The opinion of the court was delivered by: SHAPIRO
This proceeding arises from a nationwide investigation by the Federal Trade Commission ("FTC") into certain credit practices. The investigation and litigation it instigated were described as follows by District Judge Charles Schwartz, Jr., United States District Court for the Eastern District of Louisiana:
This proceeding was invoked by the Federal Trade Commission (Commission) pursuant to Section 20 of the Federal Trade Commission Act, 15 U.S.C. 57b-1 for an order compelling respondents to comply with civil investigative demands (CIDs) issued by the Commission during the course of an investigation to determine whether respondents may be or may have been engaged in unfair or deceptive acts or practices in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(2). Specifically, the purpose of the investigation is to determine whether finance companies, automobile dealerships or others may be engaged in unfair or deceptive acts or practices in connection with arranging for or consummating of a consumer credit transaction, including misrepresenting, directly or by implication, that the purchase of credit insurance is a prerequisite to the extension of credit.
Respondents have failed to provide the requested documents on the ground that the Commission's inquiry is an unlawful attempt to investigate and regulate the 'business of insurance' which is protected by the McCarran-Ferguson Act, 15 U.S.C. § 1012(b) (McCarran Act) from review by the Federal Trade Commission.
FTC v. Dixie Finance Co., 695 F.2d 926 (5th Cir. 1983; Appendix A (footnotes omitted)).
The investigation does not transgress the McCarron-Ferguson Act, 15 U.S.C. § 1012(b) (the "Act"), as the activity the FTC seeks to investigate is not part of the "business of insurance." While the investigation pursuant to which the subpoena was issued is within the power of the FTC, the court will defer ordering its enforcement as issued until a hearing on whether the subpoena duces tecum should be enforced as issued or modified as overbroad and burdensome.
The FTC investigation is within the scope of its statutory authority unless the subject matter is part of the "business of insurance." If it is not, then the Act does not protect the activity from regulation, and therefore from investigation, by the FTC.
The Supreme Court has established criteria for this determination in two recent cases, Group Life & Health Insurance v. Royal Drug Co., 440 U.S. 205, 99 S. Ct. 1067, 59 L. Ed. 2d 261 (1979) and Union Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S. Ct. 3002, 73 L. Ed. 2d 647 (1982).
The Pireno majority articulated three criteria to be used in determining whether an activity is part of the "business of insurance:"
. . . first, whether the practice has the effect of transferring or spreading a policyholder's 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.
73 L. Ed. 2d at 656. Applying these three criteria to the facts of the present case leads to a conclusion that the activity in question is not the business of insurance.
The first criterion is whether the practice is to spread the risk. The answer to this inquiry depends largely upon how one defines the "practice." If one defines the practice as the sale of credit insurance in connection with the sale of financed automobiles, then this practice clearly spreads risk. Many automobile purchasers pay a small premium so that the automobile purchasers unable to make finance payments and subject to loss by repossession and judgment lien are not forced to bear the entire personal risk -- a classic example of underwriting. See generally, Royal Drug, supra; SEC v. Nat. Sec. Ins., 393 U.S. 453, 21 L. Ed. 2d 668, 89 S. Ct. 564 (1969). At the same time, the finance company benefits by the elimination of credit risk to it at the expense of the debtor who pays for this credit insurance as a part of the cost of credit. If one considers this as a credit practice, see, Dixie Finance, supra, then there is no risk spreading. Even if this court were to determine that there is a form of risk spreading, that would not require a finding that the activity being investigated is the business of insurance. Risk spreading is an indispensable element, Royal Drug, supra, 440 U.S. at 212, but its presence is not determinative. Pireno, supra, 73 L. Ed. 2d at 656. Both the other criteria strongly suggest that this activity is not the business of insurance.
The second criteria is whether the practice is an integral part of the policy relationship between the insurer and the insured. This issue was the focus of the Dixie Finance decision, which held that the practice was credit related and not an integral part of the insurer/insured relationship. (Appendix A at 1979). Where a policyholder relationship is intertwined with other activities, the decision is to be made by focusing on "the gravamen of the complaint." SEC, supra, 393 U.S. at 462. When the Dixie Finance court focused on this aspect it found that:
The specification set out by the Commission in its CIDs do not intrude on the insurer-insured relationship; they seek to determine only whether respondents may be making false or misleading misrepresentations to prospective borrowers that credit insurance is a prerequisite to the extension of consumer credit. The Commission is not ...