activity that has traditionally had its validity determined by the antitrust laws themselves. Id. Consequently, Noerr protection was not available in that case. (79) Using the Allied analysis, we must evaluate the "context and nature" of respondents' activity to determine whether it is the type proposal (and the agrment on price that preceded the proposal) is protectedNoerby but the implementation constitutes anticompetitive private action for which the private actor: may be held liable. In the instant cas more than petitioning tok place. Respondents also prod ded to charge the collectively-set rates. GCAB at 144.

28 Respondents aso cite in pagsingLleellyn v. Crothes 765 l".2d 769 (9th Cir. 1985). The court, with spars language, ruled there was a valid Noer defense where "lobbying effort" by a public curpration defendant (Salt) "resulted in lawful action" by the state workers' compensation department. Id. at 775. However, the instant cas does not involve lobbying-it involves collective rate setting. 29 Such a distinction is important beause in Noer the Supreme Court distinguished collective lobbying activities from the kinds of combinations "ordinarily characterized by an express or implied agreement or understanding that the participants wil jointly give up their trade freedom. . . through the use of such devices as price-fixing agrements. . . and other similar arrangements. " 365 U. S. at 136. 30 Cj. Litto Syste, Inc. v. AT&T Co. 1982-83 CCH Trade Cas. 65, 194 (2d Cir. 1983). at 71 777: AT&T errneously assumes that a mere incident of regulation-the tariff fiing requirementtantaount to a request for governmental adion akin to the conduct held protected in Noerr and Penningtn. . . The decision to impose and maintain the interface tariff was made in the AT&T boardrom, not at the FCC. . .

81 As we stated in New England slip op. at 23 (b)ecause of its context (private standard-setting) and nature (packing the annual meeting) the Court concluded that Alled' s activity, in essence promoting agrments not to manufacture, distribute, or purchase plaintiffs product id. at 1937, was 'the type of commercial activity that has traditionally had its validity determined by the antitrust laws themseh'es id. 1939.

..

344 Opinion that has "traditionally had its validity determined by the antitrust laws themselves." Respondents' collective rate formulation and adoption were equivalent to a horizontal price agreement among competitors. Such an arrangement traditionally has had its validity determined by the antitrust laws. Immunizing respondents' conduct would lead to the result the Supreme Court in Indian Head said should be avoided:

Just as the antitrust laws should not regulate political . activities simply because those activities have a commercial impact (citation omittd) so the antitrust laws should not necessarily immunize what are in essence commercial activities simply because they have a political impact. (footnote omitted) Indeed, the Court in Allied employed an example that is tellng: We cannot agre with (Alled' s) absolutist position that the Noer doctrine immunizes every concertd effort that is genuinely intended to influence governmental action. If all such conduct were immunized then, for example, competitors would be free to enter into horizontal price agreements as long as (80) they wished to propose that price as an appropriate level for governmental ratemaking or price supports.

108 S. Ct. at 1938-39.

Thus, respondents' collective rate setting efforts can "more aptly be characterized as commercial activity with a political impact " 1 08 S. Ct. at 1941, than as political activity with a commercial impact. Consequently, we hold that the Noerr doctrine does not immunize respondents' collective ratemaking from the antitrust laws. Horsemn a case on which respondents rely, was decided before Allied. It did not include in its reasoning the Allied formulation that the antitrust laws should not necessarily immunize what are essence commercial activities simply because they have some political impact. The factual premise in Horsemen, furthermore, differs from that herein. Horsemen 8 was based on an "information" rationale: The Noer-Pennington doctrine is applicable here. The members of the Dockey Guild, in the exercise of their First Amendment rights of association and to petition the government, may jointly submit a proposal to increase jockey fees to the Horse Racing Commission. Since the law permits them to do this, it follows that (81) they must be permitted to confer and to agree upon the fees they wish to propose. (citation omitted) It is vital to the effective functioning of the Commission that it be informed by the jockeys and other interested parties concerning the effectiveness or inadequacy of the current jockey fee schedule. In order to accomplish this objective, it is 464 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

clearly pennissible for the Commission to consider data and suggestions submitted by the jockeys themselves who unquestionably are the most fertile source of infonnation concerning the adequacy of their compensation. (footnote omitted) In other words, the Horsemn court placed reliance on the necessity for private collective action in order to enable the governmental authorities to receive vital information and accomplish the underlying objective of the state regulatory scheme.

As such Horseme does not help respondents' argument. The Horsemen court relied on the needed participation in the decisionmaking process of the regulated parties, who provided data that helped the state carr out its regulatory program. But as noted herein there is no such "need" for participation by the regulated parties here. The collective setting of search and examination rates has no logical connection with underwriting and risk spreading; there is no evidence that collective ratemaking (82) is undertaken by title insurers for the purposes of sharing their collective risk experience. To the contrary, the record evidence is overwhelming that both joint and individual rates for title insurance (i. apart from the "risk" rate) are set by looking to the cost of performing the search and examination servce rather than the claims experience of insurers. This cost is not only easily ascertainable by each insurer, but is also within the control of the individual insurer, and therefore the basic rationale of the McCarran Act-that is. the presumed need for insurers to combine for the purpse of sharing their experience relating- to an uncontrollable element (future claims) which is then spread among- a larg-e univers of insureds-is not present. (Emphasis supplied) ID at 86. We thus conclude that Horsemen even if it is good law aftr Allied is inapposite. If anything, respondents' provision of information can be characterized essentially as a "sham " analogous to the unprotected "sham" petitioning behavior in (83) Califoria Motor Transport v. Truking Unlimited 404 U.S. 508, 513- (1972).

VI. RULE OF REASON The AU held that the collective ratemaking activities of a rating bureau are not governed by the rule of reason because such agreements are per se ilegal. ID at 100. Respondents argue inter alia however, that the Supreme Court' s pronouncements in Broad- S2 We note in passing that nothing in our decision would prohibit parties collecively frm providing meaningfl information to state authorities, such as proposing statistical methodologies by which a state commission could determine whether individual submissions and rate request by members of the industry were "reasnable.

.

J.J.\JVh J.J. .a 'UU o.HV.. V"HU ru. , .... H.. 344 Opinion cast Music, Inc. v. CBS 441 U. S. 1 (1979), and NCAA v. Board of Regents of the University of Oklahom 468 U.S. 85 (1984), stand for the proposition that price-fixing should not be treated automatically as a per se violation of the antitrust laws. Respondents also contend that the rate filings in this case cannot be considered per se unlawfl because they were filed through state-sanctioned rating bureaus and because such rates must meet certain statutory standards (e. reasonableness).

We disagree with respondents' argument. Using the reasoning we employed in Massachusetts Board of Registration in Optomtry, 110 FTC 549 (1988), we find the challenged agreements are inherently suspect. Id. at 604. Respondents have not advanced, (84) and we cannot conceive of, any plausible effciency justification for their price-fixing activities. Nor can they argue that title insurance would be unavailable but for their price-fixing-the record is clear that in the majority of states such practices are not permitted and title insurance" still is provided. Accordingly, we hold that respondents price fixing violates Section 5 of the FTC Act. VII. REMEDY The Al would issue an order limited to the states where there was a law violation and prohibit respondents pzrpetually from discussing, proposing, setting or filing any rates for title search and examination servces through a rating bureau. We concur with this assessment of the appropriate scope of the order although we have expanded the number of states included in the order.

To the extent an order is appropriate, respondents argue that the Al' s order is overly broad in that it would not permit rate bureau participation even where protected by the state action doctrine. 33 We agree with this point and the attached (85) order incorporates an appropriate reflection of the state action doctrine. Respondents also contend that the order should not be perpetual stating that their participation in the rating bureaus was conducted openly and in good faith observance of existing legal standards. RAB at 85- , RRB at 111. "The current volatilty of the law of state that any order should contain a state acion proviso. However, complaint 38 Complaint counsel ags counsel' s propose proviso would limit the defense to those states that provided for acive supervision through notice, comment and written decision procedures. CCAB at 157. We reject such an approach as being to rigid an application of the acive supervsion requirement. Respondents also oppose complaint counsel' s suggstions that the order should encompass all forms of price fixing and not be limited in gegraphic covera. We need not discuss those arguments in view of the relief ordered.

(;;:

466 FEDERA TRAE COMMISSION DECISIONS Opinion 112 F.

action immunity, as well as the possibility of future changes in state regulatory practices, warrants that any decree that purports to spell out a standard of 'active supervsion' be of limited duration. " RRB at 111-112.

Our proposed order enjoins the respondents from fixing prices for title search and examination servces in perpetuity. It is the general policy of the Commission, in order to foster deterrence, that conduct prohibitions be perpetual. Respondents' claim that courts and the Commission have found it necessary to limit the duration of orders " similar circumstances" (see RAB at 86) is unfounded. For example respondents cite for this point In the Matter of Krafico Cororation 89 FTC 46 rev d on other grounds 565 F.2d 807 (1977). In this case Krafto was found to have violated both the Clayton Act and the FTC Act by (86) use of an interlocking directorate. Krafico 89 FTC at 60. While the Commission did limit the duration of the provision of the order specifyng a particular means of compliance with the order, the Commission in no way limited the duration of the order s core prohibition against such practice. Krafico 89 FTC at 69-70. Respondents also cite Occidental Petroleum Cor., et al. 101 FTC 373 (1983). However, that case involved removal of a perpetual conduct provision under the order modification process after consideration of a petition and opportunity for public comment and after passage of time under the order had demonstrated there was no need for the perpetual provision. The Commission expressly reiterated that perpetual conduct orders remain appropriate. Occidental 101 FTC at 374.

Respondents' assertion that the order should not be of perpetual duration because it responds to actions taken openly and in good faith is unpersuasive. The order against respondents is narrowly crafted and wil not impede their lawful business activities. Further, the perpetual aspect merely forbids conduct-horizontal price-fixingwhich is per se unlawful. (87) Respondents good faith" assertions remain unproven among contradicting hypotheses. But, in any event once stripped of the inadequate state action and business of insurance justifications, these activities have been shown to constitute pernicious antitrust violations.

Similarly inapposite is respondents' citation Lewx,of Inc. v. Federal Trat Commissio 417 F. 2d 126 (2d Cir. 1969). The three-year term limitations there were imposed upon fencing-- in provisions, not core tin... "1"'';'';'''''' " ,,, H'D ll- "f T."",,., ''''''''lWl't,, 77 J;(' I/r.n Qr.1 (1Q7f1 J.J.J.J. J.nIJVJ.o....J. \...J.UJ..n. 1."- =.. 344 Separate Statement SEPARATE STATEMENT OF COMMISSIONER TERRY CALVAN I concur in the Commission s decision, with one exception. I would affrm the Administrative Law Judge s findings that New Jersey and Pennsylvania have clearly articulated a policy to displace competition. In each state, the statutory language suggests that its authorization of collective rate-making for insurance might not extend to servces provided by insurance company attorney-agents. Each statute, aftr describing the scope of regulated fees, provides that those do not include charges paid to an attorney. For each state, the Administrative Law Judge resolved what he perceived as statutory ambiguity by examining the state s practice and intent. Pennsylvania filed an amicus brief explaining that it interprets its own law to make regulated inclusive insurance rates (that is, those that include search and examination) applicable to attorney-agents, and that the legislature merely intended by the proviso to exclude from this regulatory scheme those aspects of an attorney-agent's law practice that are unrelated to title insurance, such as issuing opinions. New Jersey did not submit a brief, but its evidence showed that its practice is similar to Pennsylvania In Southern Motor Carrers the Court said that special deference should be given to a state administrative agency s interpretation of its own regulatory statute. 471 U.S. at 64. The two states' agencies interpret their statutes as requiring filing of fees by all agents who issue commitments and policies, including those who are lawyers. There is no case law authority in either state contradicting the agencies' interpretation of their powers, nor indeed has anyone in either state previously contested them. The statutes are comprehensive regulatory schemes, placing the conduct and fees of all title insurance agents within the agencies' regulatory jurisdiction regardless of attorney status. The provisos are best read as the Administrative Law Judge read them, rhetorical concessions to the bar alleviate concerns that the agencies not regulate legal fees unrelated to title insurance transactions.

The Commission should not lightly substitute its own interpretation of state laws in contradiction to the states' own interpretation, with no support but its own reading of the texts. I am sensitive to the danger of allowing agency bootstrapping into ultra vires territory, see FMC v. Seatrain Lines 411 U. S. 726 , 745 (1973). But the Commission may not always be the proper agent to prevent that. The issue here is ;,, ;.. ,,, 468 FEDERA TRE COMMISSION DECISIONS Separate Statement 112 F.

whether the respondents have violated the law because the states had not articulated their policy against competition clearly enough. Here the state agencies have formally appeared on the record to assert that their law does indeed articulate such a policy. The laws are not as ambiguous as the Administrative Law Judge believed, but the states practice leaves no room for doubt about what they think they mean. SEPARATE STATEMENT OF COMMISSIONER MARY L. AZCUENAGA CONCURRING IN PART AN DISSENTING IN PART I agree with the majority that the collective ratemaking for title search and examination services engaged in by the respondents in Arizona, Connecticut, Idaho, Montana, New Jersey, Pennsylvania, and Wisconsin was unlawfl price fixing. I agree that title search and examination servces are not the "business of insurance " and that the respondents' collective ratemaking activities are not protected under the Noer-Pennington doctrine. I also agree that the respondents collective ratemaking in Montana, New Jersey, Pennsylvania, and Wisconsin are not protected by the state action doctrine. I disagree however, with the conclusion of the majority that the respondents collective ratemaking was not actively supervsed in Arizona and Connecticut, and I also disagree with the conclusion of Commissioners Strenio and Calvani that the respondents were not actively supervised in Idaho.

Active supervsion is not established merely by the existence of statutory authority to review anticompetitive acts of private parties and disapprove those that fail to accord with state policy. We must also consider whether state offcials exercise that authority. Patrik v. Palrik thatBurget (2)108 S. Ct. 1658 , 1663 (1988). We know from active supervsion requires a review suffcient to ascertain consistency with state policy. I therefore agree with the majority s holding that the active supervsion requirement is satisfied only where a state offcial or agency has engaged in a "substantive review" of the collective rate proposals. Slip op. at 9.

1 The following abbreviations ar use in this statement: Slipop. slip opinion of the majority lD. initial decision I.D. initial decision finding T,. transcript of testimony complaint counsel's exhibit respondents' exhibit h.. h;h;t A .. ..

....,-un """.L U''''_ H-.nv.u VV U"-H.....L , Lo.L 344 Separate Statement The majority s statement that the active supervision requirement is satisfied "only where the state agency has acted affrmatively to review and approve the proposed tariff or rate id. along with its quotation of the majority s statement in New England Motor Rate Bureau Docket No. 9170 (Aug. 18 1989), that "(nJo clear inference of conscious state approval. . . can be drawn from a state agency passive acceptance. . . of rate filings, id. (quoting New England slip op. at 15), suggests that the majority would find active supervsion only when the agency engages in some visible activity. By suggesting that evidence of affrmative activity is required, the majority apparently excludes as a basis for active supervision the use of so-called negative option" procedures, pursuant to (3) which a proposed rate is deemed approved if it is not rejected or suspended by the state agency before a certain number of days have passed. As I explained in my separate statement concurrng in part and dissenting in part in New England slip op. at 3-5 (Azcuenaga, concurrng in part and dissenting in part), this approach may be too facile and may overlook a genuine review on the merits.

The majority s statement that an affrmative, substantive review ensures that the state agency has consciously considered the anticompetitive consequences of the activity," slip op. at 14, reveals a fundamental misunderstanding of the gravamen of the state action doctrine. The agency need not consider the anticompetitive consequences of the private acts it is reviewing; it need only examine the consonance of those acts with the state' s regulatory policy. Although we may earnestly believe that it is a mistake for a state to choose to displace competition among title insurance firms with a regulatory system that permits those firms to set prices collectively, it is not our place to use the federal antitrust laws to displace that state s decision. The majority s apparent distaste for state-regulated price-fixing, which I share, perhaps carres more (4) weight than it should in the majority s analysis of active supervision.

The decision of the majority with respect to active supervision particularly diffcult, if not impossible, to reconcile with the recent decision of the Commission regarding active supervsion in New England Motor Rate Bureau Docket No. 9170 (Aug. 18, 1989). In New England the majority found active supervsion in the state of Rhode Island apparently based solely on one post-complaint hearing 2 Negative option proedures (also known as "fie and use use and fie " or "deemer" proedures) were use in Connecticut, Wisconsin, Arizona, and Montana. In Idaho, by contrast, rate fiings. were not effective until they were approved by the department of insurance. See, e. I.D.F. 165. , Separate Statement 112 F.

and the fact that the Rhode Island agency could point to written orders indicating that rates had been approved. New England slip op. at 6- , 21-22. To the extent that the majority prefers visible activity of review over the testimony of state officials that review in fact occurred, there is far more evidence of such activity in Connecticut Arizona and Idaho than there was in the New England case in Rhode Island.

Connecticut The Connecticut rating bureau fied only two general rate proposals one in 1966 and one in 1981. LD.F. 130. The majority concludes that Connecticut did not actively supervise the rating bureau because it did not "meaningfully examine" either of those fiings. Slip op. at 12. The majority also (5J concludes that Connecticut did not give sufficient review to a number of ancilary filngs. Id. As the ALJ noted ( w Jith the passage of time, the facts relating to the 1966 filng are elusive. " LD.F. 130. The record does show that the Connecticut insurance department wrote to the rating bureau on April , 1966, to request additional information and to schedule a meeting between the insurance commissioner and the president of the rating bureau, RX 104; that the rating bureau wrote its members seeking additional statistical data, RX 105; that the rating bureau told the insurance department that it was "preparing the data requested by you" and expected to submit that data soon after May 24 , 1966, RX 105A; that the rating bureau withdrew its original filing in favor of a revised filng, RX 106-07; and that the department approved the revised rate filng several weeks later, RX 11 The majority agrees with the ALJ' s finding that "there is no evidence that the department's request for justification relating to this rate was ever answered satisfactorily. " Slip op. at 12 quoting LD. 130. Of course, the record contains no evidence (6) that the 3 At first glance, the situation in Montana may appear similar. But I agree with the majority that there is no evidence of active supervision in Montana, although my reasons are somewhat different. The record contains virtually no information about the Montana insurance department' s supervision of the 1983 fiing, which was the only general rate filing submitted by the Montana rating bureau in the two and one- half years of its existence. The parties stipulated that the department offcial who was responsible fof reviewing the 1983 filing met with the former director of the rating bureau, Robert L. Stratton, the day he submitted that fiing, but that she has no recollection of what was said at that meeting or whether the rating bureau provided any additional financial or statistical data to the department at a later time. ex 343A. According to the majority, Montana requested additional data about that filing, but "(tJhere is no evidence that the additional data requested by the state was ever provided. " Slip op. at 23(citing LD.F. 177). It is not clear that Montana did seek any additional data about the 1983 filing; the state insurance department sent a letter to the rating bureau seeking additional information concerning a supplemental filing submitted in 1984 RX 227, but I am unable to find on the record any such letter concerning the 1983 filing. Although the 1984 letter appears to anticipate a review on the merits, there exists no other evidence suggesting that such a (footnote cont' 344 Separate Statement department' s request was not answered satisfactorily. Even assuming that the department's request was in fact not answered, this would tell us very litte, if anything, about whether the department performed a substantive review of the rate filing. (7) The letter of April 3 , 1966 , and the subsequent exchange of correspondence demonstrates at least that personnel in the insurance department were aware of the 1966 filng and that they took some steps that indicate attention on their part relevant to a review of that filing on the merits. The more plausible reading of the evidence is that the department's approval of the 1966 collective rate filing was predicated on a review of the filing on the merits. ' My confidence in this reading is strengthened by the clear evidence of active supervsion of the 1981 collective rate filing.

The director of the Connecticut insurance department's Property and Casualty Rating Division, Waldo R. DiSanto, testified that he and another employee of the department, Mr. Walter S. Bell, reviewed the 1981 filng. Tr. at 2744. Mr. DiSanto concluded that the rate fiing, which he described as "well-supported and detailed " met the statutory requirements, so it was approved. Id. at 2744-45. Mr. Bell testified that he read the fiing itself as well as an Arthur D. Little Company report justifying the proposed rates from cover to cover, and that he compared the proposed rates to previous filings. Tr. at 2827- 28. The majority nevertheless concludes that the department (8) did not actively supervise the 1981 rate fiing because it lacked the statutory authority to control the allegedly excessive commissions paid by respondents to their attorney-agents. According to the review in fact oceuITcd in Montana at any time. In Connecticut, Arizona, and Idaho, by contrast, there is credible evidence that stale offcials reviewed some rate filings on the merits; in the absence of evidence to the contrary, it is reasonable tu infer that review on the merits also lok place at other times. In his separate additional statement, Commissioner Strenio characterizes my approach as a "some review active supervision standard, under which "evidence that state offcials occasionally exercised their authority is enough to demonstrate that active supervision has taken place. My colleague apparently misunderstands the basis for my conclusion that Connecticut, Arizona, and Idaho actively supervi::d respondents' collective rate filings. In those three states, there is general evidence that state offcials reviewed rate fiings for consistency with state policy, and particular evidence that certain filings were reviewed. In the absence of evidence that no review of other filings was conducted, I believe it is more reasonable to infer that review of those filings did take place. In Wisconsin, by contrast, where there is evidence that no review of certain filing- took place, I conclude that the respondents were not actively supervsed. See supra note 6. 4 The majority s approach disregards the usual presumption that official! actions by public officers have ben regularly performed. C. McCormick Law of Evie 343, at 807 (2d ed. 1972). 5 Mr. DiSanto testified that he thought commission expenses were "very high " but that his agency had statutory authority only to verify the validity and accuracy of an insurer s claimed expenses. Id. at 2738, 2740. Mr. DiSanto also testified that (T)he reason that commission costs are high is that the title insurance companies do not control or make a market.

(footnote cont'd) , 472 FEDERA TRADE COMMISSION DECISIONS Separate Statement 112 F.

majority, Connecticut's failure to "meaningfully regulate a critical component of the ratemaking process" demonstrates that it did not actively supervse the 1981 collective rate. Slip op. at 12. (9) The Connecticut statute states that insurance rates may not be excessive. Conn. Gen. Stat. 38-201c(a) (JXA at 141). If the insurance commissioner finds that a rate is excessive or otherwise Id. at 38-201p(d). Theunlawfl, he may prohibit the use ofthe rate. statute does not provide for the direct review of expenses and does not authorize the commissioner to prohibit excessive expenses. If the commissioner concludes that an insurer s proposed rate is excessive because its expenses are excessive, his remedy is to disapprove the rate, not to regulate the expense. Implicit in Mr. DiSanto s conclusion that the 1981 filing satisfied the requirements of the statute is the conclusion that those proposed rates were not excessive. His testimony that commission expenses were "very high" is not necessarily inconsistent with such a conclusion.

The Connecticut statute also provides that the insurance department shall consider, among other things past and prospective expenses both country-wide and those specially applicable to this state. Id. at 38-201c(b). The Connecticut insurance department certainly considered the issue of commission expenses. Mr. DiSanto testified that his discussions of the 1981 (10) fiing with the members of the rating bureau "centered around" commission expenses. Tr. at 2737.

The evidence indicates that the Connecticut insurance department did all that was required of it by the statute. The majority does not question that the Connecticut statute meets the "clear articulation The market is controlled and made by attorneys. They control the business because people purchasing homes need an attorney and go to him for the3e functions. The attorney has the ability in most inslances. . to deal with any title insurance company he wants. . Tr. at 2799. Finally, Mr. DiSanto testified that he had no suspicion that the attorney-agents had agrd to fix the commissions they would charge respondents or had pressured the respondents improperly in order to seure higher commissions. Id. at 2804. 6 The majority finds a similar problem in Wisconsin. Although r agre that Wisconsin did not actively supervse the respondents, I do not ba.'I my conclusion, as the majority does, on Wisconsin s failure to scrutinize the reasonableness of each "critical component" of the respondents' expenses. Norman J. Wirtz, a rate analyst in the Wisconsin insurance commissioner s office, testified that "we did not review" the rates filed by the rating bureau for new policy endorsements because it Was assumed that competition among the rating bureau members would drive those rates down. Tr. at 1768-69, 1802-08. Even if Mr. Wirtz s assumption were corrt-and he admitt that he did not know whether competition had driven the endorsement rates downthe competitive price would be fortuitous, not a result of active supervsion. The state action doctrine allows a state to displace competition with regulation. Wisconsin intended to displace competition by authorizing regulated ratemaking, but the state offcials who were given the authority to regulate simply decided not to exercise that authority.

344 Separate Statement part of the state action doctrine. It is not justifiable to insist that the insurance department do more than the statute authorizes it to do in order to satisfy the active supervsion requirement. The majority may believe that attorney-agents of title insurance companies are paid excessive commissions, but the issue here is active supervision, not whether commissions are too high.

The majority s holding that the 1981 filing was not actively supervised because Connecticut did not "meaningfully regulate a critical component" of the proposed rates has other troubling implications. Commissions to attorney-agents are a significant expense for title insurers, but by no means their only significant expense that the agency might need to consider. The majority s opinion in in theeffect may require a degree of government involvement business decisions of regulated firms that begins to look like comanagement rather than external supervision in the form of judgments that proposed rates are or are not excessive or otherwise inconsistent with state policy. One other point deserves mention. Assume that the commissions (11) paid to attorney-agents in Connecticut are excessive-perhaps because those attorney-agents colluded, or due to some market failure. It would be punishing the victims for the Connecticut insurance department to disapprove proposed rates or to take some other action against title insurers. The Connecticut insurance department has the authority to disapprove excessive rates, but it concluded aftr its review of the 1981 filing that the proposed rates were not excessive. The Commission has no reason to doubt that active supervision took place. The majority also holds that what the AU characterized as endorse-Connecticut's " minimal review" of some of the "ancilary" ments and amendments filed between 1966 and 1983 was insuffcient. that Connecticut gaveSlip op. at 12. The record shows, however, appropriate review to all these filings. As the AU noted, some of the ancilary filings were "carefully reviewed. " J.D. at 51 n. 192. In fact at least three fiings were either disapproved or withdrawn and revised by the rate bureau aftr state insurance officials questioned certain features of those filings. Tr. at 2759-69. The AU' s characterization of the review of some other filings as "minimal" seems to be based on Mr. DiSanto s statement that insurance department officials gave greater scrutiny to fiings that had greater significance to (12) of less importance. Id.consumers, and less scrutiny to filings 2772. But Mr. DiSanto also testified that the Connecticut insurance 474 FEDERA TRADE COMMISSION DECISIONS Separate Statement 112 F.

department "reviews every filing that we receive. Id. at 2758. Mr. DiSanto s unrefuted testimony that all the filings were reviewed along with the evidence that some fiings were formally or informally disapproved, is suffcient to support a finding that all the ancilary filings were reviewed.

Arizona The majority concludes that Arizona did not actively supervise respondents' collective ratemaking between 1968 and 1981 because the state insurance department "conducted no examination of the rating bureau although there is a statutory requirement for such an examination at least once every five years. " According to the majority, " (n)o active supervsion can be said to exist when a state agency does not even carr out the bare minimum of statutory duties entrusted to it." Slip op. at 17.

Although the majority's reasoning on this point has some appeal, I am not persuaded that an agency s failure to perform each and every one of its statutory duties necessarily demonstrates that it has failed to supervse rates. The Arizona statute that requires examinations ' rating bureaus does not specify what is to be examined or why. (13) Ariz. Rev. Stat. Ann. 20-370. Nothing on the face of that statute suggests that the required examination is necessary or even related to the state insurance department's review of rates for conformance with state policy. 7 I presume that the examination requirement was intended seriously by the legislature, and I do not dismiss as insignificant the department's failure to perform examinations. But the focus of the active supervision part of the state action doctrine is whether the state agency conducted a review sufficient to ascertain that the private acts conform with state policy. Looking to the agency's performance of ancilary functions, however important those functions may be, may actually detract from what should be our primary concern: that is whether the agency looked at the proposed rates and concluded that they were consistent with state policy.

1 Of course, nothing on the face of the statute prevents the insurance department from using the required examination as a-vehicle for the review of proposed rates. In 1980, the director of the insurance department announced his intention to perform an examination, one purpse of which was to assist the department in the performance of its responsibility to regulate rates. Even if we assume that the examinations that should have ben performed before 1980 also would have focused, in part or in whole, on the reasonableness of proposed rates, it is clear that the department had the ability to review those rateshroug-h other means. The evidence discussed below, including the testimony of Mr. Barberich, indicates that rates were reviewed even though no examinations were performed unti 1980.

344 Separate Statement The majority also concludes that Arizona did not actively supervse certain "minor rate amendments, adjustments, and (14) endorsements" filed between 1968 and 1981 because "there is nothing in the record indicating that justifications were submitted with these ancilary filings, and the record is inconclusive as to the kind of review, if any, to which they were subject. " Slip op. at 17 (quoting I.D. 61 , n.233).

Emil L. Barberich, who was the chief deputy director of the Arizona insurance department between 1973 and 1982, testified that every rate filing submitted during those years was examined to see if it met the statutory requirements. It was scrutinized and it was either approved or disapproved. There would be sometimes situations where more information was needed and once that was obtained and it met the reuirements, it would be approved.

Tr. at 2230. He also testified that the department would have acted promptly if it had believed that any title insurance company was earning excessive profits. Id. at 2262. The majority points to nothing that would call into question the truthfulness or accuracy of this testimony, but concludes nonetheless that the respondents have failed to establish that Arizona actively supervsed their collective filings. Mr. Barberich's unchallenged testimony that his department did (15) scrutinize all such fiings is credible evidence that it did actively supervise collective rate fiings between 1973 and 1982.

The record contains very little information about how the department operated before Mr. Barberich went to work there in 1973 which is unfortunate. It appears that no examination of the rating bureau was performed between 1968 and 1973, but that does not distinguish the earlier period from the tenure of Mr. Barberich. One could infer from this sparse record that the department probably failed to review rate filings. It seems more reasonable, however, to draw inferences from the record evidence about the department' review of rate filings between 1973 and 1982. Government agencies like all institutions, change as time passes. But it would be surprising 8 The reord does contain a letter wrtten by a rating bureau offcial on October 23 1969, which says that the deparment accepted the rating bureau s 1968 general rate filing "without any question and without requirement of any justification theref." RX-60A. This letter tells us only that the author was not asked provide justification or otherwse questioned about that fiing-it does not purport to describe what did or did notocllF inside the stte agncy. The department's failure to sek additional infonnation, like a failure to hold a hearing on a propose rate, does not demonstrate that no review occurrd. 476 FEDERA TRAE COMMISSION DECISIONS Separate Statement 112 F.

if (and we have no reason to think that) the Arizona insurance department' s policies, procedures, and personnel changed completely when Mr. Barberich arrved in 1973. Delores Wiliamson, who succeeded Mr. Barberich, testified that the department's current rate review procedures were similar to those that existed during his tenure. See, e. Tr. at 2190-92. In the absence of evidence to the (16) contrary, the more likely inference is that the department followed similar procedures before Mr. Barberich was appointed to his posi- 9 Having concluded that the department did actively supervsetion. rate filings submitted aftr 1973, I conclude that it is more probable than not that the department also reviewed fiings submitted before 1973.

In his separate additional statement, Commissioner Strenio also concludes that Arizona could not have actively supervised the respondents' collective rate fiings because the personnel in its insurance department were not "qualified" to evaluate the reasonableness of those rates. I do not question my colleague s statement, based on his experience as a member of the Interstate Commerce Commission, that "reviewing rates for reasonableness or possible discrimination is a very diffcult task that generally requires highly qualified experts. " But I believe the Commission should decline to accept his invitation to base our active supervsion determinations in part on a review of the resumes of state regulatory personnel. Federal oversight of the qualifications of state regulatory personnel is hard to distinguish from federal oversight of state regulatory decisionmaking. For example, a decision that actuaries are qualified to be insurance rate reviewers but that accountants (17) (or lawyers or economists or MBA's) are not is essentially a decision that only a particular mode of analysis is acceptable.

Idaho The Idaho insurance department audited the title insurance rating bureau three times between 1974, when the rating bureau was organized, and 1984, when it was dissolved. I.D.F. 164, 171. The department also suspended the rating bureau s first major rate filing until aftr it held a public hearing and amended a regulation relating to a variety of title insurance matters. I.D.F. 168. The rating bureau only other general rate filing was approved only aftr the d partment 9 The majority s holding in Arizona suggests that it would never find that acive supervsion occurrd in a particular time period unless the state employee who reviewed the rates filed during that period so testified. If that is their intention, perhaps it would be weH to state it straight out. .

llluVr. 11.LJ. JHUU.l\.r1..HV.u VVn"'.

344 Separate Statement subpoenaed additional expense data from the rating bureau members and hired a consultant to examine the filing. LD.F. 169. Despite this evidence, Commissioners Strenio and Calvani conclude that Idaho did not actively supervse a number of miscellaneous rate adjustments forms, and endorsements filed by the rating bureau because there was apparently litte or no review" of these filings. Slip op. at 20 (quoting 1.0. at 68 n.259).

That conclusion seems to be based on nothing more than the inabilty of Robert A. Fraundorf, the insurance department offcial who was responsible for the review of those miscellaneous filings, to remember much about the details of those reviews. Given that title insurance filings constituted a (18) relatively small number of the filings that this offcial was also responsible for reviewing-he also reviewed fiings for property and casualty insurance, disabilty insurance, and several other lines of insurance-and that several years had passed since the fiings in question had been submitted, it is not altogether surprising that the official's recall of specifics was less than impressive. On cross-examination, Mr. Fraundorf did testify that he never permitted a title insurance filing to go into effect without reviewing it, and that he "definitely" would have asked questions about each rate filing he reviewed until he was satisfied that the rate was proper. Tr. at 3446-48.

Idaho clearly engaged in active supervsion of some of the respondents' collective filings. Mr. Fraundorfs unrefuted testimony that he reviewed all the filings submitted to the department is credible and, along with the other evidence of review by the Idaho insurance department, is sufficient to support a finding of active supervision of all the fiings in question.

Conclusion The majority s reading of the evidence and application of the state action doctrine loads the dice heavily against the (19) respondents. The majority finds a lack of active supervision even when the record contains direct evidence that substantive review occurred, choosing instead to emphasize various perceived deficiencies. The failure to carr out any statutory requirement, whether that requirement has anything to do with a review of proposed rates for consistency with state policy or not, is taken as proof that active supervision of rates did not take place. On the other hand, the failure to take action to limit commissions paid to attorneys demonstrates a lack of supervsion 478 FEDERAL TRAE COMMISSION DECISIONS Additional Statement 112 F. s enablingeven where such action is not authorized by the agency statute; the agency must review each and every "critical component" of a proposed rate even if the state legislature intended only that it review the reasonableness of the rate itself. This comes perilously close to a "heads we win, tails you lose" standard. As in New England Motor Rate Bureau the majority appears to approach state action as a doctrine to be narrowly construed as an exemption to the federal policy favoring competition. The state action doctrine involves principles of preemption of state or local law federal law. Community Communications Co. , Inc. v. City of , dissenting);Boulder 455 U.S. 40, 60-70 (1982) (Rehnquist, J. accord 321, Liquor Cor. v. Duffy, 479 U.S. 335, 345-46 n.8 (1987); Fishe v. City of Berkeley, 475 U.S. 260, 264-65 (1986). It is not our role to question the correctness of a state agency s decision that proposed rates are reasonable or (20) unreasonable but rather to examine whether a state agency in fact exercises its authority to review privately fixed prices. As an agency concerned with promoting competition, the Commission generally prefers to see prices set by the competitive forces of the market. We have no authority, however, to impose this preference for competition on unwiling states that choose instead to regulate certain industries. To do so would establish the Commission as the arbiter of state policy, a result that the principle of federalism underlying the state action doctrine precludes. The complaint allegations of violations in Connecticut and Arizona should be dismissed.

, JR. ADDITIONAL STATEMENT OF COMMISSIONER ANDREW J. STRENIO The majority and Commissioner Azcuenaga ("minority ) hold contrasting views on how to apply the active supervsion requirement of the state action doctrine. The majority insists upon taking a good look at whether state officials actually have exercised their regulatory authority. ! The minority, however, as I read the eloquent statement by Commissioner Azcuenaga, would be satisfied by a casual glance. In my judgment, this minority position is shortsighted, apart and aside from the potential harm consumers would be exposed to from price 1 The insistence by the majority is consistent with the unanimous Commission decision to appear on the brief before the Supreme Court alongside the Department of Justice in Patrik v. Burget. The brief, fied jointly, emphasized regarding the active supervision issue that " (mjerely finding some state involvement or monitoring does not suffce. " (citations omittedJ Brief for the United States As Amicus Curiae Supporting Petitioner at 8 Patrik v. Burget No. 86- 1145. .. . . . , .

344 Additional Statement fixing should a quick glimpse approach prevail. As I see it, the position espoused in the minority statement is inconsistent with the principles of a number of state action cases including Patrick v. Burget 108 S. Ct. 1658 (1988), impractical, and inclined to pay far more deference to the presumption of the regular performance of public duties than warranted here.

To begin with, the minority approach apparently would consider the active supervsion requirement of substantive review to be fulfilled if there is evidence that state officials (2) occasionally exercised their authority. For example, the minority statement asserts that " (iJn Connecticut, Arizona, and Idaho, there is credible evidence that state officials reviewed some rate filings on the merits; in the absence evidence to the contrary, it is reasonable to infer that review on the merits also took place at other times. " Minority statement at 4 , n. But this logic flies in the face of Patrik where the Court held not only that there must be a "program of supervsion " but also that (tJhe mere presence of some state involvement or monitoring does not suffice." 108 S. Ct. at 1663. Nowhere does the Court suggest that some review" is adequate to provide active supervision. 2 Indeed, the discussion in Patrik belies any notion that "some review" by supervsory agencies or courts wil do. The Court said that the Oregon courts have indicated that even if they were to provide judicial review of hospital peer-review proceedings, the review would be of a very limited nature." (3)108 S. Ct. at 1665. "This kind of review would fail to satisfy the state action doctrine s requirement of active supervision. Id. Such constricted review does not convert the action of a private party in terminating a physician s privileges into the action of the State for purposes of the state action doctrine. Id. Similarly, haphazard evidence of some review of some rate filings can not by alchemy transform the lead of general inattention into the gold of active supervsion.

The impractical nature of the minority position on active supervsion stems from the difficulty of securing firm footing on such a slippery 2 In accord withPatrik' holding that "the mere presence of some state involvement or monitoring does not , n.7 (1987). The Patrik Court characterized Duffy suffice" is 324 Liq Car. v. Duffy, 479 U. S. 335, 345 as deciding that "certin forms of state scrutiny. . . did not constitute active supervision beause they did not exer(tJ any significant control over' the terms of the restraint." 108 S. Ct. at 1663. A " some review" standard also would run counter to theCourt' s admonition in Califaria Retail LiqWJ Dealers Assn. v. MUkai Aluminum, 1m. 445 U.S. 97, 106 (1980) that "(tJhe national policy in favor of competition cannot be thwart by casting such a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement. " Contrary to a " some review" line of analysis, these Supreme Court cases stand for the proposition that even a litte bit of unsupervised price fixing is impermissible. 480 FEDERA TRADE COMMISSION DECISIONS Additional Statement 112 F.

slope. Aftr all, a "some review" standard would beg a series of diffcult questions as to just when and where partial review will be tolerated. For instance, would there be active supervsion when regulatory offcials exercise their authority fifty-one percent of the time? On Tuesdays and Thursdays? When staff is inadequately trained or otherwise incapable of monitoring all types of the private conduct involved? Another diffcult question arises from the minority s dismissal ofthe evidence that the Arizona Department of Insurance for many years did not carr out a (4) statutorily-required, regular examination of the state rating bureau. The minority expresses skepticism that " agency s failure to perform each and every one of its statutory duties necessarily demonstrates that it has failed to supervise rates. Minority statement at 8. Yet the minority does not explain which of these failures to comply with statutory duties are to be excused and which are to be deemed of consequence. ' Nor does the minority (5) explain which principle of federalism provides the lodestar for deciding when a state legislature s directives to a state agency are to be treated seriously and when they are to be treated as optional. Moving along, the minority complains that " (tJhe majority approach disregards the usual presumption that offcial actions by public officers have been regularly performed. " Minority statement at , nA. To the contrary, the majority here concluded following careful 3 Note that as reently as theDuffy cas, the Supreme Court found active supervsion was lacking in a state beause it "does not monitor market conditions or engage in any ' pointed rexamination' of the program. " 479 4S.Theat minority345. statement seems internally inconsistent in this regard. How couid the Arizona Insurance Department have ben examining "the con!!nance of (the private acts at i6sueJ with the state' s regulatory policy" at one and the same time that-despite a statutory requirement which must be deemed part of the state' s regulatory policy-the Department was not examining the state rating bureau? To be sure, the minority statement argues that nothing on the face of the Arizona statute reuiring review diretly speifies "what is to be examined or why." Minority statement at 8. Bul lhe statute reuires an examination, and the Arizona Insurance Department had a clear idea of the type of examination needed. See RX 93-938 (letter from Arizona Department of Insurance Director Low to Title Insurance Rating Bureau of Arizona, Inc., November 3, 1980). When the Department at long last did initiate a statutorily-required examination, it sought to conduct, among other things, "(a)n evaluation of the extent to which there is competition among title insurers doing business in Arizona. . . RX 93. See Finding 152 for a more detailed list.

Of cours, the minority statement contends that " (n)othing on the face of that statute suggests that the reuired examination is necessary or even related to the state insurance department' s review of rates for conformance with state policy." Minority statement at 8. However, Director Low had no diffculty in drawing the connection. He wrote in his letter of November 3 , 1980 that "I believe this examination is a necessary undertaking on behalf of the Department. As you may be aware, the Department has never, to the best of my knowledge, conduclcd an examination of the title insurance rating organization, notwithstanding the fact that ARS 20-370 requires such an examination at least once every five years. " Aftr noting that " the Department has not, as yet, approved the statistical plan prepared and filed on behalf of TIRHA by Arthur D. Little. . ." , Director Low added that "I believe this examination is of critical importnce in permitting the Department to carr out its statutory rate rel!latory responsibilty over title insurers. .". RX 93A- ..

.l.luv.l. .l.l.l.I UH.JU.lo.HU.u v.. .u- "L''' 344 Additional Statement deliberation that the weight of the evidence overcame any presumption of the regular performance of offcial duties. In contrast, the minority at times seems inclined to go to inordinate lengths in constructing chains of reasoning in support of the presumed existence of offcial regularity. For example, the minority expresses confidence that active supervsion took place in Connecticut in 1966 because of evidence assertedly showing active supervision in 1981. Minority statement at 5. But, such a leap of faith can not surmount the chasm of fifteen years. Too much can change by way of policy and personnel to justify a retroactive finding of active supervsion covering the entire period. (6) Caution also is warranted lest excessive reliance be placed upon the presumption of offcial regularity. Patrik and Duffy make clear that the mere creation of a state regulatory mechanism hardly establishes the presence of active supervsion. In the realm of state action law, it is advisable to keep in mind the abuses that could flow from credulity toward all claims of active supervsion. As the Supreme Court said in Patrik ( w Jhere a private party is engaging in the anticompetitive activity, there is a real danger that he is acting to further his own interests, rather than the governmental interests of the State. " 108 S. Ct. at 1663. That is one reason the Court "sought to ensure that private parties could claim state action immunity from Sherman Act liabilty only when their anticompetitive acts were truly the product of state regulation" by establishing a "rigorous two-pronged test. . . 108 S. Ct. at 1662.

Turning now to some of the individual state findings, although a detailed restatement of the majority s assessment is unnecessary, a few comments are worth making in support of the majority conclusion that active supervsion was lacking in Connecticut and Arizona. I do not discuss Idaho below, since an equally-divided Commission found no liability as to that state. (7) Connecticut The minority statement makes much of the exchange of correspondence requesting or promising to supply information about the 1966 filing, but brushes aside the fact that no further evidence tending to show the existence of active supervsion has been introduced. 5 6 The minority statement also assert that ancillary rate filings were adequately supervised. However although some ancillary rate filings were disapproved, overall the review process was inadequate. Mr. DiSanto testified that the department never examined insurance company expenses for reasonahleness. DiSanto Testimony at 2793. DiSanto testified further that expense information supplied by the title insurers in their (footnote cont' Additional Statement 112 F.

According to the minority, the "more plausible reading of the evidence is that the department's approval of the collective rate filing was predicated on a review of the filng on the merits." Minority statement at 4. This observation does not carry the day. In the first place respondents had the burden of showing active supervsion and did not do so here. The Supreme Court in Patrick reaffirmed its long-held tenet that respondents have the burden of demonstrating the actual exercise of regulatory authority. See Slip Op. at 9- 10. See also City of Lafayette v. Louisiana Power Light Co. 435 U. S. 389, 400 (1978). Further, I think the most plausible reading of the evidence is quite different from the conclusion reached by the minority. (8) It seems to me that a rational agency regularly performing its official duties would retain in its files the most important documentation that exists while discarding the trivia. Here, there is no record whatever of substantiating data-or of any work that was performed upon such hypothetical data. Yet, the relatively unimportant correspondence between the parties has been preserved carefully. To me, this suggests strongly that the agency kept on fie everyhing of the slightest consequence and that substantiating data is missing simply because it never was supplied to the state.

The minority proceeds to infer from the record that the state agency concluded after its review of the 1981 filng that the proposed rates were not excessive." Minority statement at 7. However, that inference is not readily reconciled with much of the record evidence. The Connecticut statute says that insurance rates may not be excessive, 6 and also authorizes the state insurance department to prohibit the use of excessive rates by title insurers. Here, though, there is testimony from the Chief of the Connecticut Insurance Department's Property and Casualty Division, Mr. DiSanto, that he approved the rates despite a " disproportionate allowance for commissions." DiSanto (9) Testimony at 2737. Mr. DiSanto testified further that in his view the agent' s commission component of title insurer expenses was "very high '" that this was the main problem area in title insurance lo and annual statements was not even broken out by state.Id. at 2795. Without such data, the insurance department lacked the ability to conduct a meaningful review. 6 Conn. Gen. Stat. 38-201c(a).

1d. at 38-Z01p(d).

See also DiSanto Testimony at 2756: "Again, one of the things discussed was the impact of commissions and a discussion of alternative means that could effectively address the disproportionate expense loading for commissions.

9 DiSanw Testimony at 2737. DiSanto estimated that agents' commissions "are about 60 percent" of the title insurance premium. DiSanto Testimony at 2797. 10 DiSanto Testimony at 2797.

344 Additional Statement that this was driving up the cost of title insurance. 11 In light of this evidence, it is more reasonable to infer that either the state agency should have disapproved the rates as excessive, or that the Connecticut regulatory system failed to confer to the state agency adequate power in practice to block the imposition of excessive rates. See Slip Op. at 12.

Regarding the latter inference, recall the Supreme Court's admonition that "a gauzy cloak of state involvement" can not thwart the national policy in favor of competition. Indeed, a state legislature may clearly articulate and affirmatively express an intent to displace competition (thus meeting the first prong of the state action test), but fall short of the mark set by the second prong if an inadequate system of regulation subsequently is established. After all, in Duffy the Supreme Court found clear articulation but not active supervsion since, (10) inter alia the state "d(idj not monitor market conditions "l2 Duffy,or engage in any 'pointed reexamination' of the program. 4 79 U.S. at 345. Nor did the state "control month-to-month variations " 13 Id. In ringing and relevant words, the Court heldin posted prices. that active supervsion was lacking because the state "has displaced competition among liquor retailers without substituting an adequate system of regulation. Id.

Arizona I have discussed above the extended time during which the state insurance department did not conduct the statutorily-required examination of the state rating bureau, and Director Low s conclusion that such an examination was "of critical importance in permitting the Department to carry out its state (11) regulatory responsibility over 14 In addition, Mr. Wilkie s testimony meritstitle insurers. . . consideration in connection with the majority s finding about ancilary filings.

Mr. Wilkie had worked in the Arizona title insurance industry since 11 DiSanto Testimony at 2738.

12 This, of cours, was exactly the situation in Arizona during the time no examination of the state rating' bureau was conducted despite the statutory mandate. 18 In other words, the state must exert significant control over an aspects of price fixing by private parties. The majority found, accordingly, that this principle was violated by inactivity such as thatdisp!ayer by thoE! state insurance agencies that did not examine amendments to the general rate schedules. The majority opinion notes that the use of scientifically-sound sampling tehniques to examine a rate filing might be defensible. Slip Op. at 12. This is beause sound sampling tehniques may provide an accurate survey of a fiing as a whole. The majority opinion goes on to stress the simple pointthat state agencies may not engage in "hit-or-miss" review by ignoring some filings (or some category of filings) in their entirety.Id. 14 See footnote 4 supra.

484 FEDERA TRADE COMMISSION DECISIONS Additional Statement 112 F. 1946, and had held a senior position with Lawyers Title of Arizona since about 1957. Wilkie Testimony at 2056. His testimony overall conveys an intimate knowledge of the industry and the operations of the rating bureau. Yet Wilkie, as noted by the AU in his Initial Decision at 61 , n.233, had no recollection of any communication between the rating bureau and the state agency regarding the numerous amendments that were filed. Given other testimony pointing in a different direction, I agre with the AL that the record is inconclusive on this point. However, it bears repeating that respondent has the burden of showing active supervsion. The minority statement does not address other instances of nonsupervsion cited in the majority opinion. Slip Op. at 18. The minority argues that a likely inference to make about pre-1973 procedures is that they were the same as followed under Mr. Barberich, who was Chief Deputy Director of the Arizona Department of Insurance from 1973 to 1982. Minority statement at 9. However, Mr. Barberich testified that the insurance department hired an outside firm to conduct an examination of the (12) data submitted in 1983 by Tillnghast, Nelson & Warren, Inc. (fied in response to Arizona tardy efforts to examine the title insurance industry), because "no one in the insurance department had a good handle of what went on with title insurance companies. . . . Barberich Testimony at 2277. Barberich said that during the period 1973 to 1982 he "tried to find someone that could give us a rate review. Going back to 1974 and ' I remember we paid somebody $1 000 to just give us an idea what it was all about. The report we got didn t tell us anything. " Barberich Testimony at 2281. Barberich also testified that the insurance department did not do anything with respect to that basic rate between 1973 and 1982 . . . . Barberich Testimony at 2289. This testimony lends further support for two propositions. The first proposition is that the rates in use in Arizona were not actively supervsed during the time in question. The insurance department was confronted with complex submissions and yet had no personnel who had a good handle" on the title insurance industry and the rate justifications that were submitted. " As noted previously, the rates were in effect for a number of years before any serious attempt was 1& Commissioner Azcuenaga suggests that this conclusion is derived frm my "review of the resumes of state regulatory personnel" Minority statement at 10. To the contrary, this conclusion is derived from Mr. Barberich' s assessment that "no one in the insurance department had a good handle of what went on with title insurance companies. . . Barberich Testimony at 2277. 344 Final Order made to evaluate (13) them. " The second proposition is that-where highly complex matters are involved, such as reviewing rates for reasonableness-one must be wary about automatically following presumptions to the effect that substantive reviews are being conducted. 17 Arizona here could not actively supervse the industry for an extended period because it had no qualified personnel. 18 In the context of something as intricate and challenging as the active supervsion of rate fiings, it thus is necessary for reviewing courts and agencies to sift through the available evidence rather than sit back and presume that all is in order.

Conclusion The minority concludes that the majority s standard "loads the dice heavily against the respondents" by emphasizing "various perceived deficiencies" in the review process. Minority (14) statement at 11. Yet, as shown here and in the majority opinion, the deficiencies were real and substantial. The case law is clear that state regulatory agencies may not pick and choose when they wil exercise their authority; merely providing some state involvement or monitoring can not substitute for active supervsion. Further, the non-performance here of statutory duties was directly related to the relevant state policy. See e. the discussion of Arizona s non-examination of the title insurance industry. The majority view, accordingly, follows from the Supreme Court's establishment of a "rigorous two-pronged test" (Patrik v. Burget 108 S. Ct. at 1662) requiring that a state exercise ultimate control over the challenged anticompetitive conduct." Id. at 1663.

FINAL ORDER This matter has been heard by the Commission upon the appeals of respondents and complaint counsel from the initial decision and upon briefs and oral argument in support of and in opposition to the respective appeals. For the reasons stated in the accompanying 16 See also Slip Gp. at 18.

17 As a fonner commissioner at the Interstate Commerce Commission, J know from experience that reviewing rates for reasonableness or possible discrimination is verya diffcult task that generally requires highly qualified expert. Director Low of the Arizona Department of Insurance apparently would agr. In commenting on the proposed study of the Arizona time insurance industry, his recommendation of a speific finn for the examination was made on the basis of "the extremely technical nature of this examination including the obvious need for subslantial actuarial and economic expertise in this area. . .". RX 93A. 18 The absence of suffciently trained personnel seems substantively equivalent to not having an "adequate system of regulation. Cf Duffy, 479 U.S. at 345. Final Order 112 F.

opinion, the Commission has determined to deny the respondents appeal (except as to the insertion of a "state action" proviso in the order) and grant complaint counsel's appeal in part. Accordingly, It is ordered That the initial decision of the administrative law judge be adopted as findings of fact and conclusions of law except to the extent inconsistent with the accompanying opinion. Other findings of fact and conclusions of law of the Commission are contained in the accompanying opinion.

For purposes of this order, the following definition shall apply: a. Title search and examination serices means all activities which are designed to identify and describe the ownership of a particular parcel of real property as well as any other actual or potential rights to, encumbrances on, or interest in the property. II.

It is ordered That each respondent, its successors and assigns, and its officers, agents, representatives, and employees, directly or indirectly, through any corporation, subsidiary, division or other device in connection with the sale of title search and examination servces in or affecting commerce, as "commerce" is defined in the Federal Trade Commission Act, shall forthwith cease and desist in New Jersey, Pennsylvania, Connecticut, Wisconsin, Arizona, and Montana, from discussing, proposing, setting, or filing any rates for title search and examination services through a rating bureau. A. Provided that nothing in this order shall prohibit respondents from collectively setting or adhering to prices for title search and examination services in any state where such collective activity is engaged in pursuant to clearly articulated and affirmatively expressed state policy and where such collective activity is actively supervsed by a state regulatory body.

It is further ordered That each respondent shall within thirty days aftr servce of this order deliver a copy of this order to all its present officers, directors, and personnel having any responsibility in determining company prices as well as to the commissioner of insurance in each state listed in Paragraph II. of this order. 344 Final Order IV.

It is further ordered That each respondent notify the Commission at least thirty days prior to any proposed change in the corporate respondent such as dissolution, assignment or sale resulting in the emergence of a successor corporation, the creation or dissolution of subsidiaries, or any other change in the corporation which may affect compliance obligations arising out of this order. It is further ordered That each respondent shall, within ninety days aftr service upon it of this order, and at such other times as the Commission shall require, file with the Commission a report, in writing, setting forth in detail the manner and form in which it has complied with this order.

Commissioner Calvani and Commissioner Azcuenaga concurrng in part and dissenting in part, and Commissioner Machol not participating.

"'Pror to leaving the Commission, fonner Chainnan Oliver registered his vote in the affrmative for the Final Order and the Opinion of the Commission in this matter. Chainnan Steiger did not register a vote in this matter.

488 FEDERA TRAE COMMISSION DECISIONS Complaint 112 F.