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Ticor Title Ins. Co. v. F.T.C.

filed: January 9, 1991.


On Petition for Review of an Order of the Federal Trade Commission; FTC Docket No. 9190.

Hutchinson and Nygaard, Circuit Judges, and Edward D. Re, Judge.*fn*

Author: Hutchinson


HUTCHINSON, Circuit Judge

Five of the nation's largest title insurance companies, Ticor Title Insurance Company, Chicago Title Insurance Company, SAFECO Title Insurance Company (now operating under the name Security Union Title Insurance Company), Lawyers Title Insurance Corporation and Stewart Title Guarantee Company (collectively Ticor), petition for review of a final order of the Federal Trade Commission (FTC). In a forty-seven page majority opinion that formed the basis of the FTC's final order, the FTC held that the five title insurance companies engaged in "unfair methods of competition" in violation of § 5 of the Federal Trade Commission Act (FTC Act), 15 U.S.C.A. § 45(a)(1) (West Supp. 1990), when they collectively agreed to set rates for title search and examination services in six states. The final order found antitrust violations in Arizona, Connecticut, Montana, New Jersey, Pennsylvania and Wisconsin.

In its petition for review, Ticor does not dispute the FTC's holding that the horizontal price-fixing agreements among five of the nation's largest title insurance companies for title search and examination services at issue in this case were anti-competitive and unfair within the meaning of § 5 of the FTC Act. Instead, Ticor advances four alternate arguments for reversal of the FTC's final order. Ticor's first argument is that the state action doctrine, which traces its origin to the Supreme Court's opinion in Parker v. Brown, 317 U.S. 341, 87 L. Ed. 315, 63 S. Ct. 307 (1943), immunizes its challenged collective rate setting activities from antitrust liability. Ticor's second argument is that its challenged activities are exempt from the antitrust laws pursuant to § 3(a) of the McCarran-Ferguson Act, 15 U.S.C.A. § 1013(a) (West 1976). Ticor's third argument is that its activities constitute joint petitioning of state regulators immune from antitrust liability under the Noerr-Pennington doctrine. See Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L. Ed. 2d 464, 81 S. Ct. 523 (1961); United Mine Workers v. Pennington, 381 U.S. 657, 14 L. Ed. 2d 626, 85 S. Ct. 1585 (1965). Ticor's final and most abbreviated argument, taking up less than two pages of the ninety pages of briefing it submitted in this cause, is that the FTC's final order is void because its proceeding violated the doctrine of separation of powers since the FTC exercises executive power and yet is not subject to the executive branch's control.*fn1

For the reasons set forth below, we hold that Ticor's collective rate setting for title search and examination services in these six states is immune from federal antitrust liability under the state action doctrine. As we examine in more detail below, the state action doctrine limits the reach of the FTC's enforcement jurisdiction. As a result, we find it unnecessary to address at any great length Ticor's other three arguments in favor of reversing the FTC's order. Thus, we will grant Ticor's petition for review and will vacate the FTC's final order.


On January 7, 1985, the FTC issued an administrative complaint alleging that six*fn2 of the nation's largest title insurance companies had engaged in "unfair methods of competition" in violation of § 5 of the FTC Act, 15 U.S.C.A. § 45(a)(1) (West Supp. 1990).*fn3

The alleged antitrust violation was the insurers' agreements collectively to set rates for title search and examination services.*fn4 At one time or another, these insurers set uniform rates for title search and examination services through private "rating bureaus" in thirteen states. The FTC did not challenge the insurers' collective formulation of uniform rates for insuring against the risk of loss from defective title. Thus, this aspect of title insurance is not before us.

The matter came before an administrative law judge (ALJ) who held hearings and took evidence. The ALJ issued an initial decision and proposed order on December 26, 1986. The ALJ found without merit the insurers' claims that the collective formulation of rates for title search and examination services is part of the "business of insurance" exempt from the FTC Act pursuant to § 3(a) of the McCarran-Ferguson Act, 15 U.S.C.A. § 1013(a) (West 1976). The ALJ also rejected the insurers' claim that the challenged conduct was protected from antitrust liability under the Noerr-Pennington doctrine as joint petitioning of state regulators in an attempt to influence state policy.

As to the insurers' remaining defense of state action,*fn5 the ALJ ruled that in Connecticut and Wisconsin the insurers' collective rate setting was not supervised at all and thus could not satisfy the "active supervision" requirement of the doctrine. The ALJ held that the insurers' price-fixing in Arizona, Idaho, Montana, New Jersey and Pennsylvania satisfied the two-pronged state action defense and was thus immune from antitrust liability. Finally, the ALJ ruled that with respect to Ohio, the FTC's complaint counsel, who prosecuted the case on behalf of the government, failed to prove that the insurers used their rating bureau to establish uniform rates for title search and examination services.

The insurers appealed the ALJ's initial decision to the FTC, and complaint counsel cross-appealed. On September 19, 1989, the FTC, through four commissioners, issued its final order and decision affirming in part and reversing in part the ALJ's decision.*fn6 It is the FTC's decision that is before us for review.

In its decision, the FTC independently considered the record, including the ALJ's initial decision and findings. With respect to the insurers' state action defense, the FTC rejected its application to New Jersey and Pennsylvania, finding that the relevant state statutes did not clearly articulate a policy to displace competition with regulation.*fn7 The FTC found that the contrary position that the state insurance departments in both states advanced was in conflict with the plain and unambiguous meaning of the relevant state statutes.

The FTC also rejected the state action defense as to Arizona, Connecticut, Montana and Wisconsin on the ground that the "active supervision" requirement of the state action doctrine was not satisfied.*fn8 The FTC dismissed the complaint's allegations concerning Idaho and Ohio. It split evenly over whether there was active supervision of the insurers' collective ratemaking in Idaho. It agreed with the ALJ that the FTC's complaint counsel failed to demonstrate a sufficient link between the collective filing of risk rates and fees for the insurers' search and examination services in Ohio.

Next, the FTC held that the insurers' collective formulation of charges for search and examination services was not part of the "business of insurance" and thus was not exempt from regulation under the FTC Act by reason of the McCarran-Ferguson Act. The FTC agreed with the ALJ that searches and examinations are services that persons and entities other than insurance companies commonly perform. Further, the FTC found that insurance companies themselves usually differentiate between the rates charged for indemnification against loss from non-record title defects (which the FTC viewed as the core function of title insurance) and the rates charged for tracking down title defects prior to writing the policy.

The FTC then went on to reject the insurers' claim that their collective ratemaking for search and examination services was immunized from antitrust regulation under the Noerr-Pennington doctrine. The FTC wrote that the challenged conduct was the type of commercial activity that has traditionally had its validity determined by the antitrust laws and was not "political activity with a commercial impact." Joint Appendix (Jt. App.) at 170.

The FTC's final order to cease and desist prohibits the insurers from fixing prices for title search and examination services in the six states where violations of law were found. However, the order contains a proviso that permits collective establishment of rates for search and examination services in any of these states if undertaken "pursuant to clearly articulated and affirmatively expressed state policy and where such collective activity is actively supervised by a state regulatory body."*fn9 Jt. App. at 125.

In their petition to this Court, the insurers ask us to reverse the FTC's final order. The FTC asks us to affirm the order and to issue our own order mandating its enforcement, which Congress requires us to do to the extent the FTC's order is affirmed. See 15 U.S.C.A. § 45(c) ("To the extent the order of the Commission is affirmed the court shall thereupon issue its own order commanding obedience to the terms of such order of the Commission.").


As a result of the FTC's dismissal in its final decision of the complaint's allegations concerning Ticor's settlement and escrow services, the issues before us relate solely to Ticor's collective setting of rates for title search and examination services. A brief description of title search and examination services, and the role such services play in the issuance of a policy of title insurance, is helpful to an understanding of this case.*fn10

Title to a piece of real estate is evidence of an ownership interest in that property. However, title is not proof of absolute ownership. For example, a search of public records concerning a particular piece of real estate may disclose that there are liens, encumbrances, easements, covenants, restrictions or other claims in existence as to that property. Examination of the title itself would often reveal none of these preexisting defects.

As a result, potential purchasers of real estate and their lenders desire to know before purchasing or financing a purchase of property whether the title has any preexisting defects. Once such defects are discovered, the purchasers and lenders can determine whether to continue with the deal as is, whether to demand cure of certain or all of the defects or whether to call off the deal.

Title insurance did not become widely used until after the conclusion of World War II. At that time, a national market in secondary mortgages emerged. The attractiveness of title insurance was due in large part to the limitations inherent in the two methods of verifying title that existed prior to the widespread use of title insurance. These two methods that were seen as somewhat unsatisfactory were the use of title searchers and the use of attorneys' opinions.

The role of title searchers is clear from their name. They examine the public records concerning a piece of property, which includes the chain of title for that property, and report the results of that examination. A title searcher's liability for an erroneous report was limited, however, to his negligence. If the searcher made an error in searching the public records, someone harmed could recover only after proving that a reasonable title searcher would not have made such an error. Furthermore, a title searcher had no liability for title defects that were not listed in the public records. Title searchers continue to practice their trade today; however, most now work for title insurance companies.

The meaning of an attorneys' opinion is also largely self-evident. Whereas title searchers merely report on the existence of recorded documents concerning a particular title, an attorneys' opinion evaluates the legal significance of any title defects that have been discovered. However, an attorney's liability for an erroneous opinion is also limited to his professional negligence. Thus, just as with title searchers, an attorney is not liable for hidden defects in the public records that a diligent searcher could not have discovered or for public records that are themselves inaccurate.

By comparison, title insurance offers much broader protection in the event that the state of the title differs from that which a title insurance company reports it to be. The technical definition of title insurance is an agreement to indemnify the purchaser or lender "for loss or damage sustained by reason of a defect in title not explicitly excepted or excluded from the policy." Jt. App. at 37. In order to recover, it is unnecessary to prove negligence. Further, title insurance protects the buyer and the lender from losses resulting from defects not discoverable from a search of the public records. Such undiscoverable defects can include forgery, missing heirs, previous marital interests, impersonation and confusion of names.

As noted just above, title insurance indemnifies the purchaser or lender for loss or damage sustained by reason of a defect in title not explicitly excepted or excluded from the policy. Before issuing a title insurance policy, the insurance company conducts a search of the public records just as a title searcher or an attorney would do. In fact, title insurance companies most often employ their own searchers or attorneys to search and examine the public records. The title insurance policy usually will not insure any defects that are uncovered during this search. Instead, agents are trained specifically to exempt these record defects from the scope of coverage. Thus, a title insurance policy usually insures only against undiscovered and undiscoverable title defects, regardless of negligence.

Title insurance companies choose from among three different groups of people to perform title searches. In the first group are title searchers who work for the title insurance company. We have already examined the role that such title searchers play. The second is the attorney-agent, who serves as an agent of one or several particular insurance companies. The attorney-agent searches and examines title documents. As compensation for his work, the agent receives from the title insurance company a fee that the insurance company has fixed in advance. The third is the approved attorney. An approved attorney does not have a direct employment relationship with the insurance company as does the attorney-agent. Instead, the title insurance company provides a list of approved attorneys to its customers; then, the customer and the approved attorney are free to negotiate the approved attorney's fee for the search and examination services he will perform. Often the same attorney will be an attorney-agent for one title insurance company and an approved attorney for another.

While often difficult to separate, a title search is distinct from a title examination. The search denotes the act of compiling a chronological account of the publicly recorded instruments that are found in the chain of title to a particular piece of real estate. Many jurisdictions require that the search extend back sixty years, although some jurisdictions have marketable title acts that require a shorter resort to history while other jurisdictions require tracing title as far back as its original issuance by the sovereign. The examination requires the critical evaluation of the title's condition as reflected in the documents gathered in the search.

This case involves Ticor's collective setting of rates for the search and examination services it performs. In the six states at issue, these rates are collectively set through private organizations known as title insurance rating bureaus. Title insurance companies comprise the membership of these bureaus. Once the title insurance rating bureau establishes the uniform rate for search and examinations services in a certain state, the insurance companies that are members of the bureau charge this rate for these services.


We have jurisdiction pursuant to 15 U.S.C.A. § 45(c) (West 1973) over the FTC's final order in this matter, since the FTC's cease and desist order includes within its scope methods of competition practiced within this Circuit. Ticor filed its petition for review within sixty days after the FTC served the final order,*fn11 which is within the applicable time the statute provides for filing such a petition. The FTC had jurisdiction to adjudicate this matter pursuant to 15 U.S.C.A. § 45(b) (West Supp. 1990).

We have written that "the state action exemption cases clearly indicate that this issue involves a question of law . . . ." Euster v. Eagle Downs Racing Ass'n, 677 F.2d 992, 997 (3d Cir.), cert. denied, 459 U.S. 1022, 74 L. Ed. 2d 519, 103 S. Ct. 388 (1982); see also New England Motor Rate Bureau, Inc. v. FTC, 908 F.2d 1064, 1072 (1st Cir. 1990) ("How these facts meld into the state action concept -- the issue now before us -- is a legal issue which the courts have plenary authority to decide.") Thus, we exercise plenary review over the FTC's application of the state action doctrine to the facts before us.


As the Supreme Court has stated, "the starting point in any analysis involving the state-action doctrine is the reasoning of Parker v. Brown [, 317 U.S. 341, 63 S. Ct. 307, 87 L. Ed. 315 (1943)]." Hoover v. Ronwin, 466 U.S. 558, 566, 80 L. Ed. 2d 590, 104 S. Ct. 1989 (1984). In Parker, the Supreme Court wrote:

We find nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature. In a dual system of government in which, under the Constitution, the states are sovereign, save only as Congress may constitutionally subtract from their authority, an unexpressed purpose to nullify a state's control over its officers and agents is not lightly to be attributed to Congress.

The Sherman Act makes no mention of the state as such, and gives no hint that it was intended to restrain state action or official action directed by a state.

Parker, 317 U.S. at 350-51. In 324 Liquor Corp. v. Duffy, 479 U.S. 335, 343, 93 L. Ed. 2d 667, 107 S. Ct. 720 (1987), the Supreme Court wrote that Parker "rests on ...

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