West Virginia Court Expands COPPERWELD Doctrine

In the 1984 case Copperweld Corp. v. Independence Tube Corp.,¹ the United States Supreme Court forever altered antitrust law by holding that a parent company cannot conspire with one of its wholly owned subsidiaries such as to violate Section 1 of the Sherman Act.² Since that time, lower courts have been left to decide the scope of what has become known as the Copperweld Doctrine. A recent decision of the Supreme Court of Appeals of West Virginia clarified just how far the Copperweld Doctrine extends within West Virginia’s own antitrust law jurisprudence.

The Copperweld Case

In Copperweld Corp. v. Independence Tube Corp., the United States Supreme Court framed the scope of Sherman Act antitrust protection by deciding the question of “whether the coordinated acts of a parent and its wholly owned subsidiary can . . . constitute a combination or conspiracy” in violation of Section 1 of the Sherman Act.³ Section 1 of the Sherman Act established that in order to demonstrate an illegal restraint on trade, a plaintiff must prove:

(1) concerted action by the defendants; (2) that produced anticompetitive effects within the relevant product and geographic markets; (3) that the concerted action were illegal; and (4) that it was injured as a proximate result of the concerted action.⁴

The Court in Copperweld held that, in the instance of a parent corporation and a wholly owned subsidiary, there can be no section 1 violation because, regardless of any possible restraint on trade, a parent company and its wholly owned subsidiary have a “unity of purpose or a common design” that prevents them from conspiring in concerted action.⁵

Lower Courts Must Decide How Far Copperweld Doctrine Extends

While the Copperweld Doctrine clearly established that a corporation and its wholly-owned subsidiary cannot conspire as contemplated in the “concerted action” requirement of section 1 of the Sherman Act, just how far the Copperweld Doctrine extends to anything less than a parent company/wholly-owned subsidiary relationship, such as in the instance of partially-owned subsidiaries, has been left up to lower courts to decide. Courts have been left to wrestle with whether a parent company must have complete ownership interest in the subsidiary, whether mere majority ownership interest is enough to trigger the Copperweld Doctrine, or whether a legal “control” standard decides the issue without drawing a bright line at a particular ownership percentage.

Princeton Insurance Agency, Inc. v. Erie Insurance Co.

A recent insurance case in West Virginia has cast some light on how the state’s appellate court will interpret the Copperweld Doctrine as it applies to companies doing business within West Virginia. The Supreme Court of Appeals of West Virginia recently decided the case of Princeton Insurance Agency, Inc. v. Erie Insurance Co.⁶ The case involved a challenge by a former insurance agent to the termination of his contract by the insurance company as an unlawful restraint on trade under the state’s antitrust law, the West Virginia Antitrust Act.⁷ In a decision that reversed a $4 million verdict against the insurance company, the court applied the Copperweld Doctrine to less than wholly-owned subsidiary companies within the state.

Facts of the Erie Case

Erie involved Erie Insurance Company, which had an independent insurance agency agreement with Princeton Insurance Agency (“Agency”) and Kevin Webb, the licensed agent. The Agency was an independent insurance agency, in the business of marketing insurance for multiple insurance companies.⁸

The Erie Insurance Group consisted of Erie Insurance Company, Erie Insurance Property and Casualty Company, Erie Family Life Insurance Company, Erie Insurance Exchange, and Erie Indemnity Company. The Agency entered into an agency agreement with two members of the Erie Insurance Group: Erie Insurance Property and Casualty and Erie Family Life.⁹ In 1999, Kevin Webb became the responsible agent for the Agency.¹⁰

In 2002, the Agency entered into an agreement with a new insurance agency, Princeton Insurance Associates (“Insurance Associates”), whereby the Agency allowed Insurance Associates to operate out of its Princeton, West Virginia offices and utilize its office staff .¹¹ A “significant portion” of Insurance Associate’s business came from an Insurance Associate stockholder who transferred her book of business with State Auto.¹² Erie claimed, and produced supporting evidence at trial, that after the Agency and Insurance Associates entered into a business relationship, Erie noticed a substantial reduction in the profitability and quantity of the Erie insurance products that the Agency was underwriting.¹³

After some negotiation in which Erie unsuccessfully attempted to force the Agency to disclose production reports of Insurance Associates for sales of State Auto policies, Erie gave proper notice and terminated its agency agreement with the Agency and Kevin Webb.¹⁴ The Agency and Kevin Webb sued under the West Virginia Antitrust Act and the jury returned a verdict in favor of the plaintiff s, stating that the termination of the agency agreement was an unreasonable restraint of trade in violation of the West Virginia Antitrust Act.¹⁵ From this verdict, Erie appealed.

The Ruling of the Supreme Court of Appeals of West Virginia

The Supreme Court of Appeals of West Virginia stated that the only difference between W.Va. Code § 47-18-3(a) and Section 1 of the Sherman Act was that the state Act applies in the State of West Virginia, whereas the Federal Act applies to contracts and conspiracies in restraint of trade or commerce “among the several states, or with foreign nations.”¹⁶ The court therefore cited to applicable state law stating that when the antitrust law of West Virginia follows the Sherman Act, federal law should be followed.¹⁷

The court noted that the “triggering event” for liability under Section 1 of the Sherman Act is “an agreement that entails a ‘unity of purpose or a common design and understanding, or a meeting of the minds in an unlawful arrangement.’”¹⁸ The court then cited the United States Court of Appeals for the Fourth Circuit in stating that “[p]roof of concerted action requires evidence of a relationship between at least two legally distinct persons or entities.”¹⁹ The court further pointed out that the Copperweld court and subsequent federal courts have made it clear that antitrust liability does not merely depend on corporate form, such as whether a subsidiary is wholly or partially owned, but requires an examination of the practical application of the governance of the subject corporations.²⁰ The court further quoted the United States Court of Appeals for the Third Circuit in stating that the key question for application of the Copperweld Doctrine is “whether an agreement between a parent and its wholly owned subsidiary represents the conduct of one economic actor or two.”²¹

Erie argued that its corporate structure was such that the parent company and its subsidiaries could not engage in concerted action such as to restrain trade in violation of the West Virginia Antitrust Act. Erie effectively argued that Erie Indemnity owns 100% of Erie Insurance Company and Erie Insurance Property and Casualty; Erie Indemnity owns 21.6% of Erie Family Life Insurance with Erie Insurance Exchange owning another 53.5%; Erie Indemnity is the attorney-in-fact for the policyholders of Erie Insurance Exchange; and therefore, Erie Indemnity, as the parent corporation, owns over 75% of Erie Family Life Insurance. Erie’s winning argument was that all of its subsidiaries are owned and operated by the parent company, Erie Indemnity.²²

The court criticized the trial court for simply stating that Erie Family Life was not a wholly-owned subsidiary of Erie Indemnity and therefore refusing to apply the Copperweld Doctrine to the charges of antitrust violation, with no examination of the possible unity of interest. The court stated that the trial court in essence ignored what Copperweld and subsequent case law stood for: the fact that employees of the same company cannot conspire together as is necessary for there to be concerted action in violation of state and federal antitrust law.²³ The West Virginia court ultimately held that Erie Indemnity effectively controlled its subsidiaries and had a unity of interest with the same. As such, they could not conspire together to violate the West Virginia Antitrust Act. Thus, the court applied the Copperweld Doctrine to less than wholly-owned subsidiaries of companies within the State of West Virginia.

Court Further Comments on Antitrust Damages

In dicta, the court went even further in making the argument that even if the Agency and Kevin Webb could have proven concerted action and a conspiracy amongst Erie and its subsidiaries, it could not have proven damages because antitrust damages require more than mere damage to a competitor, but damage to actual competition itself.²⁴ The court stated that the appellees could show that they had been harmed by Erie’s action, but they had no evidence to demonstrate an actual injury to competition in the relevant market.²⁵

As a result of Erie, antitrust law is more settled in West Virginia. It is clear that not only can a parent company not violate antitrust law by engaging in conspiracy and concerted action with a wholly-owned subsidiary, but the same Copperweld Doctrine applies to less than wholly-owned subsidiaries, when the parent company has legal control over the subsidiary companies and they share a unity of interest.

Endnotes

1 467 U.S. 752 (1984).

2 15 U.S.C. § 1 (federal law making it illegal to conspire to restrain trade)

3 467 U.S. at 759.

4 15 U.S.C. § 1.

5 467 U.S. at 777.

6 685 S.E.2d 914 (W. Va. 2009).

7 W. Va. Code § 47-18-3 (2006).

8 685 S.E.2d at *3.

9 Id.

10 Id. at *4.

11 Id.

12 Id.

13 Id. at *5.

14 Id. at *6-7.

15 Id. at *9.

16 Id. at *12 (citing Kessel v. Monongalia County Gen. Hosp. Co., 648 S.E.2d 366, 375 (W. Va. 2007)).

17 Id. (citing W. Va. Code § 47-18-16).

18 Id. at *13 (citing Mathews v. Lancaster Gen. Hosp., 87 F.3d 624, 639 (3d Cir. 1996)).

19 Id. at *14 (citing Oksanen v. Page Mem’l Hosp., 945 F.3d 696, 702 (4th Cir. 1991)).

20 Id. at *18.

21 Id. at *19 (citing Siegel Transfer, Inc. v. Carrier Express, Inc., 54 F.3d 1125, 1132 (3d Cir. 1995)).

22 Id. at *21-22.

23 Id. at *25.

24 Id. at *32-33.

25 Id. at *35.