Group Life & Health Insurance Company v. Royal Drug Company, Inc. – Oral Argument – October 11, 1978

Media for Group Life & Health Insurance Company v. Royal Drug Company, Inc.

Audio Transcription for Opinion Announcement – February 27, 1979 in Group Life & Health Insurance Company v. Royal Drug Company, Inc.

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Warren E. Burger:

We’ll hear arguments next in 952, Group Life and Health Insurance against Royal Drug.

Mr. Kaiser, you may proceed whenever you’re ready.

Keith E. Kaiser:

Mr. Chief Justice and may it please the Court.

I represent Group Life and Health Insurance Company also known as Blue Shield of Texas.

This case involves the construction of the exemption to the antitrust laws established under the McCarran-Ferguson Act.

There is only one issue before the Court in this case and that issue is whether the statutory term business of insurance as contained in the McCarran-Ferguson Act includes a contract between and insurer and a health care provider to furnish benefits owed to the policyholders under the insurer’s health care service benefit policies.

We talk only about one issue.

Blue Shield Health Care service benefit policies and in particular the prescription drug pharmacy policy which we talked about today — a tripartite service benefit agreement.

The tripartite service benefit agreement is composed of a policy between an insurer and an insured obligating the insurer to furnish benefits to the insured in the form of goods and services as opposed to cash reimbursement.

A second feature of the tripartite service benefit agreement is that it expressly obligates the insurer to enter into a provider agreement in this instance Your Honors, a pharmacy agreement to provide the goods and services which are the risk under written or the risk assumed in the policy.

William J. Brennan, Jr.:

I want to be sure I understood you Mr. Kaiser.

You said that the — you began by saying there’s a tripartite situation and did you say that the contract between your client Blue Cross and —

Keith E. Kaiser:

Blue Shield, Your Honor.

William J. Brennan, Jr.:

Blue Shield and the insured expressly provides that Blue Shield shall enter into a contract with the suppliers?

Keith E. Kaiser:

It expressly provides that the benefits will be provided to the insured through a participating provider and it obligates the insurer to enter into participating agreements with providers.

William J. Brennan, Jr.:

In other words that would be inconsistent with the insurance contract if Blue Shield itself were to go under the business of being a pharmacist and itself provided the in kind of —

Keith E. Kaiser:

With its policy it certainly would Your Honor.

This policy only provides that Blue Shield will contract with the provider to provide goods and services or needed goods and services in the form of prescription drugs —

Potter Stewart:

Since, Blue Shield prescription couldn’t have its own drugstores under the insurance policy?

Keith E. Kaiser:

No sir, not into this policy.

William H. Rehnquist:

Mr. Kaiser, what is the business reason either from the point of view of the insured or the insurer for requiring in the policy between those two that Blue Shield enter into an agreement with providers?

Keith E. Kaiser:

Your Honor that involves a little bit of history.

The business reason in this particular instance was that the insured and the beneficiaries insisted upon that type of policy.

The insureds under the policy that we are or under the forerunners of our policy where the domestic automobile manufacturers during a rather prolong strike in 1967 one of the major issues between the unions and the manufacturers was additional fringe benefits specifically health insurance benefits.

Out of that collective bargaining agreement between the unions and the domestic automobile manufacturers arose in agreement that the domestic automobile manufacturers would in fact provide health insurance benefits in the form of full coverage service benefit provider agreements.

Our tripartite agreement here is the end-result of that collective bargaining agreement.

Now, we’re not saying we’re connected with the unions or the auto manufacturers, we are saying though Your Honor that the insureds and their beneficiaries.

The insureds being the automobile manufacturers and there have been beneficiaries being their employees and the employees’ families insisted upon this type of arrangement.

William H. Rehnquist:

Why did they insist on it?

Keith E. Kaiser:

They wanted full benefits coverage Your Honor, at a minimum cost.

William H. Rehnquist:

But couldn’t they get that sort of coverage and leave it up to the insurer to decide how he was going to go about procuring the benefits?

Keith E. Kaiser:

That could have been done Your Honor.

However, it was insisted that provider agreements be included in this type of policy.

This entire tripartite agreement was not conceived or instigated by Blue Shield.

It was conceived and instigated by the insured and beneficiaries from the very beginning.

William J. Brennan, Jr.:

In other words, the reason of the insurance contract contains that provisions that it does as largely and historic reason, it’s not essential that the contract be that way that is if you’re doing it now from scratch but there are historic reasons why the contract is as it is?

Keith E. Kaiser:

The essential provisions in the policy dealing with benefits and coverage were all insisted and in fact demanded by the insureds and beneficiaries.

William J. Brennan, Jr.:

As matter of historic fact?

Keith E. Kaiser:

Yes, sir.

Warren E. Burger:

Would it be fair to say in broader terms and you cast it that this was a response to the demand of consumers?

Keith E. Kaiser:

No doubt about it.

No doubt about it, Your Honor.

Warren E. Burger:

Excuse me, but it wouldn’t be limited to just the automobile people?

Keith E. Kaiser:

No, sir and it has not been limited to the automobile people.

In fact, tripartite service benefit arrangements not only by Blue Shield but by many other insurance companies throughout the country or in effect and operating today.

They are in widespread use.

William J. Brennan, Jr.:

But there’s no real reason why this be tripartite, is it, is there?

I mean no reason in rationality or normally when the insurance said benefits are in terms of money is just a bipartite agreement — bilateral agreement?

Keith E. Kaiser:

Yes, sir.

William J. Brennan, Jr.:

The beneficiary receives money directly from the insurance company.

There’s no reason why it shouldn’t receive benefits in kind directly from the insurance company either directly of through a subsidiary, is there?

Keith E. Kaiser:

There is really no distinction, no practical distinction to be drawn here with the way benefits are provided under our policy and the way benefits maybe provided under another traditional form of interest.

William J. Brennan, Jr.:

But this isn’t inexorably a tripartite situation.

The logic doesn’t inexorably require that it be a tripartite agreement with insurance contract itself?

Keith E. Kaiser:

Well, I might add Your Honor that tripartite service benefit agreements already distinct the feature of the health insurance industry.

That is for a number of reasons, one, the insured or the policyholder wants full coverage.

He doesn’t want to worry about being reimbursed later when he is ill or a member of his family are ill they want goods and services.

William J. Brennan, Jr.:

Only what’s full coverage when he wants money too when he has liability or accident insurance, he wants full coverage?

Keith E. Kaiser:

That’s right.

William J. Brennan, Jr.:

But that that is not necessarily tripartite he just gets the money from the insurance company.

Keith E. Kaiser:

There is another distinctive feature of this particular type arrangement and that is that under a full coverage and when I say full coverage Your Honor I’m talking about no matter what it takes to make this person well, the insurance company will furnish those have insurance.

Lewis F. Powell, Jr.:

It couldn’t be full coverage if there is $2.00 deductible?

Keith E. Kaiser:

I’m sorry, Your Honor?

Lewis F. Powell, Jr.:

It isn’t full coverage, is it?

There’s a $2.00 deductible?

Keith E. Kaiser:

Now, there’s a $2.00 deductible here with each prescription.

Lewis F. Powell, Jr.:

So, that’s not full coverage then is it?

Keith E. Kaiser:

No, Your Honor.

Over and above, the $2.00 deductible there is full coverage —

Lewis F. Powell, Jr.:

Well, how is this any different in the old-fashioned automobile policy in which reliability policy which insurance company agrees to provide the defense if the insured gets sued and the company then hires lawyers to represent the policyholder and provides in effect the benefit in kind to the services of the lawyer?

And therefore, enters into agreements with the lawyers to work in such a rate and be available and so forth.

Isn’t that just like this?

Keith E. Kaiser:

Your Honor, I can’t agree that the health insurance industry is anything at all like the casualty insurance industry because of the very peculiar nature.

Lewis F. Powell, Jr.:

But the contractual arrangement between the liability insurance carrier and the lawyer who defense cases from time to time for the benefit of the policy holder.

Why is that any different or is it any different from an agreement between the health insurance carrier and a drug company will provide drugs?

Keith E. Kaiser:

In as much as you’re talking about that being a part of the benefits and coverage of the policy.

Lewis F. Powell, Jr.:

Correct.

Keith E. Kaiser:

There is really —

Lewis F. Powell, Jr.:

Yes, No difference and so this case would be and if you’re correct and you may well be that this is the business of insurance and then lawyers when they represent liability — represent insureds under liability policies are equally engaged in the business for insurer.

Keith E. Kaiser:

No, Your Honor.

I don’t think so.

I can’t say that because for a very simple reason we say that there is a bright line standard to be drawn here and what is included in the business of insurance and the context of our case and we’re talking about a provider agreement.

It does not encompass everything that an insurance company could do.

It does not encompass every contract that an insurance company could enter in to.

Potter Stewart:

But it might well encompass a provider agreement when the agreement involves the provision of legal services to somebody who sued as the result of the automobile accident.

I don’t see why you run away from that, that helps you, it doesn’t hurt you.

Keith E. Kaiser:

Well, Your Honor I’m trying to confine and I’m not arguing with the Court.

Potter Stewart:

I won’t if I were you.

But you can indicate all you want but not on this basis because that’s on your favor.

Warren E. Burger:

Mr. Kaiser, you cannot distinguish between the variants and the case Justice Stevens opposed was services, here it’s goods.

Keith E. Kaiser:

Goods and services, Your Honor.

Warren E. Burger:

And unless someone can distinguish between those two variants from the normal concept of insurance that’s very strongly in your favor.

Keith E. Kaiser:

No, I think that that is a normal concept of insurance as I understood.

I just don’t want the Court to think that I’m coming in here arguing for the automobile casualty insurance industry when I’m not.

We believe that the health insurance industry is some what different.

William H. Rehnquist:

Well, I happened to do disagree with my brother Stewart’s comment that your answer that Justice Stevens’ question helps you rather than hurts you and I don’t see the bright line that you’re talking about between an agreement on the part of and casualty insurance company with a law firm to defend its policyholders in lawsuits in which they’re sued and an agreement with drugstores or pharmaceutical houses to provide drugs where the causality insured against is the need of drugs.

Keith E. Kaiser:

Your Honor, we think that the proper line is that an agreement — a third party agreement which relates directly to the provision of benefits.

Those benefits which are under written in the policy and anything in that agreement which directly relates to the cost of those benefits to be delivered and which are under written in the policy would constitute a part of the business of insurance from McCarran-Ferguson purposes.

William H. Rehnquist:

But that Justice Stevens’ questions meets everyone of the criteria you’ve just set forth.

The covenant on the part of casualty insured to defend the insured if he’s sued as a result of an accident.

If I’m wrong if in thinking, so tell me why I’m wrong?

Keith E. Kaiser:

Your Honor, there is no service benefit policy.

I mean there is no tripartite agreement there.

There is no tripartite agreement that’s been established by the insured.

William H. Rehnquist:

So if the insured simply went ahead and as a part of the policy with the insurer when they have as a part of the policy with the insureds said, we’re also going to draw up an agreement with the law firm to provide services to you and that’s part of this policy then the two would be the same.

Keith E. Kaiser:

Your Honor, I think we’re getting very close to prepaid legal services in many states which I have been proposed to be operated in just that fashion.

I think —

Warren E. Burger:

Is it not true that some forms, some policies of insurance beside replacing the casualty loss, fire or whatever also provide a fixed amount for the lawsuit profits during the period when the building or the plant or the factory is being rehabilitated and you certainly would not say that that takes that out of the business of insurance because it goes that far, would you?

Keith E. Kaiser:

Your Honor, I can’t — without knowing the full terms of a policy and the requirements of the insurer, the obligations — the contractual obligations of the insurer, I’m not really sure that I could comment on that.

The pharmacy agreement in this particular instance though is the integral and indispensable part of the tripartite agreement.

Without it, neither the policy or the policy is not effective and without the policy then the pharmacy agreement is not effective.

John Paul Stevens:

Mr. Kaiser.

Keith E. Kaiser:

Yes, Your Honor.

John Paul Stevens:

I’d like to go back because I’m not all clear in light of the way you started your argument.

You emphasized the fact that historically this arrangement was a result of collective bargaining and you seem to think that that was important to your case.

As I understood, the briefs that have been filed in this case, the arrangement is suppose to be beneficial to the consumer and also to Blue Shield — your client financially beneficial in terms of lower rates to the consumer, the public, the insured.

Am I correct in understanding that’s your position?

Keith E. Kaiser:

Your Honor, first of all let me and maybe I misunderstood you but we are not hinging our case upon the fact that this arose out of a collective bargaining agreement.

The essential fact there though is that this type of policy was demanded by the insureds and the beneficiaries that’s how we got in to business.

John Paul Stevens:

Demand it because it offers this coverage at lower rates?

Keith E. Kaiser:

Precisely, Your Honor.

John Paul Stevens:

Well, I hadn’t heard you say that.

Keith E. Kaiser:

It offers full coverage at lower rates.

John Paul Stevens:

At lower rates.

Keith E. Kaiser:

And it guarantees the provision of benefits.

John Paul Stevens:

And it in a sense that protects I understood from your argument in your brief the Blue Shield Company and similar insures from the hazard of perhaps higher charges by pharmaceutical retailer outlets around the state.

Keith E. Kaiser:

One of the principle policies behind the enactment of the McCarran-Ferguson Act was that insurance companies be able to maintain themselves, manage their own business subject to regulation by the states and that they’ll be able to managing their business.

More fully assess their risks and provide solvency for their policy over us.

This provides the reliability that the insurance company must have.

That is one of the reasons for the pharmacy agreement because it does in fact assist Blue Shield in controlling the cost of the risks that it has assumed, it controls the magnitude of the risk so to speak.

And in such a situation as here where we have a full benefits coverage policy open-ended, there is no limit to this policy.

It’s essential —

John Paul Stevens:

And for all of these, would you have thought Blue Shield would wanted this without regard to any pressure from labor unions?

Keith E. Kaiser:

I’m sorry Your Honor, I didn’t understand.

John Paul Stevens:

I said for all of the economic reasons I would’ve thought Blue Shield as a business operation saving the public would want it this sort of contract without regard to any pressure from a labor union.

Keith E. Kaiser:

Your Honor, this tripartite benefit arrangement polices have been in effect since the early 1930’s.

They were an outgrowth of the depression when people couldn’t get adequate health care service at a reasonable cost.

It initially started out with three party arrangements between the insurer and hospitals and the insured.

By 1940, these three party arrangements had increased to where they had 4 million subscribers across the United States.

This is not something new.

Subsequent to that, insurers began to enter into three party arrangements for the precise reasons that we have for with the positions to provide physician services to the insured.

In 1944, during the joint Senate House debates on the passage of the McCarran-Ferguson exemption, Attorney General Biddle made an express comment referring to the tripartite in nature of these service benefit policies and in his comment he said, that the insurance or the policy that they were talking about — the arrangements that they were talking about during the discussion fits put one word in that perfectly.

He said, that word is the business or is insurance.

Attorney General Biddle was referring there to a company called Group Health who had physicians on its staff and it agreed with its policyholders to provide hospital services.

So, this is nothing new Your Honor just as you said but the pharmacy arrangement portion of it is relatively new.

It was in — became effective in 1969.

Tripartite arrangements though have been around since 19 — the early 1930’s, Your Honors, we believe that under the plain meaning of the statute, the statutory construction in this Court’s two prior decisions that clearly pharmacy agreements come within the business of insurance.

John Paul Stevens:

Does last terms Paul case have any bearing on this case?

Keith E. Kaiser:

Your Honor, the St. Paul versus Barry case dealt with the three —

Potter Stewart:

St. Paul Insurance.

Keith E. Kaiser:

Portion of the statute, the boycott exception.

Potter Stewart:

Boycott Exception.

So, it really doesn’t have any bearing.

It doesn’t have direct bearing?

Keith E. Kaiser:

It has no direct barring but it does has some barring that I think it’s very beneficial and that this Court said in St. Paul versus Barry that there is no indication in the legislative history of the Act that Congress intended to define the business of insurance in a manner inconsistent with its ordinary meaning or customary understanding that being the state of the industry at the time of the Act’s passage.

And as I just related the state of the industry at the time of the Act’s passage was that tripartite health service benefit arrangements were flourishing.

They were well-known to the public.

They were known to Congress and in fact brought the Congress’ attention by Attorney General Biddle.

With respect to the meaning of the statute, we see some very broad words, “business of insurance” and every person engaged therein.

There is no indication in the statute that Congress intended to limit the meaning of the term “business of insurance” even though during the Senate House debates in the subcommittee meeting.

There were numerous suggestions that the McCarran-Ferguson Act be limited severely.

It would suggest about —

Lewis F. Powell, Jr.:

May I ask about the words “every person engaged therein” is it your position that those words grant an exemption to the pharmacies?

Keith E. Kaiser:

No, Your Honor, we’re not saying that the pharmacies are exempt.

It is our position that the pharmacy agreement constitutes a part of the business of insured and as exempt.

Therefore, both signatories to that agreement must be exempt or we disrate the purpose of the Act.

Lewis F. Powell, Jr.:

Does that mean that if the pharmacy hold a trade association or similar meeting and say, “We’d like to increase by 15% the price of drugs on our schedule with this Blue Shield policy is that that meeting would be exempt and they implement it by then going around to the insurance company and say, “we want 15% more”, and you renegotiate the agreement with the group as a whole and come out with a higher drug price, is that exempt or is it not?

Keith E. Kaiser:

As I understand your question if there was collaboration among the pharmacies and then they went in the insurance.

Lewis F. Powell, Jr.:

If there are persons engaged in the “business of insurance” is my question.

You say they’re not persons engaged in the business of insurance so.

Keith E. Kaiser:

We’re saying that the pharmacy agreement constitutes the business of insurance and in order to effectuate the purpose of the Act both signatories to the agreement must be exempt.

Lewis F. Powell, Jr.:

Well, then the other signatories exempt in so far as a collaborate with one another in determining what — how to negotiate with Blue Shield about the price schedule.

Keith E. Kaiser:

Your Honor, it would be our position and if the signatories collaborated among themselves went to the insurance said, “We want a 25% increase in the dispensing fee which you prepared to offer.”

If that —

Lewis F. Powell, Jr.:

No, not the dispensing fee.

I’m not talking about the dispensing fee.

I’m talking about the drug price, the price schedule.

You have a price schedule I take it with chapters agreements on —

Keith E. Kaiser:

No, Your Honor there is a formula — a reimbursement formula for the pharmacist.

The pharmacist receives $2.00 from the insured.

Lewis F. Powell, Jr.:

Right.

Keith E. Kaiser:

We pay him a dispensing fee.

Lewis F. Powell, Jr.:

Oh, I’m sorry the dispensing is —

Keith E. Kaiser:

Plus, the acquisition cost of the drug.

Lewis F. Powell, Jr.:

Right.

Keith E. Kaiser:

That is the formula which is reimbursed.

However, back to your question, Your Honor.

If the pharmacist went to Blue Shield and said, “We want to readjust the formula and we want more money.”

And if that was ultimately agreed upon and incorporated into the pharmacy agreement which is a part of the business of insurance and therefore exempt.

We don’t believe that that would be an actionable collaboration between the pharmacists.

Warren E. Burger:

What about the action of the pharmacy trade association that Justice Stevens postulated their own action independent to whatever success they — whatever agreements they had with the insurance company?

Keith E. Kaiser:

Your Honor, we believe that if it —

Warren E. Burger:

You don’t mean that their action in agreeing to fix prices would be completely immune when you’re just talking about all the drug companies.

Keith E. Kaiser:

I’m not really sure that I understand your question, Your Honor.

Warren E. Burger:

Well, you postulated that a group of the drug suppliers got together and entered what amount and I took it to be a price-fixing agreement.

Now, if it stopped right there, isn’t that a violation?

Keith E. Kaiser:

If it stopped right there before they got to Blue Cross, it probably would Your Honor.

I mean Blue Shield, I’m sorry.

Warren E. Burger:

Blue Shield is not the part of that consortium at that stage.

Now, Blue Shield might conceivably have to yield to it ultimately but they’re not part of any agreement.

Keith E. Kaiser:

Well, Your Honor most times, these prices or the establish reimbursement formula would be establish in a competitive atmosphere.

If the pharmacists want to charge more money then Blue Shield can afford to pay in order to issue its policies at a reasonable level.

Well, then there may be some negotiation and it will come down to what each party can afford to pay or accept but the reimbursement formula or the reimbursement fee would therefore be established in a competitive atmosphere and if incorporated into the pharmacy agreement which is a part of the “business of insurance.”

Warren E. Burger:

But Blue Shield itself might be a victim of that price-fixing agreement if they couldn’t buy any where else but suppose it was so pervasive that it covered that whole round of suppliers.

Keith E. Kaiser:

Well, Your Honor that’s — I guess that is always possibility obviously —

Warren E. Burger:

No, you will have antitrust violation and wouldn’t you conceivably?

Keith E. Kaiser:

Quite possibly you would, Your Honor.

I might mention and I apologize for not doing it.

Those are not the facts of our case and in fact the facts of our case were quite to the contrary.

In our case, it is undisputed and uncontroverted that there was no collaboration, no conspiracy among the pharmacy defendants who were involved.

Keith E. Kaiser:

It was a take it or leave it offer offered by Blue Shield.

They accepted unilaterally.

We entered into bilateral contract.

In fact, the Government agrees that that does not constitute the violation of the antitrust laws but that’s really beside the point when we’re talking about an exemption.

We don’t need to get to the merits of —

Lewis F. Powell, Jr.:

No, the reason that’s beside the point is because the exemption if it applies would cover the conduct even if you did have an antitrust violation.

So, we have to really consider whether or not the exemption covers the illegal conduct as well as the conduct which does not appear to be legal on this.

Keith E. Kaiser:

Yes sir, I understand.

Lewis F. Powell, Jr.:

And you mentioned would be said in a competitive atmosphere but you’re talking about competitions between Blue Shield and the drug companies rather than competition among the drug companies.

And here, I gather some drug companies accepted your offer and others turned it down.

So that some think that maybe if they could agree on a higher price they might come into the program.

Keith E. Kaiser:

I think that’s right Your Honor but as the Government said in its brief that the antitrust laws are or the purpose of the antitrust laws is to protect competition not competitors.

We have some that felt that they could accept what was offered by Blue Shield and we have some that felt they could not.

Therefore, they didn’t enter to the pharmacy.

Lewis F. Powell, Jr.:

And the purpose of the exemption is to protect the competitors even if there is no competition at all even if there is collaboration.

In your point as I understand it and I think you’re forth right on it that even if the drug companies all — the whole market got together and agreed to try and change the economic arrangement so that they’ll get 15% more out of these sales and they do now that that would be an exempt.

And if they ultimately and if Blue Shield ultimately signed up with them then it would be exempt?

Keith E. Kaiser:

Yes, if there was incorporated in the pharmacy agreement, so our position that the pharmacy agreement constituting a part of the “business of insurance” that that would be exempt.

Lewis F. Powell, Jr.:

So that Blue Shield within effect have the power to grant the exemption if it were approved ultimately approved by the Blue Shield.

Keith E. Kaiser:

Oh, no, Your Honor.

We’re talking about an exemption which we’re talking only about the term “business of insurance” and —

Lewis F. Powell, Jr.:

When it comes of “business of insurance” as soon as Blue Shield signs the contract.

Keith E. Kaiser:

Your Honor, the pharmacy agreement is the “business of insurance.”

Lewis F. Powell, Jr.:

I’m talking about a business price by the drug companies which ultimately Blue Shield could take or leave but ultimate if it takes it if I understand your position as soon as the insurance company signs up then that has the effect of conferring exemption on what would otherwise have been an illegal price fixing conspiracy.

That’s your position, it’s perfectly legitimate position but I’m just trying to make sure I understand it.

Keith E. Kaiser:

Well, I don’t like the way it sounds but.

Lewis F. Powell, Jr.:

Well, you’re asking for an exemption from the antitrust laws.

If there is a pure free competition you don’t need an exemption.

Well, you don’t have to come in and ask for an exemption if you’re just talking about having nobody be liable for competing with one another.

You don’t need for an exemption on that hypothesis.

Lewis F. Powell, Jr.:

You just need it when you have conduct which would otherwise violate the statute.

Otherwise, there’s no point in this litigation.

Keith E. Kaiser:

Well, Your Honor I don’t —

Lewis F. Powell, Jr.:

That lawsuit here too, I understand that.

Keith E. Kaiser:

Of course and that is really —

Thurgood Marshall:

Mr. Kaiser, suppose you have five drug manufacturers, who deliberately conspire in violation of every antitrust principle in the world to run up the price of at least all and that it put in, the insurance contract is protected?

Keith E. Kaiser:

Would we claim that to be the business of insurance?

Is that your question, Your Honor?

Thurgood Marshall:

Would that be protected?

Keith E. Kaiser:

No, Your Honor.

It is our position that the business of insurance with respect to a provider agreement encompasses only those provisions which directly relate to the delivery of the goods and services under written in the contract and only those provisions which directly relate to the cost of those goods and services delivered to the insured.

As I said earlier an insurance company might put a number of non-cost related items into any of its contracts whether they are policies or —

Thurgood Marshall:

Well, I’m telling about based on drugs.

Keith E. Kaiser:

No sir, I think that would be too far removed if they took the manufacturer?

Thurgood Marshall:

Do you mean the fact that — they deliberately got together and then jacked up the price of one drug, five companies in deliberate violation of antitrust laws and insurance company took that price?

Keith E. Kaiser:

Your Honor, I’m not sure I’m totally understanding are you talking about a manufacturer or a pharmacist?

Thurgood Marshall:

I said manufacturer.

Keith E. Kaiser:

A manufacturer, Your Honor I think a manufacturer would be too far removed to come within the scope of the exemption of the business of insurance under the situation that we have here.

Lewis F. Powell, Jr.:

Mr. Kaiser, your time maybe running a bit short.

I’m interested in knowing precisely what the Insurance Commission of Texas did with respect to these agreements.

I understood that initially it exempted them from approval but thereafter regarded their agreements are subject to all other laws applicable to the insurance business in Texas.

Keith E. Kaiser:

Your Honor, initially, the State Board of Insurance in Texas absolutely disapproved the issuance on use of the policy.

Lewis F. Powell, Jr.:

But then it —

Keith E. Kaiser:

Then it issued an order.

Lewis F. Powell, Jr.:

Yes.

Keith E. Kaiser:

To prevent a competitive disadvantage with a foreign insurance carrier who was carrying on the same business in Texas and permitted authorized Blue Shield to issue and use this policy in the State of Texas specifically referring to the pharmacy agreement and the fact that Blue Shield would enter into participating providers to provide dispensed drugs to the policyholders under the terms of the contract.

Later on in 1974, another policy form was submitted to the State Board of Insurance identical in content to the one that was submitted in 1969 and the State Board unequivocally approved that policy for issuance in use in the state.

Now, with respect to your question or the inference of exemption Your Honor from the Texas antitrust laws, there is a provision in the approval statutes of Texas and we do require that only policy for us to be file for approval prior to issuance or use.

But if the commissioner of insurance determines that a policy should be for reasons that are totally discretionary with him and within his regulatory capacity.

If the commissioner determines that a policy maybe issued or should be issued and use within the state then he may exempt that policy only from the approval requirement — a very limited exemption.

Keith E. Kaiser:

Subject — thereafter, the policy is subject to all of the regulatory authority, all of the regulatory statutes and other provisions within the State of Texas.

So, there was no exemption from regulation.

Lewis F. Powell, Jr.:

Well, I understood you say initially that the policy had been approved and now you say that it was exempted, and I so understood the opinion of the Court of Appeals to say and I have it before me that in September 1969, the Texas Insurance Commission of Insurance issued another written order exempting the policy from the approval requirement of the Texas Code, is that correct?

Keith E. Kaiser:

Yes sir, that’s exactly correct.

We’re talking about two separate policies that were submitted to the State Board of Insurance.

Lewis F. Powell, Jr.:

Yes, but what’s the current status, is it approved or exempted?

Keith E. Kaiser:

We have one policy that’s being issues that is issued under an exemption order.

Lewis F. Powell, Jr.:

Yes.

Keith E. Kaiser:

And one policy that’s being issued under a flat approval order by the Commissioner.

Lewis F. Powell, Jr.:

Which is the more recent?

Keith E. Kaiser:

The 1974 policy is the more recent and it’s being issued under an approval order by the Commission.

Lewis F. Powell, Jr.:

An approval order?

Keith E. Kaiser:

Yes, sir.

Lewis F. Powell, Jr.:

And all other laws with respect to insurance remain applicable even with respect to an exempted policy.

I understand from what C-85 said.

Keith E. Kaiser:

Yes sir, the Deputy Commissioner of Insurance testified that with respect to — there is no difference between an exempted policy and an approved policy as it applied to state regulation.

They are regulated and identically the same manner.

Lewis F. Powell, Jr.:

Of what does that regulation consists so far as this type of insurance then?

Keith E. Kaiser:

Your Honor, it consists of the traditional forms of prior approval of policies.

The traditional forms of supervisory regulation such as continuing financial filings regulation of the internal organization of the company but more importantly in Texas, we have an unfair trade practices act which is very broad and prohibits virtually every type of an unfair trade practice that is imaginable.

It’s a part of our insurance code.

In addition, the Texas antitrust laws are specifically made applicable to the business of insurance.

With the Court’s permission I would like to reserve the remainder of my time for rebuttal.

Warren E. Burger:

Very well, Mr. Kaiser.

Mr. Pullen.

Joel H. Pullen:

Mr. Chief Justice and may it please the Court.

First of all, I would like to set this case in the proper pattern.

We do not here have the policy of insurance which in any way mentions the price fixing aspects about which we complain.

All the policy provides with respect to who is a participating pharmacist is that he is someone who has agreed to furnish covered drugs to Blue Shield’s insured.

There is nothing said about the agreement with the pharmacy beyond that language.

Joel H. Pullen:

And this is the policy that was exempted and this is the policy that was subsequently approved at nowhere in the process however was the pharmacy agreement considered or approved or anything done to it rather than the fact then it was mailed to Austin, to the State Board of Insurance.

They took it and they didn’t send it back.

It’s not marked filed, it is marked for informational purposes only.

When we took their positions of the people at the State Board, I asked them specifically, “Do you claim any jurisdiction over pharmacists?”

Their answer was, “No.”

I said, “Do you regulate this pharmacy agreement in any manner and they said, “No.”

And I said, “Why not?”

And they said, “Because it’s not part of the business of insurance in Texas.”

So, we have today presented to the Court a question which is basically not the situation that the McCarran Act was designed to reach.

We have no —

Byron R. White:

Mr. Kaiser —

Joel H. Pullen:

Excuse me.

Byron R. White:

Is that the testimony referred to on page 28 of your brief?

Joel H. Pullen:

I believe that it is, Your Honor.

Byron R. White:

Where does he say it’s not part of insurance?

Joel H. Pullen:

I asked question, so that the record will be clear.

Is it your understanding that the State Board of Insurance under the regulatory authority granted it under the Texas Insurance Code has authority to regulate contracts between a company such as Blue Shield and an independent pharmacy?

Byron R. White:

Uh-huh.

Joel H. Pullen:

Answer: My personal opinion is that this particular contract that you showed me, then I said you’re talking about the deposition exhibit 3, the pharmacy agreement.

He said, “Right, would be contract between an entity and a provider.”

Which would not be part of the original or full contract of insurance.

The contract would be filed with us for informational purposes which would be part of a plan of operations.

But when we get an entire plan of operation then there are certain aspects of it that we file such as the pharmacy agreement certain aspects of it that we approved.

Byron R. White:

Well, I’m reading that but why did the Commission report to approve a contract in 1974?

Joel H. Pullen:

I believe if you look at the contract Your Honor and we covered this in our brief.

The contract again there refers to an agreement to supply covered drugs.

It does not say anything about the price fixing agreement of what we’re talking about here.

We’re talking about two things, Texas law has no provision which provides for approval of the pharmacy agreement.

It provides for approval of policy forms and the policy form here which the state has permitted to use does not include the price fixing aspect of the pharmacy agreement.

If all we had here was an agreement that was consistent with the policy, we would not be here because the issue would not have come up because all they would’ve ask the pharmacy is, “Will you furnish covered drugs to our insured?”

Joel H. Pullen:

Well, obviously, they will.

What is bad about it, it goes beyond the policy terms and they knew it.

In fact, —

William H. Rehnquist:

What if the state had chosen to regulate this contrary to your contention, would you say that you would — should lose your case?

Joel H. Pullen:

No, Your Honor.

I still think that that would be a situation where this Court could determine under the McCarran-Ferguson Act which is a federal statute what from McCarran-Ferguson Act purposes under federal law constitutes the “business of insurance.”

William H. Rehnquist:

But you say even if it constitutes the business of insurance if the state is not regulating it then and who was this person that you had on the witness stand that you were asking by these legal questions to?

Joel H. Pullen:

That was Mr. Ferguson who was the — I believe the Assistant Manager of the Department of Policy Regulation.

William H. Rehnquist:

Was he a lawyer?

Joel H. Pullen:

No, Your Honor.

But he is the man who regulates the policy.

He is the man who actually determines what policy are approved and which are disapproved.

Lewis F. Powell, Jr.:

Was that the deposition on that testimony given prior to the 1974 approval of this policy?

Joel H. Pullen:

No Your Honor, it was given after the approval.

Lewis F. Powell, Jr.:

How did he reconcile that action of the Commission if indeed that Commission did act that way with his testimony?

Joel H. Pullen:

Well, the Commission only approves policy forms.

It does not approve or disapprove the pharmacy agreement.

Lewis F. Powell, Jr.:

But I understood that the policy call for this agreement that we’re talking about here this pharmacy agreement.

Joel H. Pullen:

No Your Honor, apparently I did not make myself clear.

The only agreement to which the policy form refers is an agreement with a pharmacy that it will furnish covered drugs.

It says nothing about the price at which they will be furnished and that is our argument.

Potter Stewart:

It does say some about the price that which they will be furnished to the beneficiaries to which the drugs will be furnished by the beneficiary.

Joel H. Pullen:

Yes, in other words — but the only thing there Your Honor again, nothing in the policy itself refers to a price fixing agreement.

It refers —

Byron R. White:

It didn’t say anything about the cost to the insurance company —

Joel H. Pullen:

That is correct.

Byron R. White:

Which in terms of the seller is the price to the insurance company?

Joel H. Pullen:

Now, I would like to also —

Warren E. Burger:

Well, weren’t they — weren’t the policyholders simply in the open market they brought drugs and paid the first $2.00 as I understand it on each proscription.

And then whatever the price was they paid the differential?

Joel H. Pullen:

Blue Shield?

Warren E. Burger:

Yes.

Joel H. Pullen:

No, Your Honor.

And that’s an important part of this case.

The policy provides that if an insured patronizes a participating pharmacist which is defined is someone who has agreed to furnish covered drugs.

The policyholder pays the deductible and Blue Shield pays the rest.

Now, that is not how it operates in practice but first of all to get back — to stay on your question Your Honor if he goes to a non-participating pharmacist who has defined to someone who has not agreed to furnish covered drug.

That’s the only test and price is not to think.

Then the policyholder still pays his $2.00 but it’s done in a different manner.

He pays the cost to the pharmacist.

He then sends his claim to Blue Shield.

Blue Shield then deducts the $2.00 deductible but penalizes the pharmacy and only reimburses him 75% of a reasonable charge as determined by Blue Shield.

Warren E. Burger:

How does — you say that penalizes the pharmacy?

Joel H. Pullen:

Yes sir.

Well, it penalizes the insured who in turn learned very quickly that he had better go to a Blue Shield pharmacy who signed this agreement.

I think it’s extremely significant in this case that in 1975 when we took the deposition in October over 98% of the 31,000 claims a month which were filled in Texas under this type of coverage went to participating pharmacists and I think the significance of that it shows the coercive effect, it certainly shows a boycott and I think the question that was raised earlier of does the boycott exemption have anything to do with this case, I think it does very strongly because what this —

John Paul Stevens:

Well, not as it shows a boycott, I don’t understand that.

Joel H. Pullen:

Because Your Honor what the effect of the policy is to allocate the business of Blue Shield insurers to those pharmacists who have agreed to fix prices with Blue Shield.

John Paul Stevens:

I agree to accept the price Blue Shield is willing to pay is what you’re saying which has to be a lower price than the others want for their drugs.

Joel H. Pullen:

Yes sir and it’s consistent —

John Paul Stevens:

I don’t understand that to be a boycott.

Warren E. Burger:

Anybody can get in that participation, can’t they?

Joel H. Pullen:

Yes, Your Honor but that’s not the problem.

The problem is if you don’t get in, if you try and have a free market transaction with your customer Blue Shield then exerts this effort on his customer.

William H. Rehnquist:

Well, we’re talking about now more about the merits I suppose and about the business of insurance exemption —

Joel H. Pullen:

Well, we’re talking about the boycott provision and the exemption Your Honor which I say is a matter that this Court should consider.

William H. Rehnquist:

Well, supposing would somebody have a retail drugstore have an action against the Bank of America because the Bank of Americard, it’s kind of coerces people to go to drugstores that will accept the Bank of Americard even and take 5% off their gross as a result of it?

Joel H. Pullen:

I’m not familiar without the Bank of Americard could work.

William H. Rehnquist:

Well, any kind of credit card is going to have a certain coercive effect.

Joel H. Pullen:

I think that’s true Your Honor but let’s look at this transaction and I think it will be very quickly demonstrated.

Joel H. Pullen:

If pharmacist is in business to sell drugs in pharmaceuticals, a customer comes in.

He’s had a prescription from his doctor that the pharmacist wants to fill and the customer wants filled.

The pharmacist fills that prescription; he gives him a bill for his normal charge for it.

Blue Shield says that we have some particular interest in that transaction even though it’s a transaction in the ordinary course of the pharmacy business which occurs everyday.

They say, “You’re dealing with our insured” and apparently their feeling is that they have some sort of vested interest in that insured.

And that therefore, they can determine at what price the pharmacy will sell the drug to his customer and I don’t think the Court should be misled that this case in the Court’s decision is going to be limited to pharmacist.

If this action if the “business of insurance” it is going to be the “business of insurance” or similar actions in every aspect of our society where insurance is written.

Home, fire insurance companies can have participating construction agreements.

Automobile company —

Thurgood Marshall:

Getting back to the drugs.

Joel H. Pullen:

Yes, sir.

Thurgood Marshall:

What other interest does Blue Shield have other than to get for the — its customers the lowest price drugs they can get?

Joel H. Pullen:

I don’t know that that’s their interest, Your Honor.

Thurgood Marshall:

Well, give me one other interest they have.

Joel H. Pullen:

I think their interest basically is to increase the amount of money which they will retain out of the transaction.

Thurgood Marshall:

And in the meantime they get drugs cheaper?

Joel H. Pullen:

That is questionable.

Thurgood Marshall:

And that —

Joel H. Pullen:

They do —

Thurgood Marshall:

You just said so sir, you said that when they go to another place and they charge more, isn’t that what you said?

Joel H. Pullen:

I did use that Your Honor but —

Thurgood Marshall:

But more means more, doesn’t it?

Joel H. Pullen:

Yes, sir.

Thurgood Marshall:

So, the other place is cheaper, isn’t it?

Joel H. Pullen:

It maybe as to a Blue Shield customer and the way that it operates, I would say yes it is cheaper.

Thurgood Marshall:

It is cheaper.

Joel H. Pullen:

Yes, sir.

Thurgood Marshall:

So, the persons that’s buying the drugs or the person is buying the insurance is getting cheaper drugs at a cheaper price, and that’s a crime?

Joel H. Pullen:

No, Your Honor.

I don’t say that’s a crime at all.

Joel H. Pullen:

What I say is that it takes the transaction out of the competitive process.

And it allows the insurance company rather than the free market place which this Court have been very eager to protect and rightfully so it takes that transaction out of the market place transaction.

Now, following along and this with the question that in my analysis of this case I became concern about.

I said, is the insurance company — let’s reverse it.

Are they to be so to speak a target for whatever the drug is one to charge?

Well, clearly not; they have a way to protect themselves sales and they can protect themselves within what is traditionally been recognized is the insurance relationship in their contract with their insured.

Warren E. Burger:

Isn’t there a factor of the predictability of prices that goes into the actuarial activities of the insurance company involved here?

Joel H. Pullen:

Yes, Your Honor.

Warren E. Burger:

They must know reasonably what the exposure of risks amounts to.

Joel H. Pullen:

Yes Your Honor, I agree with that.

Warren E. Burger:

And if they’re at the mercy of any one who wants to charge a higher price they can’t predict the prices, can they?

Joel H. Pullen:

No, they can’t predict the price but they can by specifying in their contract what they’re going to pay predict their exposure on which their premium is based.

And they can do it much better if they did it that way because in that manner they could also cover the cost of drugs.

We have cited statistics which show the drug cost the part at which and all we get from Blue Shield is our acquisition cost of the drug.

We have shown statistics that those cost they’re going up 59% if pharmacist’s total drug cost — total cost a furnishing service is only up 28%.

If they were truly concern with maximum control they would regulate the drug cost.

Warren E. Burger:

But the participating druggists manage to accommodate themselves to the economics, do they not?

Joel H. Pullen:

That is the question, Your Honor.

Many tell me they cannot continue to function and furnish competition in services —

Warren E. Burger:

Well, is there anything in the record here that would indicate that?

Joel H. Pullen:

There in some of the deposition testimony of some of the plaintiffs in my case, I believe you will find that Your Honor because there was inquiry about what’s wrong of which you’re getting and they say it’s too low.

There’s also a letter in the record that says the price is too low.

Warren E. Burger:

On your approach to this thing although in some business they’re not involved in this case, if you carried it to its logical conclusion you’d undermine the whole cooperative movement in the United States, would you not?

Joel H. Pullen:

I don’t think so, Your Honor.

Warren E. Burger:

What produce bargain for the lowest prices and limit the areas of their purchase, do they not?

Joel H. Pullen:

Yes, Your Honor but I think here we’re looking at something into determine not the cooperative movement but the “business of insurance.”

Warren E. Burger:

Well, they’ve coupled the cooperative concept with the business of insurance or made it part they say —

Joel H. Pullen:

Well, I would disagree with that statement.

Warren E. Burger:

We’ll resume there at 1 o’clock counsel.

[Lunch Recess]

Warren E. Burger:

Counsel, you may resume.

Joel H. Pullen:

Thank you, Your Honor.

William H. Rehnquist:

Could I ask you if in the 19 — in the approvals or exemptions of the policy forms that you were speaking about in 1974 and was it in 1969?

Joel H. Pullen:

Yes, sir.

William H. Rehnquist:

Now, weren’t the provider agreements attached to those forms?

Joel H. Pullen:

They — as I recall Your Honor they were submitted with one of them and maybe near on this.

I think with regard to the first exemption order that the pharmacy agreement was submitted.

William H. Rehnquist:

Well, submitted it was attached to the form, wasn’t it?

Joel H. Pullen:

Yes, sir.

William H. Rehnquist:

And how about in 1974?

Joel H. Pullen:

In 1974, I do not recall.

I recall a letter in the record which is I with —

William H. Rehnquist:

But what about was attached and the policy was approved?

Joel H. Pullen:

I would still say Your Honor that all that would be approved would be the policy because that’s all the state has authority to approve under the specifically under statute.

William H. Rehnquist:

Was the deposition of Paul Conner introduced in the evidence?

Joel H. Pullen:

Your Honor, this was on a motion to dismiss the deposition is before that was before the court and this Court.

William H. Rehnquist:

So, it is before the —

Joel H. Pullen:

Yes, sir.

William H. Rehnquist:

And didn’t Mr. Conner testify that this provider agreement was part of insurance subject to the jurisdiction of Commission?

Joel H. Pullen:

I don’t think he did so too clearly and there is some debate about —

William H. Rehnquist:

Well, too clearly I am —

Warren E. Burger:

Perhaps, we’ll have to decide that when we examine it again.

Joel H. Pullen:

All right.

William H. Rehnquist:

But you do recognize that he looking in a little bit different direction in Mr. Paul?

Joel H. Pullen:

Yes, sir.

Warren E. Burger:

Well, now, you suggest that they approve only the terms of the policy?

Joel H. Pullen:

Yes, sir.

Warren E. Burger:

But the Commission had before it exactly the interpretation of the insurer as to the scope of that policy and the meaning of the language of policy, did they not?

Joel H. Pullen:

Your Honor, my reading of Mr. Ferguson’s testimony was that this came in they did put it the file although they did not stamp it filed it I will just the matter which they received for informational purposes.

As I read his testimony, it is even though I may read this and examine it, I have no jurisdiction over it.

Joel H. Pullen:

And that, I believe is what he said as the record will reflect.

William H. Rehnquist:

Well, is this a question that would ultimately you said by a Supreme Court of Texas?

Joel H. Pullen:

Was it ultimately decided?

William H. Rehnquist:

Is this a kind of question that would ultimately be decided by the Supreme Court of Texas whether the Texas Insurance Commissioner has what your furtherance jurisdiction over this matter?

Joel H. Pullen:

It could be Your Honor.

I don’t think for the purpose of this case it has to be.

I think because the statute is clear.

William H. Rehnquist:

Well, then you’re not relying on the deposition?

Joel H. Pullen:

No, I am relying on deposition very much so.

William H. Rehnquist:

Well, do you really think that’s the way you establish what might be a fairly important question to state law to have conflicting depositions of two agencies subordinates as to what they think the state law provides?

Joel H. Pullen:

No Your Honor, I think you have to look at the state statute and when you look at the Texas State statute when it talks about what will be filed, it is insurance policy forms.

And this is the point I’m trying to make when I first opened my argument that that’s all the statute provides Texas has regulatory authority over.

There is nothing in the Texas statute and there’s nothing it’s been cited to this Court that shows any authority of the state to approve the pharmacy agreement.

William H. Rehnquist:

Then you don’t need the depositions from —

Joel H. Pullen:

No sir, I think it helps considerably because he’s the man who is enforcing the Texas law and this is how it does operate.

I would point out to the Court in answer to Justice Marshall’s question before lunch about whether prices would increase.

The pharmacy dispensing fee of $2.00 was fixed in 1969.

There were no studies at that time to determine whether that was adequate.

There had been no studies since to determine whether it is adequate.

Our position is that we wish to compete.

We wish to have our prices set subject to the competitive forces.

They may increase if this agreement is held subject to the antitrust laws our competition may keep them from increasing but it would be the competitive factor in our society which would determine that.

I would like to also spend a little time talking about the type of policy we have here.

Despite the terms that counsel for Blue Shield has used, it is purely and simply an indemnity type of policy.

Page 255 (a) in the appendix which is the Michigan contract, they say Blue Shield is not a party to this drug sale.

The Walgreen contract in Texas which is the 203 of the appendix, says Blue Shield is the underwriter of insurance protection only.

On page 182 (a) of the appendix which is a form letter for Blue Shield it talks about how they will make payment.

And that basically, is what we have here.

The compensation to the pharmacy is fixed at one level for all pharmacies.

The net result of this and particularly since it stayed the same since 1969 except and this is not in the record.

Joel H. Pullen:

I think it did go up to two and a quarter after the Fifth Circuit’s decision.

It is our position that this eliminates competition in the retain sales of drugs and pharmaceuticals not only price competition but service competitions.

Our client say, “We cannot operate and compete fully.”

We cannot compete in the area of services.

We cannot compete in the area of hours.

And the test is also is a significant factor but it also shows in my opinion that that transaction and question is purely and simply a business transaction between a pharmacist and his customer.

Blue Shield goes further and say, “That customer happens to be an insured of ours.”

So, therefore Mr. Pharmacist we contend you what to charge him and we can make it stick and they can and they have.

They have entered into a conspiracy —

Warren E. Burger:

When you say they can tell them, I’m not sure what you mean.

Are you talking about the participating pharmacy?

Joel H. Pullen:

Yes, sir.

Warren E. Burger:

Well, participating pharmacy it doesn’t have to participate.

Joel H. Pullen:

No, Your Honor, but this is where the percentage comes in because what they do the way the program is set up with the non-participating pharmacist and the penalty that an insured suffers if he deals with a non-participating pharmacist.

It teaches that insured very quickly that if he wants to get the maximum reimbursement he has to go where the price agreement —

Warren E. Burger:

Mr. Pullen, tell me specifically, what’s wrong with that in your view in antitrust terms?

Joel H. Pullen:

Your Honor, in my opinion, that is a price fixing conspiracy and it is a boycott and it is a conspiracy to boycott and it’s been very successful.

The figures show Blue Shield’s own figures showed that 98% of their customer’s business goes to the participating pharmacist.

Warren E. Burger:

It’s price fixing to take your terms in a sense that the participating druggist agreed to sell at a lower price.

Joel H. Pullen:

At one fixed price Your Honor.

It may —

Warren E. Burger:

And the lower price solved ore you wouldn’t be here I assume?

Joel H. Pullen:

Well, what I was trying to say again and apparently for the second time I have not articulated it very well is that the ultimate price which their customers will find acceptable will be a price fixed by competition.

We could very well be successful in this case and then find that our customers will not pay any more than the $2.00.

And in fact, they’ll pay less but nevertheless it is the competition that is important under the Sherman Act and that that is where the price fixing should be determined not by this type of agreement.

We have here an agreement, it is not been approved by any state regulatory authority.

In Michigan, Blue Shield is not an insurance company.

In fact, in the demo case which we’re citing in Michigan, the Commissioner of Insurance who while he has regulatory powers, it is not insurance regulatory power tried to regulate their rates to help them on hospital utilization.

They have fought it all the way up to the Supreme Court of Michigan and they’re still fighting and they say to him that, “That’s not your business, that’s our business.”

That’s not anything that you have regulatory authority over.

Joel H. Pullen:

In Texas, it’s even clear because the statutes says what the state what the state reviews and it does not list pharmacy agreements of this type.

Potter Stewart:

Well, we’re not all concern here with the merits of the antitrust claim but merely whether or not the defendant is under the statutory exemption.

And to be under the statutory exemption the defendant, defendants rather have to be first in the business of insurance and second, not regulated by state law and third, where interstate of the merits to this extent that you whether or not you’ve alleged the boycott?

Joel H. Pullen:

Yes sir.

Potter Stewart:

Within the many exemption and that’s all but we’re not interested in the —

Joel H. Pullen:

I understand that Your Honor.

Byron R. White:

Could I ask you, assuming you’re right that these provider agreements are not regulated by the state, well doesn’t Section 2 of the McCarran-Ferguson Act say that the Sherman Act does apply to the extent the state doesn’t regulate of certain phases in the insurance business?

Joel H. Pullen:

That is my understanding Your Honor.

Byron R. White:

So that even if you might consider for purposes of the McCarran-Ferguson Act these provider agreements to be within the contemplation of the word “insurance” but other words insurance business.

The Sherman Act to nevertheless apply in Texas if Texas didn’t regulate those agreements.

Joel H. Pullen:

That would be certainly my understanding.

Potter Stewart:

But it doesn’t have the record to regulate under its insurance commissioner; it can regulate through his antitrust laws or any other way.

Byron R. White:

But it doesn’t purport to regulate them at all I gather.

Lewis F. Powell, Jr.:

I wonder Mr. Justice Stewart is right because Section B says, it will supersede any law enacted by any state for the purpose of regulating the business of insurance.

I don’t think that language covers state antitrust laws, does it?

Joel H. Pullen:

I have some question about it Your Honor in looking at the McCarran Act legislative history.

The Court in my opinion was talking about affirmative acts of state regulation because they talk about agreements which the public authority has approved.

On this point, Mr. Kaiser mentioned the Texas Article 21 and 21 of the unfair labor practices.

We have shown in our brief and cited the Texas case that that would not apply to us because we have no insurance policy.

We are just selling to someone who has.

And I don’t think that would apply to us.

Obviously, Blue Shield if they’re going to be in court would rather be under the Texas Antitrust Act.

And we do have one and there’s no question about it but it is not been one that has been used for damage suits and it is considerably less severe in the recovery to a plaintiff.

I have some question about whether an antitrust statute which would apply on and after the fact basis and perhaps never be invoked a private plaintiff is the type of regulation that the McCarran Act is intended to.

Lewis F. Powell, Jr.:

Well, the question is to whether it supply after the fact, the question is whether it’s a law enacted by a state for the purpose of regulating the business of insurance.

Joel H. Pullen:

As compared to just regulation of business in general?

Lewis F. Powell, Jr.:

Yes.

Joel H. Pullen:

Yes, sir.

Potter Stewart:

Well, Section 2 (b) has no such limiting language and that’s the, I thought that’s the exempt Section that was an issue in this case.

John Paul Stevens:

I’ve been quoting from Section 2 (b).

Joel H. Pullen:

To continue Your Honor, the matter is not one sided.

If contracts for the sale of merchandise to people who have insurance coverage do broadly constitute the business of insurance, the situation may turn to a horrible type of thing.

For example, if one of these contracts automatically is within the business of insurance and exempts to antitrust violations could the pharmacist get together with a small insurance company acquire control over it and then say the Blue Shield, “We’ll were sorry gentlemen we’re dealing with this insurance company and we’re not going to deal with you and we don’t have a boycott because there are other people out here and they may deal with you but we’re only going to service the customers of these other insurance companies.

And we’re not going to give any service to your insureds and we’re not going to reimburse our insureds for dealing with other people.”

I believe my time has expired.

Thank you Your Honor.

Warren E. Burger:

Very well, Mr. Pullen.

Mr. Allen.

Richard A. Allen:

Mr. Chief Justice and may it please the Court.

The issue on this case is whether Blue Shield’s agreements with various pharmacists constitute the “business of insurance” within the meaning of Section 2 (b) of the McCarran-Ferguson Act.

The issue does not concern the merits of the respondent’s antitrust allegations.

There’s been no ruling on the merits the antitrust issues and there’s been no facts developed with respect to it.

But I would stress that the out — simply stress at the outset, the point that Mr. Justice Stevens made which was that the consequence of petitioner’s position would be that even if the facts showed a conspiracy between a group of pharmacists to fix the price of prescription drugs and a use of a pharmacy agreement within insurance company to implement that conspiracy the consequence of petitioner’s position would be that it would be the business of insurance and therefore exempt from antitrust laws.

But the issue presented —

John Paul Stevens:

Mr. Allen, I just want to be sure about this.

I know I put that example forward but is that true if the State of Texas has not specifically approved that particular arrangement?

In other words, doesn’t the exemption only come into place as part of 2 (b) which says no Act of Congress shall invalidate the state law for the purpose of regulating insurance and unless you have stated provably you don’t have the state law?

Richard A. Allen:

Well, Mr. Justice Stevens, there are two portions to Section 2 (b) which maybe the source of some of your confusion but under either portion if a activity is not the business of insurance it makes no difference whether the state law regulates it or does not.

Our position is that the pharmacy agreements are not the business of insurance.

John Paul Stevens:

Well, let me be sure I get my confusion cleared up because I am confused.

What part of 2 (b) would grant an exemption if you have no state regulation?

You just told me that there are two parts to 2 (b) one of which was —

Richard A. Allen:

No part, excuse me, no part of 2 (b) would grant an exemption from the antitrust laws if there was no state regulation.

John Paul Stevens:

Right.

Richard A. Allen:

Does that answer your question?

John Paul Stevens:

So, that then in my hypothetical, there’s no exemption unless there is state regulation which authorized that particular arrangement.

Richard A. Allen:

That is true even (Voice Overlap) even if the activity is the business of insurance.

John Paul Stevens:

Alright.

Potter Stewart:

State regulation doesn’t have to authorize that just as to be state regulation?

Richard A. Allen:

That is correct.

Potter Stewart:

And the language to which my brother Stevens adverted in Section 2 (b) I’d already understood as referring to none preemption prior to June 30, 1948.

And the general exempted language I thought was in the latter part of 2 (b) —

Richard A. Allen:

That’s my understanding Mr. Justice.

Potter Stewart:

After June 30 of 1948?

Richard A. Allen:

That’s my understanding too.

Byron R. White:

Isn’t true that all the state law would have to do is purport to regulate provider agreements?

You wouldn’t have to have a specific action of the state authority on a specific provider agreement?

Richard A. Allen:

That’s my understanding Mr. Justice White.

You would not have to ask —

Byron R. White:

And that even if the provider agreement was in violation of state law you have to leave the policing up to the state authority, it’s not with the antitrust laws?

Richard A. Allen:

If the provider agreements are part of the business of insurance that —

Byron R. White:

Yes.

Richard A. Allen:

But if they were not at court —

Byron R. White:

Yes, I understand right.

Richard A. Allen:

The issue presented by petitioner’s motion to dismiss and the issue before this Court is simply whether the pharmacy agreements are part of the business of insurance —

John Paul Stevens:

I hate to take up all your time on my confusion but I think it is important that I understand the statutes.

So, I’m going to ask you one more question.

What is the language in the McCarran Act which grants the exemption if there is one?

Richard A. Allen:

Section 2 (b).

John Paul Stevens:

And read me the words that you talk about.

Richard A. Allen:

The pertinent portion I think is they provide it that after June 30, 1948 the Act of July 1819 know as a Sherman Act, and the Act known as Clayton , and the Act known as a Federal Trade Commission Act shall be applicable to the business of insurance to the extent that such business is no regulated by a state law.

John Paul Stevens:

And does it at anywhere say and you say by reverse implication —

Richard A. Allen:

By reverse implication that would suggest that if it were regulated by a state law those particular Acts would not apply.

The main provision of Section 2 (b) provides no Act of Congress —

John Paul Stevens:

I understand that.

So, you’re saying that the — in other words, it’s the reverse implication of the proviso as the sole source of the exemption?

Richard A. Allen:

That’s my understanding although of course under our position it wouldn’t make difference because under our position it’s not the business of insurance.

John Paul Stevens:

Well, the words the “business of insurance” are found in that Section 2?

Richard A. Allen:

That’s correct.

John Paul Stevens:

Alright.

John Paul Stevens:

I’m sorry of taking your time.

Richard A. Allen:

That’s quite alright.

Byron R. White:

Well, I would suppose the first part of 2 (b) would set aside any state law that was in conflict with the antitrust laws.

Warren E. Burger:

Would not be, isn’t it?

Richard A. Allen:

The first part of 2 (b) provides no Act of Congress shall be construed to supersede according from memory.

Byron R. White:

That’s right.

Richard A. Allen:

Any state law enacted for the purpose of regulating insurance.

Byron R. White:

Including antitrust laws?

Richard A. Allen:

Including the antitrust laws.

Byron R. White:

So, it would not apply if it serve to —

Richard A. Allen:

Supersede.

Byron R. White:

To supersede a state law?

Richard A. Allen:

That is correct.

Byron R. White:

So, the first part of 2 (b) would give insurance business exemption from antitrust laws if —

Richard A. Allen:

That is correct Mr. Justice White.

The first part of Section 2 (b) would do so expressly.

Byron R. White:

Well, and why do you say it’s a latter part?

Only the latter part.

Richard A. Allen:

Well, let me modify my position, it is not only the latter part.

The latter part refers specifically to the Sherman Act upon which petitioners relied for their antitrust complaint.

Byron R. White:

But the first thing —

Richard A. Allen:

The first part would include the Sherman Act as well as —

Byron R. White:

Sherman Act and every other federal law.

Richard A. Allen:

That’s correct.

But the first part —

Byron R. White:

It also includes the Robinson-Patman Act the first part of 2 (b) and which is not referred to and that exempts in the proviso?

Richard A. Allen:

That is correct.

But the first part would only limit the application to federal law to the extend it happened to supersede a state law designed for the purpose of regulating the business of insurance if I made myself clear.[Laughter]

In any event, we contended that the pharmacy agreements are not part of the business of insurance and our argument may be summarized as follows.

The precise scope of the business of insurance exemption is not clearly delineated and the McCarran-Ferguson Act and there maybe areas of reasonable doubt.

Richard A. Allen:

Although, this Court has frequently stated the principle that in areas of reasonable doubt; antitrust exemptions are to be narrowly construed and antitrust application to be favor.

William H. Rehnquist:

That’s implicit exemption, isn’t it?

Richard A. Allen:

No, Mr. Justice Rehnquist, this Court has applied that principle even in the case of express exemptions.

The two cases for example that we cited in our brief, Abbott Laboratories and Federal Maritime Commission versus Seatrains were case of express exemptions from the antitrust laws.

William H. Rehnquist:

Do you think that one applies the principle of narrow construction equally to express exemptions as to imply the exemption?

Richard A. Allen:

Yes, I do Your Honor.

When you’re dealing with an express exemption such as the McCarran-Ferguson Act or the many other express exemptions, the principle applies that exemption is to be narrowly construed.

In any event, what the legislative history the McCarran Act does indicate is this Court has held in SEC versus Variable Annuity Company and SEC versus National Securities is first that Congress’ core concern with respect to the business of insurance was the underwriting risk and the relationships between insurance companies and policyholders that concern the underwriting of risk.

And the second thing the legislative history indicates is that Congress did not intend to exempt everything an insurance company does.

Those two facts support our contention that the pharmacy agreements are not the business of insurance.

First, the pharmacy agreements are not the underwriting of risk.

They are simply contracts for the purchase of drugs and drug distribution services by Blue Shield —

Warren E. Burger:

What is your response to what we suggested this morning on the universal practice of public liability insurance insuring not only against the risk of ultimate judgment against the policyholder but the cost of litigation, is that —

Richard A. Allen:

My response is that that example is a good illustration of our point.

We think it would be absurd to contend that an agreement between an insurance company and a law firm concerning the supplying of legal services to the insurance company is the business of insurance in any ordinary sense.

Warren E. Burger:

How about the provision in the policy itself?

Richard A. Allen:

Even if it’s in the policy itself it simply begs common ordinary understanding to say that an agreement between an insurance company and a law firm about how much they’re going to pay per hour is the business of insurance.

Thurgood Marshall:

Isn’t also true that medicine is part of health?

Richard A. Allen:

That’s true too Your Honor and our argument that will follow.

Thurgood Marshall:

That they can — well, as the paying of the doctor’s bill insurance?

Richard A. Allen:

The paying of the claims to the insurer — to the policyholder is the business of insurance and an agreement between the insurance company and somebody who provides services is we contend not the business of insurance.

Thurgood Marshall:

Including the doctors?

Richard A. Allen:

Including the doctors, including the pharmacists, there’s no difference between pharmacist and doctors.

Thurgood Marshall:

Then under the Group Health Plan it wouldn’t be covered, wouldn’t the insurance would because they pay the doctors?

Richard A. Allen:

I’m not certain, I understanding to your point Mr. Justice Marshall —

Thurgood Marshall:

They pay the doctors.

The Group Health hires the doctor.

Richard A. Allen:

That’s true.

Thurgood Marshall:

So, that wouldn’t be insurance then?

Richard A. Allen:

The hiring of the doctors would not be the business of insurance.

Lewis F. Powell, Jr.:

What if the —

Thurgood Marshall:

It wouldn’t be — they wouldn’t be covered by this?

Richard A. Allen:

It would not be part of the business of insurance and maybe perfectly lawful.

There’s no reason to suppose it’s not lawful but it wouldn’t be part of the business of insurance.

Potter Stewart:

What if forgetting any problems of legal ethics or anything, what if an insurance company just had a stable of lawyers, its employees that it furnished under its insurance contracts to beneficiaries who were sued for liability, would those employment contracts with the lawyers pay the business of insurance?

Richard A. Allen:

I think not Mr. Justice Stewart.

It’s hard to see how those contracts had violated the antitrust laws but the relationship between although the question is not so clear.

I think that’s an area of —

Potter Stewart:

If it’s not clear, then why is it so clear that if the insurance company does the same thing with independent contracts is it all of a sudden becomes very clear?

Richard A. Allen:

Well, it seems to me basis for distinction between one’s dealings with ones own employees and ones dealing with outside contract.

Potter Stewart:

In each case, the insurance — the insurer is furnishing the services and what difference has it whether so far as this exemption goes whether it does so through its employees or through independent contract?

Richard A. Allen:

Well, I think as I say my first response would be that I don’t think labor relation agreements between an insurance company and doctors —

Potter Stewart:

But you don’t make the labor relations agreements, they’re employment contract, no point in giving out a fancy name.

Richard A. Allen:

Between insurance company and its doctors, my first reaction was I don’t think that will be the business of insurance although I think the question there would be closer because I think there’s a basis for distinction.

But the point we wish to emphasize is that at some point you have to draw the line.

Relations — insurance companies have myriad relationships with third parties what you would call independent contractors to furnish the insurance company with good and services.

They contract with printers, they contract with lawyers, they contract with building owners.

Congress, there’s no suggestion in the legislative history the Act of Congress intended and all of those kinds of relationships to be the business of insurance.

Byron R. White:

Now, you don’t seriously contend that the promise to furnish to defend that person in a case of an accident is not insurance.

Richard A. Allen:

No, the promise is insurance to deliver in the pharmacy —

Byron R. White:

Alright then, I wouldn’t think you would think — if there’s been an accident the companies called upon to furnish the legal services that were promised.

You wouldn’t think furnishing the legal service was not insurance?

Richard A. Allen:

No, I agree that that would be insurance —

Byron R. White:

And if they’re going to furnish to legal service they’re going to have to pay for them?

Richard A. Allen:

That is correct but only in the same sense.

Byron R. White:

You wouldn’t if the insurance company goes out to an independent law firm and hires them to furnish the services that were promised; the furnishing of those services is part of insurance business?

Richard A. Allen:

Well, we can say no because —

Byron R. White:

You just said so.

Richard A. Allen:

The furnishing of the services to the policyholders, that’s right.

Byron R. White:

And but you wouldn’t think that the negotiation the price at which that they were furnished was part of the insurance?

Richard A. Allen:

Negotiation between the insurance company and the lawyer we would contend does not the business of insurance because there is no principle basis for distinguishing that kind of agreement between insurance company —

Byron R. White:

Why not draw the line and say well, perhaps that piecemeal negotiation is one thing but a forward contract, they’re sort of a supply contract in the indefinite future is something different.

You don’t think that one.

Richard A. Allen:

Because the any kind of any distinction on that basis would break down.

For instance, —

William H. Rehnquist:

Any distinction breaks down and what about the contract of purchase the paper on which the policy is written, is that part of the business of insurance?

Richard A. Allen:

The contract that purchased the paper?

William H. Rehnquist:

On which the policy is printed.

Richard A. Allen:

We would contend it would not be and that a conspiracy between printers to fix the price of printing services which used an agreement within an insurance company to do too to implement that conspiracy is not what Congress intended to exempt from the antitrust laws.

Harry A. Blackmun:

Well, the insurance company could be a plaintiff in an antitrust lawsuit against the paper manufacturers who agreed to fix the prices.

Richard A. Allen:

Exactly, we contend it would be.

Harry A. Blackmun:

It could be a plaintiff here.

It could be a plaintiff here against at any pharmacist to agree among themselves to fix the prices but it isn’t the question here, the question is whether —

Richard A. Allen:

Under our contention — but not on the petitioner’s contention.

Harry A. Blackmun:

No, no I think —

Warren E. Burger:

He responded to that this morning.

Richard A. Allen:

But not consistently.

Potter Stewart:

But the point is that now we have an agreement with them between the insurance company and the pharmacist to provide services and the question is whether or not that is the business of insurance.

Richard A. Allen:

And our response is that it is not because if it were then everything in an insurance company would do to save its own costs of services would be the business of insurance.

Potter Stewart:

Of course, perhaps that’s the answer.

Warren E. Burger:

But Mr. Kaiser —

Richard A. Allen:

But Congress did not so intend.

It’s clear from this Court’s decisions in Congress.

Warren E. Burger:

I understood Mr. Kaiser this morning when I put the question to him to say that the action of the drugs — drug people together independent of the agreement with Blue Shield could be an antitrust violation and one of the ways that could be asserted would be for Blue Shield to sue them because they were pushing the price up; price fixing agreement.

Richard A. Allen:

That’s correct Mr. Chief Justice but the distinction is important.

He makes that concession and that’s perfectly true.

We agree with that but what his position necessarily entails is that if that conspiracy between the pharmacist were embodied in an agreement with an insurance company that would be the business of — that agreement would make it all part of the business of insurance.

Warren E. Burger:

It doesn’t know his response to that was that would not render them.

It might be part of the business of insurance as between Blue Shield and the druggist but it wouldn’t render the druggist immune from an antitrust violation for their own agreement.

Richard A. Allen:

Well, I don’t understand that to be their position Your Honor.

Richard A. Allen:

I didn’t hear him to say that this morning.

Warren E. Burger:

I understood that very clearly that it was his position.

Richard A. Allen:

But if that’s his position what he saying is that then we can violate the antitrust laws by entering into an agreement with pharmacist —

Potter Stewart:

Well, that’s sort of exemption from the antitrust laws mean.

Richard A. Allen:

And the pharmacist would be guilty of antitrust and we would not.

Potter Stewart:

Well, that’s exactly an exemption means that you can violate, you can engage in conduct which would be violated of the antitrust laws if you didn’t have an exemption.

That’s exactly what his position is.

Richard A. Allen:

But what this Court has established is that the McCarran-Ferguson Act didn’t intend to immunize entities that intended to immunize conduct, agreements practices —

Potter Stewart:

Except that a business, the business of insurance?

Richard A. Allen:

That’s right.

But it doesn’t matter who’s engaging in it.

Warren E. Burger:

Very well, Mr. Allen.

You have some time left Mr. Kaiser.

Do you have anything further?

Keith E. Kaiser:

Thank you.

Mr. Chief Justice, if there was any confusion with our discussion earlier today it would be our position that in the event pharmacist get together and conspired to enter into a pharmacy agreement and came the Blue Shield and told us, held a gun to our head so to speak and said we’re not going to enter in to this agreement with you unless you pay us a certain price and that —

Byron R. White:

Well, what if Blue Shield joined the conspiracy?

Keith E. Kaiser:

Your Honor that if we are a victim of a conspiracy —

Byron R. White:

I didn’t say that.

I said they are party to it.

Keith E. Kaiser:

Under those — like we have two different circumstances under my theory —

Byron R. White:

Well, yes I know but I’m asking about mine now.

How about Blue Shield is party to the conspiracy?

Keith E. Kaiser:

Alright Your Honor, if Blue Shield was a party to the conspiracy —

Byron R. White:

Remember they are carrying out the business of insurance according to your view.

Keith E. Kaiser:

It would be my initial impression right now that if the agreement was embodied into the pharmacy agreement and it is always been our position that the pharmacy agreement is immune as a part of the business of insurance.

Well, then there would be no violation.

Byron R. White:

Blue Shield would be immune?

Keith E. Kaiser:

Yes, sir.

Byron R. White:

How about — and but nevertheless I suppose you say the druggist —

Keith E. Kaiser:

For the separate conspiracy between the druggist there maybe an actionable that maybe actionable conspiracy.

Warren E. Burger:

But Blue Shield is at least an ordinary human experience isn’t as likely to — isn’t very likely to enter into conspiracy to raise their own costs?

Keith E. Kaiser:

Not at all, Your Honor that would be totally against our own interest and the interest of our policyholders.

Warren E. Burger:

So, the hypothesis is at least economically not very real?

Keith E. Kaiser:

That’s correct, Your Honor.

Byron R. White:

Unless they get together to keep Blue Shield from going too low and Blue Shield gets paid off in some way?

Keith E. Kaiser:

Yes, I guess that is the possibility Your Honor.

Byron R. White:

Well, it has been true, hasn’t it in some places?

Keith E. Kaiser:

Not to my knowledge Your Honor.

I’m not familiar with anything of that nature that’s ever happened.

John Paul Stevens:

Is the price fixing agreement have to be the fix maximum prices to be unlawful supposing it’s an agreement to fix prices is much lower than anybody else can charge?

Keith E. Kaiser:

Your Honor, there’s considerable dispute about that but as I read the cases of price fixing can either be to fix maximum prices or minimal price.

John Paul Stevens:

It may be illegal either way, would it not?

Keith E. Kaiser:

Strictly from the antitrust from an act standpoint.

John Paul Stevens:

So they could have a lot of group of large druggist who wanted to have a very low price in order to drive small companies out of business for example and persuaded Blue Shield to go along with it and that would normally be an antitrust violation?

Keith E. Kaiser:

Well, I’m operating my thoughts are under the theory that Blue Shield would offer this agreement to everyone; somewhat to possibly be able to accept some possibly not.

Warren E. Burger:

Is there any limitation now, can anyone be a participant?

Keith E. Kaiser:

Any license pharmacy in the State of Texas has been invited and is capable of becoming a participating pharmacy.

John Paul Stevens:

Mr. Allen to be sure that my confusion is completely cleared up, do you agree with the view that in order to qualify for the exemption under Section 2 (b) of the McCarran Act you must establish both that you’re in the business of insurance and secondly that that which you claim is an exemption is regulated by state law?

Keith E. Kaiser:

Yes, Your Honor.

We claim that we — it must be constitute a part of the business of insurance and the activity must be regulated by state law.

And we believe that undeniably has in this case.

Your Honor, we have talked considerably today about —

Byron R. White:

I take it that the court below did not reach the second step.

They just simply said, it’s not the business of insurance.

Keith E. Kaiser:

The Court of Appeals for the Fifth Circuit did not reach the second step.

However, the trial court found that it had been regulated in its words pervasively.

Byron R. White:

But the Court of Appeals didn’t reach that second?

Keith E. Kaiser:

No sir.

It said that, in view of the fact that it was finding at the pharmacy agreement did not constitute business of insurance.

Keith E. Kaiser:

It was not required to go to the second step relating to state regulation nor was it required to go to the step relating to boycott.

The business of insurance is a federal question.

There seems to have been considerable discussions today about the state’s interests and whether or not the state has regulated and whether or not the state considered the matter to be the business of insurance.

While we believe —

Potter Stewart:

It’s true that the exemption however exist only at the exemption for the business of insurance exist only to the extent that it is regulated by state law?

Keith E. Kaiser:

That’s correct, Your Honor.

Potter Stewart:

So, and your opponent in part 2 I think it is what the brief asserts that this is not regulated by state law.

So, that’s reason that became relevant as I understood that relevance of that argument.

Keith E. Kaiser:

Yes sir, well, I just want to make our point clear.

We’re not relying upon what the state did to say that this constitutes the business of insurance.

We’re relying strictly upon a federal standard.

Potter Stewart:

But the federal standard upon that federal standard is that the business of insurance has to be regulated by state law?

Keith E. Kaiser:

Yes, sir.

Thurgood Marshall:

But suppose the state says that the dealing in drugs is not an insurance function and therefore we will not regulate it.

Then, what would your position be?

Keith E. Kaiser:

My position would still be the same Your Honor.

The business of insurance is a federal question.

If it happens to be the business of insurance but not regulated, the exemption does not attach.

Although, we do believe that federal court should give certain —

Thurgood Marshall:

Well, if they said it was and they did move and it would be a very question.

Keith E. Kaiser:

I’m sorry Your Honor.

Thurgood Marshall:

If they said it was an insurance problem and did regulate it, it would not be a federal?

You don’t go that way, do you?

Keith E. Kaiser:

I think its still would be a federal consideration, Your Honor.

The business of insurance is a federal question to be decided by the federal courts.

We do not suggest that everything in insurance company does constitutes the business of insurance.

An insurance company may do many things in the conduct of its business which are not directly related to the furnishing of specific benefits and which are not related directly to the cost of those specific benefits.

What we are saying in our position here today is that the pharmacy agreement directly violates —

Potter Stewart:

Well, what would some of those things be — let’s assume a company that’s an insurance company nothing else —

Keith E. Kaiser:

Yes.

Potter Stewart:

It’s not a conglomerate or anything.

So, only in the insurance business now, what would all — what are those many things be —

Keith E. Kaiser:

As the Solicitor General has said that the contracts for the purchase of paper (Voice Overlap) the buildings —

Potter Stewart:

Well, how can that be the building of insurance?

Keith E. Kaiser:

That I would say it would not —

Potter Stewart:

If it’s in the insurance business then it has to buy paper.

Keith E. Kaiser:

Your Honor, the federal courts and this Court has said that the key is not whether or not it’s in the insurance business but the business of insurance and there’s a difference —

Potter Stewart:

Well, it’s in the business of insurance and then conducting at business it has to have policies?

Keith E. Kaiser:

Yes, sir.

Potter Stewart:

Whether written or printed on paper and why therefore, shouldn’t its purchase of paper be the business of insurance?

Keith E. Kaiser:

Because there is not a requisite relationship between the insurer and its policyholder in that situation.

Byron R. White:

Well, about the paper used for — that that they send out to the policyholder to submit claims on?

Keith E. Kaiser:

That still would not really involve the claim — the risk —

Byron R. White:

Condition of the policy is that you file a claim on this form?

Keith E. Kaiser:

Your Honor, I think that would be too attenuated to the business of insurance to become an exempt to activity.

John Paul Stevens:

What about the between the insurance company and the lawyer to employees to defend the casualty case?

Keith E. Kaiser:

I’m sorry, Your Honor.

Potter Stewart:

Now, we’re back where we started.

John Paul Stevens:

I want to go back where we started on the lawyer hired by the insurance company to defend the policyholder who sued under a liability policy.

Keith E. Kaiser:

Yes, sir.

John Paul Stevens:

Would that be the business of insurance?

Keith E. Kaiser:

If it was an obligation contained in the policy of insurance?

John Paul Stevens:

The policy says, “We’ll defend all claims.”

Keith E. Kaiser:

And if it was —

John Paul Stevens:

It doesn’t say by lawyers or how but then they go and hire lawyers to defend the claims.

Keith E. Kaiser:

If it is a part of the coverage and benefits provided by the policy and if it is something that is eminently related to the insured —

John Paul Stevens:

Well, I don’t think I don’t need any adjectives.

Yes or no, is it covered in your view or not?

Is it part of the business of insurance?

Keith E. Kaiser:

I think it might be Your Honor.

John Paul Stevens:

You think it might be?

Keith E. Kaiser:

Yes, sir.

John Paul Stevens:

You’re not very confident and yet I don’t see any difference between that in providing drug as I indicated earlier.

I don’t understand your lack of confidence on that case in your complete confidence on this case.

Keith E. Kaiser:

Your Honor, it’s the difference between that.

The conceptual difference between the two types of cases here, I agree with Your Honor’s hypothesis.

I think I agree and not I think I agree but I do agree.

However, we’re looking at a different type of insurance and a different type of policy here.

We’re looking at one where this particular —

John Paul Stevens:

Supposing you pay money and you go out and borrow money from a bank to pay off a claim in dollars, is that the business of insurance?

Keith E. Kaiser:

If the insured?

John Paul Stevens:

No, the company has a little short of cash so they go to the bank to raise the cash to pay off a very large claim at some catastrophe of some kind.

Keith E. Kaiser:

Your Honor, I don’t believe that would constitute —

John Paul Stevens:

Well, how’s that different?

Keith E. Kaiser:

Well, it does — I believe that it would fall too far outside the relationship between the insurer and the insured.

The assumption of risk in providing a benefit —

John Paul Stevens:

What the insurance company needs to satisfy a claim that it’s obligated and under the policy to satisfy, it’s $10.00 rather than drugs.

I don’t see the difference.

Keith E. Kaiser:

I don’t believe it would fall within the criteria establish by this Court in SEC versus National Securities.

John Paul Stevens:

The only criteria there is that it be the business of insurance.

It’s kind of a question begging criteria —

Keith E. Kaiser:

Well, Your Honor, this Court set out —

John Paul Stevens:

And if you buy the company.

Keith E. Kaiser:

Set out some very broad criteria in determining what constitutes the business of insurance in that case but the real nexus for what does constitute the business of insurance are matters that intimately relate to the insurer-insured relationship.

The Court also said that the type of policy which could be issued its reliability, interpretation and enforcement and other activities of insurers which relate closely to their status as reliable insurers constitute the business of insurance for McCarran purposes.

John Paul Stevens:

Do you apply that all that language to make a big loan from a bank to pay-off a policy obligation it seems to me?

Keith E. Kaiser:

Your Honor, there was the preceding case in 1959 of Securities and Exchange Commissioner versus Variable Annuity said, that the merger of two insurance companies even though the sale of stock or the holding of stock involved the insureds to some respect said that that was not sufficient that did not sufficiently relate to the insurer-insured relationship.

And I think your proposition of that going out and borrowing money would be more akin to the Variable Annuity case.

Thurgood Marshall:

The real answer is, to my brother Stevens’ question is that the further we take you away from this case and your theory of the less certain you get.

Keith E. Kaiser:

Yes sir.

Keith E. Kaiser:

Thank you very much Your Honors.

Warren E. Burger:

Thank you Mr. Kaiser.

Thank you gentlemen.

The case is submitted.