State Agency Seeks Reversal of IRS Summons Enforcement

UNITED STATES OF AMERICA,
Petitioner-Appellee,
v.
DELAWARE DEPARTMENT OF INSURANCE,
Respondent-Appellant.

United States Court of Appeals for the Third Circuit

On Appeal from the U.S. District Court for
the District of Delaware (Wilmington)
No. 1:20-cv-00829-MN-CJB

BRIEF AND APPENDIX VOLUME I OF II (A001 - A291)
ON BEHALF OF APPELLANT DELAWARE DEPARTMENT OF INSURANCE

KATHLEEN P. MAKOWSKI
Deputy Attorney General
1007 Orange Street, Suite 1010
Wilmington, DE 19801
(302) 674-7326
Kathleen.Makowski@Delaware.gov

and

PATRICIA A. DAVIS
Deputy State Solicitor
102 W. Water Street
Dover, DE 19904
(302) 257-3233
PatriciaA.Davis@Delaware.gov

JAMES J. BLACK, III
JEFFREY B. MICELI
MARK W. DRASNIN
Black & Gerngross, P.C.
1617 John F. Kennedy Blvd.
Suite 1575
Philadelphia, PA 19103
Tel. (215) 636-1650
jblack@blackgern.com
jmiceli@blackgern.com
mdrasnin@blackgern.com

Counsel for Respondent-Appellant
Delaware Department of Insurance

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTRODUCTION

JURISDICTIONAL STATEMENT

STATEMENT OF THE ISSUES

STATEMENT OF RELATED CASES

STATEMENT OF THE CASE

SUMMARY OF ARGUMENT

ARGUMENT

CONCLUSION

COMBINED CERTIFICATIONS

Addendum — Text of 26 U.S.C. § 6103

Appendix — Volume I (A001 - A291)

TABLE OF AUTHORITIES

Cases

Am. Chiropractic Ass'n v. Trigon Healthcare, Inc., 367 F.3d 212 (4th Cir. 2004)

Ambrose v. Blue Cross & Blue Shield of Virginia, Inc., 891 F. Supp. 1153 (E.D.Va.1995) aff'd, 95 F.3d 41 (4th Cir.1996)

American Deposit Corp. v. Schacht, 84 F.3d 832 (7^th Cir. 1996)

Autry v. Nw. Premium Servs., Inc., 144 F.3d 1037 (7th Cir. 1998)

Bailey v. Rocky Mountain Holdings, LLC, 889 F.3d 1259 (11th Cir. 2018)

Ball v. Bd. of Governors of Fed. Reserve Sys., 87 F. Supp.3d 33 (D.D.C. 2015)

BancOklahoma Mortg. Corp. v. Capital Title Co., Inc., 194 F.3d 1089, 1098 (10th Cir. 1999)

Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996)

Bond v. State Farm Ins. Co., 2019 WL 1493698 (W.D. Pa. Apr. 4, 2019)

CenTra, Inc. v. Chandler Ins. Co., 248 Neb. 844 (1995)

Chester, ex rel. N.L.R.B. v. Grane Healthcare Co., 666 F.3d 87 (3d Cir. 2011)

Citizens United Reciprocal Exch. v. Meer, 321 F. Supp. 3d 479 (D.N.J. 2018)

City of Sterling Heights Gen. Employee's Retirement System v. Prudential Fin., Inc., 2015 WL 196368 (D.N.J. Apr. 30, 2015)

Cochran v. Paco, Inc., 606 F.2d 460 (5th Cir.1979)

Cohen v. State ex rel. Stewart, 89 A.3d 65 (Del. 2014)

Dehoyos v. Allstate Corp., 345 F.3d 290 (3d Cir. 2003)

Doe v. Norwest Bank Minnesota, N.A., 107 F.3d 1297 (8th Cir. 1997)

Dornberger v. Metro. Life Ins. Co., 961 F. Supp. 506 (S.D.N.Y. 1997)

Fed. Ins. Co. v. von Windherburg-Cordeiro, 2012 WL 6761877 (D.N.J. Dec. 31, 2012)

First Nat'l Bank of Pa. v. Sedgwick James of Minn., Inc., 792 F. Supp. 409 (W.D.Pa.1992)

Forsyth v. Humana, Inc., 114 F.3d 1467 (9^th Cir. 1999)

Genord v. Blue Cross & Blue Shield of Michigan, 440 F.3d 802 (6^th Cir. 2006)

Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979)

Heritage Healthcare Servs. Inc. v. Beacon Mut. Ins. Co., 2007 WL 1234481 (R.I. Super, Apr. 17, 2007)

Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160 (3d Cir. 2001)

Humana Inc. v. Forsyth, 525 U.S. 299 (1999)

In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010)

Kenty v. Bank One, Columbus, N.A., 92 F.3d 384 (6^th Cir. 1996)

LaBarre v. Credit Acceptance Corp., 175 F.3d 640 (8th Cir. 1999)

Lac D'Amiante du Quebec, Ltee, v. Home Assurance Co., 864 F.2d 1033 (3d Cir. 1988)

Levy v. Lewis, 635 F.2d 960 (2d Cir. 1980)

LifeWatch Servs., Inc. v. Highmark, Inc., 2021 WL 5492811 (3d Cir. Nov. 17, 2021)

Ludwick v. Harbinger Grp., Inc., 161 F. Supp.3d 769 (W.D. Mo. 2016)

Luna Music, LLC v. Exec. Ins. Servs., Inc., 2020 WL 855954 (D.V.I. Feb. 20, 2020)

Mahon v. Chicago Tit. Ins. Co., 2017 WL 3331738 (D. Conn. Aug. 4, 2017)

Merchants Home Delivery Serv., Inc. v. Frank B. Hall & Co., 50 F.3d 1486 (9th Cir. 1995)

Monarch Consulting, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 47 N.E.3d 463 (N.Y. 2016)

Moore v. Liberty Nat. Life Ins. Co., 267 F.3d 1209 (11th Cir. 2001)

Nat'l Fair Hous. All. v. Travelers Indem. Co., 261 F. Supp. 3d 20 (D.D.C. 2017)

Nat'l Union Fire Ins. Co. of Pittsburgh, PA. v. Seneca Fam. of Agencies, 255 F. Supp. 3d 480 (S.D.N.Y. 2017)

Owens v. Aetna Life & Cas. Co., 654 F.2d 218 (3d Cir. 1981)

Pardini v. Allegheny Intermediate Unit, 524 F.3d 419 (3d Cir. 2008)

In re Patriot Nat'l, Inc., 623 B.R. 696 (D. Del. 2020)

Prudential Ins. Co. v. Benjamin, 328 U.S. 408 (1946)

Robertson v. People of State of California, 328 U.S. 440 (1946)

Sabo v. Metropolitan Life Ins. Co., 137 F.3d 185 (3d Cir. 1998)

Sec. & Exch. Comm'n v. Nat'l Sec., Inc., 393 U.S. 453 (1969)

South Jersey Sanitation Co., Inc. v. Applied Underwriters, Captive Risk Assurance Co., Inc., 840 F.3d 138 (3d Cir. 2016)

Stewart v. Wilmington Trust SP Services, Inc., 112 A.3d 271 (Del. Ch. 2015)

Suter v. Munich Reins. Co., 223 F.3d 150 (3d Cir. 2000)

Ticor Title Ins. Co. v. F.T.C., 998 F.2d 1129 (3d Cir. 1993)

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982)

United States v. $7,599,358.09, 953 F. Supp. 2d 549 (D.N.J. 2013)

United States. v. Rhode Island Insurers' Insolvency Fund, 80 F.3d 616 (1st Cir.1996)

United States v. South–Eastern Underwriters Assn., 322 U.S. 533 (1944)

United States v. Stewart, 955 F. Supp. 385 (E.D. Pa. 1997)

United States v. Tann, 577 F.3d 533 (3d Cir. 2009)

United States v. Wisconsin State Cir. Ct. for Dane Cty., 767 F. Supp. 2d 980 (W.D. Wis. 2011), vacated sub nom. In re Ambac Assur. Corp., 2013 WL 3761295 (W.D. Wis. July 16, 2013)

United States v. Worley, 347 Fed. Appx. 744 (3d Cir. 2009)

United States Dep't of Treasury v. Fabe, 508 U.S. 491 (1993)

Weiss v. First Unum Life Ins. Co., 482 F.3d 254 (3d Cir. 2007)

Weiss v. First Unum Life Ins. Co., 416 F. Supp. 2d 298 (D.N.J. 2005), rev'd, 482 F.3d 254 (3d Cir. 2007)

In re Workers' Comp. Ins. Antitrust Litig., 574 F. Supp. 525 (D. Minn. 1983)

Statutes

15 U.S.C. §§ 1011-1015

15 U.S.C. § 1012(b)

26 U.S.C. § 6103

26 U.S.C. § 7602

26 U.S.C. § 7402(b)

26 U.S.C. § 7604(a)

28 U.S.C. § 1291

18 Del. C. § 318

18 Del. C. § 6920

Cal. Ins. Code § 1215.8(b)(2)

Or. Rev. Stat. Ann. § 705.138

Tenn. Code Ann. § 56-2-801

Other Authorities

Larry D. Carlson, The Insurance Exemption from the Antitrust Laws, 57 Tex. L. Rev. 1127 (1979)

Robert W. Klein, Ph.D., A Regulator's Introduction to the Insurance Industry, (2d ed. 2005) https://www.naic.org/documents/prod_serv._marketreg_rii_zb.pdf

Jonathan R. Macey & Geoffrey P. Miller, The McCarran-Ferguson Act of 1945: Reconceiving the Federal Role of Insurance Regulation, 68 N.Y.U. L. Rev. 13 (1993)

National Association of Insurance Commissioners, State Insurance Regulation, (2011), https://www.naic.org/documents/topics_white_paper_hist_ins_reg.pdf

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INTRODUCTION

This case concerns the proper application of the McCarran-Ferguson Act. The Act's primary purpose was to restore the supremacy of the states in the realm of insurance regulation. See Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 39 (1996); see also, In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 353 (3d Cir. 2010) (“the primary purpose of the McCarran-Ferguson Act was 'to preserve state regulation of the activities of insurance companies, as it [previously] existed”) (citing cases).¹ This primary and fundamental purpose is embodied in the first clause of section 2(b) (15 U.S.C. § 1012(b)).² Id. The Act also contains a second clause which addresses a secondary purpose, which is to limit when an insurer's activities can escape the applicability of antitrust laws. This secondary focus is codified in the second clause of section 2(b).³ The antitrust carve out was only “[a] secondary concern.” Id. (quoting Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 218 (1979)).

Unfortunately, the same words “the business of insurance” were used in both clauses of the McCarran-Ferguson Act in two very different contexts, and to mean two very different things. As the Supreme Court later explained, use of the term “the business of insurance” in the first clause is in the context of the broader phrase “enacted by any State for the purpose of regulating the business of insurance.” It was meant to be broadly construed, restoring to the states wide overriding authority concerning insurance regulation. The second clause, addressing a carve-out for antitrust, was to be construed narrowly, exempting only a narrow class of insurer activities from antitrust regulation. The fact that “the business of insurance” was used in both clauses to describe both broad far-ranging activities which Congress assigned to the states, and a far narrower class of activities which Congress intended to be exempt from antitrust laws, has led to decades of confusion.

It was this confusion which led to the errors below and which this Court should correct.

JURISDICTIONAL STATEMENT

The Third Circuit Court of Appeals has jurisdiction over this matter pursuant to 28 U.S.C. § 1291. The District Court had subject matter jurisdiction pursuant to 26 U.S.C. § 7402(b) and 26 U.S.C. § 7604(a). On September 29, 2021, the District Court entered as a final judgment a written order granting the government's petition to enforce Petitioner-Appellee Internal Revenue Service's (“IRS”) summons against Respondents-Appellants Delaware Department of Insurance (“DDOI”). D.I. # 37;⁴ A008.⁵ On October 28, 2021, the DDOI filed a timely notice of appeal. D.I. # 39; A006.

STATEMENT OF THE ISSUES

1. Whether the District Court erred by utilizing an erroneous four-part test for non-antitrust preemption under the “first clause” of 15 U.S.C. § 1012(b) of the McCarran-Ferguson Act as opposed to the proper three-part test because the four-part test inserts a threshold requirement appropriate only in anti-trust cases?

This issue was raised by the Appellant in its Objections to Certain Findings in the Report & Recommendation at A271-73, and noted by the District Court's Opinion, 2021 WL 4453606 at *5, A013.

2. Whether the District Court erred by determining that the conduct covered by 18 Del. C. § 6920 does not constitute the “business of insurance”?

This issue was raised by the Appellant in its Objections to Certain Findings in the Report & Recommendation at A273-78, and noted by the District Court's Opinion, 2021 WL 4453606 at *5, A013.

3. Whether the District Court erred in concluding that enforcement of the IRS Summons was proper, rejecting the contention of the DDOI that such enforcement violates the McCarran–Ferguson Act?

This issue was raised by the Appellant in its Objections to Certain Findings in the Report & Recommendation at A278-79, as noted by the District Court's Opinion, 2021 WL 4453606 at *5, A013.

STATEMENT OF RELATED CASES

This case has not been before this Court previously. The DDOI is not aware of any related cases currently pending before this Court.

STATEMENT OF THE CASE

The DDOI, under the authority of the Insurance Commissioner of the State of Delaware (“Commissioner”), administers and enforces Title 18 of the Delaware Code (the “Delaware Insurance Code”). It is a comprehensive statutory scheme with the core purpose of regulating Delaware insurers from cradle to grave. (A240, ¶¶ 7-8). For example, the Delaware Insurance Code contains over eighty chapters that address all areas of Delaware insurance regulation including formation, licensing, policies, distinct lines of business, capital requirements, market practices, financial disclosure and other areas of the business of insurance. Id.; see also, Title 18, Delaware Code. The statutes are specifically intended and designed to protect policyholders and enable the DDOI to effectively oversee the operation and financial stability of Delaware insurers. See, Cohen v. State ex rel. Stewart, 89 A.3d 65, 70 (Del. 2014).

A. Captive Insurance Companies

A captive insurance company is a type of insurer wholly owned and controlled by its insureds. (A241 at ¶ 11). Its primary purpose is to insure the risk of its owners/insureds who benefit from the captive's underwriting profits. Id. Chapter 69 of the Delaware Insurance Code governs the formation, licensing, and regulation of captive insurers, the integration and interplay of Chapter 69 with other chapters in the Delaware Insurance Code, and the DDOI's ongoing regulatory oversight of captive insurers. Id. at ¶ 9. Under Chapter 69, a captive insurer can be formed in a myriad of ways. Id. at ¶ 12. “Captive Managers” facilitate the creation and management of captive insurance companies in jurisdictions, including Delaware, which have captive insurance legislation. Id. at ¶ 14.

B. The Summons and The DDOI's Response

On October 30, 2017, the IRS issued a third-party administrative summons to the DDOI pursuant to 26 U.S.C. § 7602 (the “Summons”) for certain of the DDOI and captive insurance company records related to an IRS investigation of Artex Risk Solutions, Inc. and TSA Holdings, Inc., f/k/a Tribeca Strategic Advisors LLC (together “Artex”). (A049-A077). Artex is a captive manager in Delaware and elsewhere. (A242 at ¶ 15). The DDOI has licensed over 200 captive insurance companies managed by Artex. Id.

The Summons includes four individual requests for records. (A055, A065). The Petition seeks to enforce Request #1 which requests “all electronic mail between [the DDOI] and [Artex] related to the Captive Insurance Program.” (“Request #1”). (A042 at ¶19, A043).

On November 28, 2017, the DDOI issued objections and responses to the Summons, including confidentiality objections pursuant to 18 Del. C. § 6920. (A011, citing D.I. 19 at 5). Section 6920 prevents the Commissioner from releasing certain information unless the official or agency agrees in writing to hold it confidential and in a manner consistent with Section 6920(2).⁶ Nonetheless, the DDOI has provided over 20,000 pages of documents not covered by Section 6920, or, as provided in Section 6920, an individual captive insurer consented to disclosure. (D.I. 19 at 6).

C. Applicability of the IRS Summons, the Delaware Statute, and the McCarran-Ferguson Act

The IRS's Petition seeks to compel the Insurance Commissioner to produce the remaining documents, which constitute documents exchanged between and among DDOI (the insurance regulator), Artex (the insurance captive manager), and the owners/insureds of the captive insurance companies Artex manages. The Petition would thus have the effect of forcing the Commissioner to violate his statutory duty by forcing him to produce the remaining information which is protected by 18 Del C. § 6920, which states:

All portions of license applications reasonably designated confidential by or on behalf of an applicant captive insurance company, and all examination reports, preliminary examination reports, working papers, recorded information, other documents, and any copies of any of the foregoing, produced or obtained by or submitted or disclosed to the Commissioner that are related to an examination pursuant to this chapter must, unless the prior written consent (which may be given on a case-by-case basis) of the captive insurance company to which it pertains has been obtained, be given confidential treatment, are not subject to subpoena, may not be made public by the Commissioner, and may not be provided or disclosed to any other person at any time except:

(1) To the insurance department of any state or of any country or jurisdiction other than the United States of America; or

(2) To a law-enforcement official or agency of this State, any other state or the United States of America so long as such official or agency agrees in writing to hold it confidential and in a manner consistent with this section

(emphasis added). This conflict is the central issue of this appeal: whether Section 6920 reverse-preempts the portion of the IRS code which requires release of information to the IRS pursuant to a summons.⁷

The McCarran-Ferguson Act, as well as subsequent unambiguous rulings of the Supreme Court of the United States, have long recognized that insurance regulation is of paramount importance to the states, is under the exclusive authority of the states, and that “[n]o act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance.” 15 U.S.C. § 1012(b). This is referred to as “reverse-preemption,” where state law negates and has supremacy over a conflicting federal law. When the elements of the McCarran-Ferguson Act are met,⁸ the state law at issue has supremacy over and negates the contrary federal law, which in this case is 26 U.S.C. § 7602, the federal statute authorizing issuance of the Summons.

That statute⁹ provides, in pertinent part:

Neither Sections 6103 nor 7602 specifically relate to the business of insurance. To the extent those federal statutes invalidate or supersede the requirements of the express Delaware insurance statute which prohibits the Commissioner from providing the information sought by the IRS, the Delaware statute (18 Del. C. § 6920) reverse-preempts the IRS statutes through the McCarran-Ferguson Act and the Summons' enforcement is improper.

D. Procedural History

On June 19, 2020, the United States of America on behalf of the IRS, filed a Petition to enforce the Summons. (D.I. # 1; A036-A044). On February 8, 2021, the DDOI filed a motion to quash the Summons (D.I. # 16; A237), and an Opposition to the Petition. (D.I. # 15; A226-A236). On July 16, 2021, the Magistrate Judge issued the Report and Recommendation (“R&R”) recommending granting the Petition and denying the DDOI's motion to quash the Summons. United States v. Delaware Dep't of Ins., No. CV 20-829-MN-CJB, 2021 WL 3012728, at *1 (D. Del. July 16, 2021), (D.I. # 28, A018-A033). On July 30, 2021, the DDOI filed objections to the R&R (D.I. # 29; A266-280), and on August 13, 2021, the IRS responded to the objections. (D.I.. # 33; A281-291). By Order dated September 29, 2021, the District Court overruled the DDOI's objections, adopted the R&R, and granted the Petition (“9/29/21 Order”). (D.I. # 36; A008). On the same day, the District Court also entered an “Errata Order” making certain changes to the R&R (D.I. # 37; A034-A035) and a Memorandum Opinion setting forth the basis for the September 29, 2021 Order (No. CV 20-829 (MN) (CJB), 2021 WL 4453606 (D. Del. Sept. 29, 2021); (D.I. # 35; A009-A017)).

On October 28, 2021, the DDOI filed a Notice of Appeal (D.I. # 39; A006), and contemporaneously filed a Motion to Stay Enforcement of the September 29, 2021 Order (“Motion to Stay”) pending the disposition of the appeal (D.I. 40) which is fully briefed (D.I. 43, 44) and remains pending.

SUMMARY OF ARGUMENT

The District Court below committed two fundamental dispositive errors when it granted the Petition to Issue a Summons. It first applied the wrong test to determine whether the McCarran-Ferguson Act applies, inserting a threshold test before applying the correct three-part analysis dictated by the Supreme Court and used in the other Circuit Courts of Appeals. This error imported the narrow definition of “the business of insurance” which is part of the test for the second clause (relating to a narrow antitrust exemption) into the test designed for the first clause (relating to general regulation). As recognized by this Court and the Supreme Court, the inquiry whether a law was enacted for the purpose of regulating the business of insurance (the proper analysis for the first clause) is broader than “the business of insurance” inquiry under the second clause.

The District Court then compounded its error by misapplying the four-part test — holding that the activities covered by Section 6920 were not “the business of insurance.” However, even under the erroneous four-part standard, the activities covered by Section 6920 constitute “the business of insurance.” The Court specifically erred by too-narrowly characterizing the conduct covered by Section 6920, removing all references to insurance, and then by determining that conduct between insurance regulators and insurers is not within the business of insurance, turning the first clause of the McCarran-Ferguson Act on its head.

The effect of the District Court's two errors was to filter out and eliminate significant categories of insurance regulation from the purview of the McCarran-Ferguson Act, including numerous regulatory activities that courts have confirmed were “enacted by any State for the purpose of regulating the business of insurance” and properly reverse-preempt general federal statutes.

Had the proper test been used, or alternatively, even if the four-part test were properly applied, the result materially changes. Using the wrong test and misapplying the standards of that test, the District Court understandably came to the wrong result: finding that general IRS statutes authorizing a summons are not reverse-preempted by the McCarran-Ferguson Act when applied against specific insurance related regulatory laws.

The District Court should have denied the Petition because the undisputed facts of record show that Section 6920 satisfies the applicable three-part test: (1) it was enacted for the purpose of regulating the business of insurance; (2) the IRS code does not “specifically relate to the business of insurance; and (3) the federal statutes enabling the Summons would “invalidate, impair, or supersede” Section 6920.

ARGUMENT

I. The Summons is Reverse-Preempted By the McCarran-Ferguson Act. . . .

A. Standard of Review

This Court reviews any questions of law de novo and reviews any determination that the factual prerequisites for enforcement of an IRS summons have been met for clear error. United States v. Worley, 347 Fed. Appx. 744, 2009 WL 3182937 (3d Cir. 2009). The issue of reverse-preemption under the McCarran-Ferguson Act is one of law, which is reviewed de novo. Weiss v. First Unum Life Ins. Co., 482 F.3d 254, 263 (3d Cir. 2007) (citing Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160, 166 (3d Cir. 2001)).

B. The Trial Court Erred by Using a Four-Part Test to Determine Reverse-Preemption Under the First Clause of Section 1012(b) of the McCarran-Ferguson Act Instead of the Three-Part Test of Humana Inc. v. Forsyth and Suter v. Munich Reins. Co.

The District Court initially erred when it used an incorrect four-part test to determine reverse-preemption under the McCarran-Ferguson Act. The four-part test improperly imposed a “threshold” requirement in addition to the generally accepted three-part test, first requiring a showing that the “challenged conduct” constitutes the “business of insurance,” before utilizing the three-part test established by other courts.¹⁰ The District Court then compounded this error by committing another: it misapplied that incorrect test.

As discussed in more detail below, the Supreme Court established that in non-antitrust cases like the one at hand, the focus is on whether the statute was “enacted for the purpose of regulating the business of insurance,” and that concept was broader than whether it was the “business of insurance.” As the Supreme Court explained: “[laws 'enacted . . . for the purpose of regulating the business of insurance'] necessarily encompasses more than just the 'business of insurance.'” United States Dep't of Treasury v. Fabe, 508 U.S. 491, 504 (1993).

1. The McCarran-Ferguson Act

The McCarran-Ferguson Act is contained at 15 U.S.C. §§ 1011-1015. The applicable provision of the McCarran-Ferguson Act is 15 U.S.C. § 1012(b), which provides:

(b) Federal regulation

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

a. The History of the McCarran-Ferguson Act

As the Supreme Court has explained, “[t]he McCarran-Ferguson Act was enacted in response to this Court's decision in United States v. South–Eastern Underwriters Assn., 322 U.S. 533(1944). Prior to that decision, it had been assumed that “[i]ssuing a policy of insurance is not a transaction of commerce,” subject to federal regulation. Accordingly, “the States enjoyed a virtually exclusive domain over the insurance industry.” Fabe, 508 U.S. at 499 (citations omitted).

The South–Eastern Underwriters court held that an insurance company that conducted a substantial part of its business across state lines was engaged in interstate commerce and thereby was subject to the antitrust laws. As the Fabe Court explained, “[t]his result, naturally, was widely perceived as a threat to state power to tax and regulate the insurance industry. To allay those fears, Congress moved quickly to restore the supremacy of the States in the realm of insurance regulation and enacted the McCarran–Ferguson Act within a year of the decision in South–Eastern Underwriters.” Id. at 508.

Shortly after passage, the Supreme Court, in Prudential Ins. Co. v. Benjamin, 328 U.S. 408, (1946), upheld the McCarran-Ferguson Act as a valid exercise of Congressional power. The Court reiterated that the purpose of the Act was to remove current congressional obstructions and promote the development of state regulations on insurance as being in the public interest. Id. at 429–30.

The Supreme Court has also made very clear that “the primary concern of Congress in the wake of [South-Eastern Underwriters] was in enacting legislation that would ensure that the States would continue to have the ability to tax and regulate the business of insurance.” Group Life & Heath Ins. Co. v. Royal Drug Co., 440 U.S. 205, 217-218 (1979) (emphasis added). A “secondary concern was the applicability of the antitrust laws to the insurance industry.” Id.

Each concern addresses an entirely different issue. Each was addressed in a separate clause of 15 U.S.C. § 1012(b). The first clause is a general grant of authority over insurance regulation to the states. The second clause addresses antitrust concerns (which is not at issue in this case) and provides a narrow exemption to the antitrust laws for insurance. This dichotomy underscores why the three-part test, which need not address the antitrust concerns rooted in the second clause, is the appropriate test for cases under the first clause of the McCarran-Ferguson Act.

b. The Two Clauses of § 1012(b)

Prior to the Fabe decision, courts often overlooked the fact that Section 1012(b) of the McCarran-Ferguson Act contained two clauses, each with a separate purpose to address separate situations.

The first clause of §1012(b) is:

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . . (emphasis added.)

The second clause of §1012(b) is:

. . . after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law. (emphasis added.)

Although the same phrase, “the business of insurance” was used twice, in the first clause it is used as part of a broader phrase, “enacted by any State for the purpose of regulating the business of insurance.” As the Supreme Court in Fabe held, though using some of the same words, that concept was very different than “the business of insurance” as used in the second clause.

The Fabe Court described the difference between these two clauses: “The first clause commits laws 'enacted . . . for the purpose of regulating the business of insurance' to the States, while the second clause exempts only 'the business of insurance' itself from the antitrust laws.” 508 U.S. at 504 (ellipses in original). The first clause “was intended to further Congress' primary objective of granting the States broad regulatory authority over the business of insurance” and the second clause “accomplishes Congress' secondary goal [of] carv[ing] out only a narrow exemption for 'the business of insurance' from the federal antitrust laws.” Fabe, 508 U.S. at 505 (emphasis added).

This discussion in Fabe arose as part of distinguishing cases under the antitrust exception contained in the second clause. That antitrust test formulation required, among other things, an initial determination that challenged practices must constitute “the business of insurance.”¹¹ The Fabe Court first determined that the conduct at issue constituted “the business of insurance” even utilizing factors used by courts construing the second clause. Id. at 503-04. However, it then proceeded to distinguish and explain that, rather than dealing with the second clause of § 1012(b), “[w]e deal here with the first clause, which is not so narrowly circumscribed.” Id. at 504 (emphasis in original). The Court contrasted the formulations, holding:

The language of § 2(b) is unambiguous: The first clause commits laws “enacted . . . for the purpose of regulating the business of insurance” to the States, while the second clause exempts only “the business of insurance” itself from the antitrust laws. To equate laws “enacted . . . for the purpose of regulating the business of insurance” with the “business of insurance” itself, as petitioner urges us to do, would be to read words out of the statute. This we refuse to do.

Id.

Because of this distinction, the Court held that “[t]he broad category of laws enacted for the purpose of regulating the business of insurance consist of laws that possess the end, intention or aim of adjusting, managing or controlling the business of insurance.” Id. at 505 (citation and quotation marks omitted). As such, the Court went on to explain that “[t]his category necessarily encompasses more than just the 'business of insurance.” Id.

In a case decided just more than a month after Fabe, the Third Circuit applied Fabe to an existing case, reiterating the Supreme Court's distinction of the “business of insurance” under the first and second clauses of Section 1012(b):

The Supreme Court held that to equate the scope of the first clause with that of the second clause “would be to read words out of the statute.” The plain text of section 2(b) compels the conclusion that the first clause necessarily covers more than the second clause, which limits its exemption to the business of insurance regulated by state law.

The Supreme Court reasoned that the more limited reading of the second clause better advances the legislative purpose of section 2(b): The first clause was intended to further Congress' primary objective of granting the states broad regulatory authority over the business of insurance, while the second clause accomplishes Congress' secondary goal of carving out only a narrow exemption for “the business of insurance” from the federal antitrust laws.

Ticor Title Ins. Co. v. F.T.C., 998 F.2d 1129, 1136–37 (3d Cir. 1993) (citing Fabe, 508 U.S. 504-505) (internal citations omitted). The Third Circuit later emphasized this distinction in In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010). There, the Court extensively reviewed the history of the McCarran-Ferguson Act, and the difference between a first and second clause claim under Section (2). Id. at 351-361. The In re Brokerage Court explained:

This first clause . . . impos[es] what is, in effect, a clear-statement rule, a rule that state laws enacted 'for the purpose of regulating the business of insurance' do not yield to conflicting federal statutes unless a federal statute specifically requires otherwise. Both clauses incorporate the phrase “business of insurance,” but as the Supreme Court has emphasized, the respective protections afforded to state law under the two clauses are of different scopes. The first clause commits laws 'enacted . . . for the purpose of regulating the business of insurance' to the States, while the second clause exempts only 'the business of insurance' itself from the antitrust laws. Because “[t]he broad category of laws enacted 'for the purpose of regulating the business of insurance' . . . necessarily encompasses more than just the business of insurance,” judicial determinations made when applying one clause may not be dispositive when applying the other.

618 F.3d at 360 (citations and quotes omitted).

The Court illustrated that this distinction results in different treatment under the first and second clause in a claim relating to advertising:

In light of Fabe, we interpret this to mean that although any state law that regulates “the selling and advertising of insurance” will qualify as a “law enacted by [a] State for the purpose of regulating the business of insurance” under clause one of the McCarran–Ferguson Act, “the selling and advertising of insurance” is not the “business of insurance” under clause two unless it has some effect on “reliability” or underwriting issues.

Id. at 360–61.¹²

This is the very error made below: the Court found that since the examined conduct did not constitute the “business of insurance,” it did not even need to reach the question of whether Section 6920 was “enacted by any State for the purpose of regulating the business of insurance.” The District Court's use of a narrow concept as gatekeeper of a broader concept was error.

Put another way, the Court limited its threshold analysis of whether “the business of insurance” was implicated to the narrow antitrust focus on whether the conduct implicated the relationship between the insurer and insured. Then, the Court incorrectly concluded that the “law enacted” (Section 6920) did not relate to that too-narrow definition because the statute focused on the relationship between the insurer and regulator, and not between the insurer and insured. In doing so, the Court missed the requirement that it examine the broader question implicated by the McCarran-Ferguson Act's first clause which is whether the law had the aim or purpose of regulating the business of insurance.¹³

As a visual analogy, the District Court turned the funnel upside down, first using the narrow end to exclude laws that under the first clause need only pass through the wider opening to reverse-preempt general federal laws. In many McCarran-Ferguson Act cases and situations that error might not have been so impactful, but in this case, because regulatory authority rather than insurer conduct is involved, the District Court's faulty analysis fatally excludes most of state insurance regulation from the ambit of the McCarran-Ferguson Act. This result is directly contrary to the dictate of federal law and Supreme Court guidance.

2. The Three-Part vs. Four-Part Test for Reverse-Preemption Explained

At the heart of the DDOI's first issue on appeal is what is the proper test to be used in determining reverse-preemption under the first clause of the McCarran-Ferguson Act after the clarifying guidance of the Supreme Court and Third Circuit cases.

a. The Three-Part Test

The three-part test for McCarran-Ferguson reverse-preemption of general regulations was originally set forth in Fabe and restated by Humana as:

The McCarran–Ferguson Act thus precludes application of a federal statute in face of state law “enacted . . . for the purpose of regulating the business of insurance,” if the federal measure does not “specifically relat[e] to the business of insurance,” and would “invalidate, impair, or supersede” the State's law.

Humana, 525 U.S. at 306-307 (quoting Fabe, 408 U.S. at 501). This formulation (citing to either Fabe or Humana) is often explained as a numbered list by Courts:

Under § 1012, state laws reverse-preempt federal laws if:

(1) the state statute was enacted “for the purpose of regulating the business of insurance,”

(2) the federal statute does not “specifically relate to the business of insurance,” and

(3) the federal statute would “invalidate, impair, or supersede” the state statute.”

See, e.g. Suter v. Munich Reins. Co., 223 F.3d 150, 160 (3d Cir. 2000) (citing Fabe); see also, Dehoyos v. Allstate Corp., 345 F.3d 290, 294–95 (5th Cir. 2003) (“In sum, in extremely clear and specific language the [Humana] Court identified the following three [McCarran-Ferguson Act] preemption threshold requirements: (1) the federal law in question must not be specifically directed at insurance regulation; (2) there must exist a particular state law (or declared regulatory policy) enacted for the purpose of regulating insurance; and (3) application of the federal law to the controversy in question must invalidate, impair or supercede that state law (emphasis added).”

b. The Four-Part Test

The District Court used the four-part test applied by the Third Circuit in Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d 160 (3d Cir. 2001) (citing Sabo v. Metropolitan Life Insurance Co., 137 F.3d 185 (3d Cir. 1998),¹⁴ which is:

To determine whether the McCarran Act applies, this Court considers the threshold question to be whether the activity complained of constitutes the “business of insurance.” If the activity does not constitute the “business of insurance,” then the McCarran Act does not apply. If, on the other hand, the activity does constitute the “business of insurance,” we then look to whether § 1012(b) precludes a federal cause of action. Federal jurisdiction is barred if three requirements are met: (1) the federal law at issue does not specifically relate to the business of insurance; (2) the state law regulating the activity was enacted for the purpose of regulating the business of insurance; and (3) applying federal law would invalidate, impair, or supersede the state law.

Highmark, Inc, 276 F.3d at 166 (citing Sabo, 137 F.3d at 189-91) (internal citations omitted) (emphasis added). Thus, the four-part test imposes a threshold of whether the activity “constitutes the business of insurance,” and then, only if it finds it does, does the court proceed to the Fabe/Humana three-part test.

However, the determination of whether the activity must constitute the “business of insurance,” is an element borrowed from the test for determining the application of the antitrust exception in the second clause.¹⁵ It is only in the antitrust context, which is not applicable here, that “activity” is the focus.

Highmark's use of the four-part test was based on Sabo, a pre-Humana decision. In determining to use a four-part test, the Sabo court noted a circuit split, with some courts applying this formulation, and other courts applying the three-part test which utilizes only the three statutory requirements listed above. Id., 137 F.3d at 189, n.2.

Each of the courts cited by Sabo as applying a three-part test relied upon Fabe, either simply stating the three-part test citing Fabe,¹⁶ or stating that Fabe overruled the prior four-part test.¹⁷ By contrast, the cases cited by Sabo as utilizing a four-part test either were decided prior to Fabe or relied upon cases decided prior to Fabe.¹⁸

c. The Three-Part Test Implements the Requirements of The Supreme Court and This Court — It Avoids Equating and Confusing the Antitrust Analysis of “the Business of Insurance” with the Required Analysis of “Laws Enacted for the Purpose of Regulating the Business of Insurance”

Use of the four-part test is simply improper. It pulls the narrow threshold test from the antitrust second clause test and imports it into the very broad first clause test. It turns on its head the conclusion of the Supreme Court and this Court that “to equate the scope of the first clause with that of the second clause “would be to read words out of the statute.” Ticor, 998 F.2d at 1137 (citing Fabe). The District Court made this error. Because the “broad category of laws enacted 'for the purpose of regulating the business of insurance' . . . necessarily encompasses more than just the 'business of insurance,” imposing an initial filter that only lets through “the business of insurance” and excludes laws that were enacted for the purpose of regulating the business of insurance prevents proper application of the non-antitrust McCarran-Ferguson test.

Indeed, every Circuit which has since decided the issue has now adopted the three-part test, citing either Fabe or Humana as support for that test.¹⁹ Of the three circuits that do not appear to have decided the issue (Federal Circuit, D.C. Circuit and Second Circuit), recent district court decisions in the D.C. District Court and within the 2^nd Circuit have adopted the Humana three-part test.²⁰

The Seventh Circuit explained the precise problem at issue here with utilizing a four-part versus a three-part test in a first-clause case:

The problem with this approach is that it casts too small a net to capture all of the statutes that were “enacted . . . for the purpose of regulating the business of insurance.” There will be cases where the regulated activity does not constitute the “business of insurance” as that term is defined in Pireno, yet the statute that regulates the activity may have been enacted “for the purpose of regulating the business of insurance.” As the Fabe Court stated, the “broad category of laws enacted 'for the purpose of regulating the business of insurance' . . . necessarily encompasses more than just the 'business of insurance.'”

Autry v. Nw. Premium Servs., Inc., 144 F.3d 1037, 1041-42 (7th Cir. 1998) (quoting Fabe, 508 U.S. at 505).

As discussed above, the Third Circuit has also recognized that there are circumstances where a law which would qualify as a “law enacted by [a] State for the purpose of regulating the business of insurance” under the first clause of the McCarran-Ferguson Act would not be the “business of insurance” under the second clause. In re Ins. Brokerage Antitrust Litig., 618 F.3d at 360–61.

Such laws identified by Autry and In re Ins. Brokerage, would fail the threshold requirement of the four-part test. This is because the four-part test makes equivalent “the business of insurance” with “enacted by any State for the purpose of regulating the business of insurance,” which is in conflict with Fabe and Ticor which expressly recognize that the latter is broader than the former.

As Autry noted, the problems are heightened when Courts “borrow” the Pireno factors,²¹ which were developed in cases relating to the antitrust exception. 144 F.3d at 1041-42. Pireno emphasized that the second clause of Section 1012(b), as an exception to the antitrust laws, is construed narrowly.458 U.S. at 126. However, determinations under the first clause are not exceptions to the antitrust laws.

It is true that conduct actually constituting “the business of insurance” can, in some cases, be coextensive with the first clause. This will primarily be the case where what is at issue is “insurer conduct,” (because that is what is generally at issue in an antitrust case). For instance, whether specific conduct which is alleged to violate a general federal statute such as RICO or the Lanham act, conflicts with an insurance law (often state Unfair Insurance Practices Acts). See, e.g., Sabo (RICO) and Highmark (Lanham Act).²²

However, where, as in the case at hand, the issue is the direct regulation of insurers, the four-part test can fail in its purpose — refusing to protect from federal preemption regulations that are clearly ceded to the states by the McCarran-Ferguson Act. As discussed in Section I(C)(2)(a), below, direct regulation of insurers relating to their reliability and solvency (and other matters) are clearly laws enacted for the purpose of regulating the business of insurance. Use of the four-part test would exclude many of these laws because the “conduct” itself, e.g. allowed investments, maintenance of minimum capital, approval of transactions, etc., is not the “business of insurance” under the narrower filter. Using the antitrust threshold test eliminates the types of regulations referred to in Autry and Insurance Brokerage where use of the narrower “business of insurance” test filters out statutes that were “enacted . . . for the purpose of regulating insurance.” Put another way, the use of the wrong test, and the use of the wrong analysis, would not always lead to the wrong result. However, in this case, which involves insurance regulation rather than insurer conduct, it leads to precisely the wrong result.

The District Court's use of the four-part test was improper and mandates reversal.

3. Proper Application of Third Circuit and Supreme Court Precedent Mandates Use of the Three-Part Test

The District Court believed it was required to follow the four-part test used by Highmark because Highmark could not be overruled except by an en banc determination of this Court. 2021 WL 4453606 at *7. The District Court explained that “the Third Circuit 'has long held that if its cases conflict, the earlier is the controlling authority and the latter is ineffective as precedents.'” Id. (quoting Pardini v. Allegheny Intermediate Unit, 524 F.3d 419, 426 (3d Cir. 2008)). While this is correct as a general proposition of law, the District Court erred in its application. Both Sabo and Highmark conflict with Supreme Court decisions on the proper test to use, and because Suter, the first post-Humana determination by the Third Circuit used the three-part test, the Court's concern was backwards. It is actually Highmark's subsequent continuation of Sabo's four-part test that is “ineffective as precedent” on this point.

Specifically, the District Court's determination that a panel of this Court cannot determine that the threshold requirement (i.e. a four-part test) is not required is incorrect where, as here, there has been an intervening determination by the Supreme Court. Chester ex rel. N.L.R.B. v. Grane Healthcare Co., 666 F.3d 87, 94 (3d Cir. 2011) (quoting United States v. Tann, 577 F.3d 533, 541 (3d Cir. 2009)) (“a panel of our Court may decline to follow a prior decision of our Court without the necessity of an en banc decision when the prior decision conflicts with a Supreme Court decision”).

That Fabe mandated the three-part (rather than the four-part) test was affirmed in Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999) (citing Fabe). The Humana Court stated that the McCarran-Ferguson Act “precludes application of a federal statute in face of state law 'enacted . . . for the purpose of regulating the business of insurance,' if the federal measure does not 'specifically relat[e] to the business of insurance,' and would 'invalidate, impair, or supersede' the State's law.” Humana at 307 (quoting Fabe, 508 U.S. at 501). It is important to note that the Humana Court contained seven of the Justices who had, six years earlier, decided Fabe. The Humana Court did not merely rubber-stamp a three-part test used by the lower court. At the Ninth Circuit level, the Court applied the four-part test. Forsyth v. Humana, Inc., 114 F.3d 1467, 1479 (9^th Cir. 1999). Thus, the Supreme Court's use of the three-part test (citing Fabe) was intentional and cannot be attributed to the fact that the focus was not on the application of whether the three- or four-part test was appropriate. Indeed, as noted above, the Fifth Circuit has expressly and subsequently noted that Humana's statement of a three-part test was made “in extremely clear and specific language.” Dehoyos, 345 F.3d at 294–95.

The next pronouncement of the test used by the Third Circuit after the Humana decision was Suter v. Munich Reins. Co., 223 F.3d 150, 160 (3d Cir. 2000), which cited Fabe in holding that the appropriate test was the three-part test.²³ This case preceded the determination in Highmark, Inc. v. UPMC Health Plan, Inc., 276 F3d 160, 166 (3d Cir. 2001) that a four-part test applied citing Sabo,²⁴ and thus should be construed as the Third Circuit's first post-Humana determination of the rule to apply in first clause McCarran-Ferguson Act matters. No Third Circuit case since Highmark has applied the four-part test of Sabo. The only Third Circuit pronouncement on the issue after Highmark²⁵ sets out the three-part test citing Suter for the test. South Jersey Sanitation Co., Inc. v. Applied Underwriters Captive RiskAssurance Co., Inc., 840 F.3d 138, 142 n.7 (3d Cir. 2016).²⁶

This Court should follow Suter (and South Jersey Sanitation), and every other Circuit which has decided the issue, and hold that the Fabe/Humana three-part test is proper for deciding questions of McCarran-Ferguson Act reverse-preemption under the first clause of Section 1012(b), and that the District Court committed error by using the wrong test.

C. The District Court's Application of “the Business of Insurance” Was Improper Even Under the Prior Four-Part Test

Even applying the four-part test of Sabo, the District Court erred in determining that the conduct covered by Section 6920 did not constitute the business of insurance. The District Court's error was two-fold. First, it characterized the “practice at issue” too narrowly. Second, it rejected the argument that Section 6920 relates to both licensing and the reliability of insurers — two areas specifically acknowledged by the Supreme Court and the Third Circuit as being part of “the business of insurance.”

1. Section 6920, as a Statute Regulating the Licensing and Examination Information of Captive Insurance Companies, Is a Statute Regulating the Business of Insurance

The District Court accepted that the licensing of insurers is the business of insurance. 2021 WL 4453606, at *9 (“licensing of insurance companies [is a] clear example[ ] of the 'business of insurance'”) (citing Sec. & Exch. Comm'n v. Nat'l Sec., Inc., 393 U.S. 453, 460 (1969)).²⁷ However, its determination that the conduct covered by Section 6920 is “fundamentally [not] about the licensing of insurance companies” is belied by its own factual determination, the uncontradicted factual record, and caselaw.

In its Opinion, the District Court adopted the “Factual Background” section from the R&R, including the finding that “Section 6920 of the Delaware Insurance Code (“Section 6920”) relates to the confidential treatment of materials and information that captive insurers submit to the state tax [sic] commissioner, either directly or through DDOI, as part of the application and licensing process.” 2021 WL 4453606 at *2 (A010). This finding cited to ¶ 20 of the Declaration of John Tinsley (the Special Deputy for Examinations for the DDOI) as support.²⁸ The connection of the confidentiality provision in Section 6920 to the interests of regulators was explained in further detail in other paragraphs of Mr. Tinsley's Declaration, which were uncontradicted:

17. Because insurance regulators are charged with protecting the public interest and promoting the solvency of insurance companies there is a natural tension between the regulator's need to have the necessary and accurate information to perform his or her duties and obligations and an insurer's concerns to protect confidential and proprietary information from third party access while they are at the same time competing in the marketplace.

18. Maintaining confidentiality is important while sharing information because both regulators and insurance companies have an interest in ensuring confidentiality. Other states' laws, like Delaware's, uniformly require that the receiving party verify it will maintain the confidentiality of information to be provided by the state, as well as by states with federal agencies.^[29]

19. This confidentiality promotes transparency between the insurer and its regulator and provides a framework for the free flow of information necessary for effective insurance regulation and oversight by state insurance departments. This is particularly true with captive insurers because they do not provide insurance coverage for members of the public, and their financial and business information are generally not subject to public filing requirements.

* * *

21. Section 6920 is part of a broader confidentiality policy that likewise provides confidentiality to other areas of insurance addressed by the Delaware Insurance Code, as well as part of a reciprocal policy among state insurance commissioners and state and federal agencies, allowing the sharing of information, so long as it is held confidential. Current state information sharing laws authorize regulators to share important confidential regulatory information with each other, state and federal financial regulators and law enforcement agencies.

(A242-243).

In examining the purpose of anti-disclosure statutes in insurance codes, courts have specifically found that “[t]he statute is designed to assure companies such as [defendant] that they will not suffer harm from disclosure by entities over which they have no control, so that they will be encouraged to cooperate with [the insurance department] during an examination.”³⁰ Mahon v. Chicago Tit. Ins. Co., 2017 WL 3331738 at *7(quoting Heritage Healthcare Servs. Inc. v. Beacon Mut. Ins. Co., 2007 WL 1234481 (R.I. Super. Apr. 17, 2007)).³¹

Insurance examinations are for the purpose of determining the solvency and safety of insurers, and for the protection of its policyholders. See, e.g. Stewart v. Wilmington Trust SP Services, Inc., 112 A.3d 271, 314 (Del. Ch. 2015) (“DDOI has been given significant authority to achieve the goals of making innocent insurance policyholders whole”, citing examination statute 18 Del. C. § 318). See also, generally, Jonathan R. Macey & Geoffrey P. Miller, The McCarran-Ferguson Act of 1945: Reconceiving the Federal Role of Insurance Regulation, 68 N.Y.U. L. Rev. 13, 72 (1993) (hereinafter “Macey”) (“State insurance regulators monitor the safety of institutions under their jurisdiction by means of site examinations and analyses of report data”).³²

Both licensing and examinations relate to this essential regulatory function of determining and monitoring the reliability, i.e. solvency of insurance companies, including captive insurers. The DDOI uses the information that it receives — whether through the application/licensing process or through examination — to evaluate an insurer's status as a reliable insurer. National Association of Insurance Commissioners [NAIC], State Insurance Regulation, at 4-5 (2011), https://www.naic.org/documents/topics_white_paper_hist_ins_reg.pdf; Robert W. Klein, Ph.D., A Regulator's Introduction to the Insurance Industry, at 133-40 (2d ed. 2005), https://www.naic.org/documents/prod_serv._marketreg_rii_zb.pdf.

Therefore, examinations fall within the description of “other activities of insurance companies [that] relate so closely to their status as reliable insurers that they too must be placed in the same class [the core of the 'business of insurance'].” Nat'l Sec., 440 U.S. at 460. See also, e.g., Ludwick v. Harbinger Grp., Inc., 854 F.3d 400, 404 (8th Cir. 2017) (“Questions about insurance companies' solvency are, no surprise, squarely within the regulatory oversight by state insurance departments”); In re Workers' Comp. Ins. Antitrust Litig., 574 F. Supp. 525, 528 (D. Minn. 1983) (“there are several overriding goals behind the regulation of the insurance industry; insurer solvency and reasonable rates”) (citing The Insurance Exemption From the Antitrust Laws, 57 Tex.L.Rev. 1127, 1139 (1979)); Lac D'Amiante du Quebec, Ltee v. American Home Assurance Co., 864 F.2d 1033, 1045 (3d Cir. 1988) (“solvent and healthy insurance coverage is an essential state concern”) (considering Burford abstention).

The issues relating to confidentiality for examination materials are identical to the those for licensing, and examinations, and the attendant confidentiality of their materials are likewise part of the business of insurance.

Even when using the outdated four-part test, as the District Court noted, the Third Circuit has mandated that the “threshold” should be applied “broadly” and it is only if the conduct is “wholly unrelated to the insurance business” that the McCarran-Ferguson Act should not be applied. 2021 WL 4453606 at *6 (A013) (quoting Sabo, 137 F.3d at 190) (citing Nat'l Sec., 393 U.S. at 459-60).

Construed broadly, the conduct governed by Section 6920 relates to the determination of the reliability of insurers through the licensing and examination process. As discussed above, that confidentiality serves several significant purposes in the application process. It is designed to ensure that insurance companies are fully forthcoming (A242 at ¶ 16-17, 19); Mahon, 2017 WL 3331738; c.f. Ball, 87 F. Supp.3d at 57. Further, confidentiality is required in order for the DDOI to share information from other states' insurance departments; (A242, 243 at ¶¶18, 21). As this Court has recognized “backers of the McCarran-Ferguson Act were acutely aware of the data-gathering aspects of the insurance business.” Owens, 654 F.2d at 225 (discussing cooperative ratemaking among separate states).

Construed broadly, as required, the conduct at issue in Section 6920 relates to the licensing of insurers, and it is part of the business of insurance. It is certainly true that Section 6920 is a law which “possesses the end, intention or aim of adjusting, managing or controlling the business of insurance.” Fabe, 508 U.S. at 505 (quotation and citation omitted). The District Court erred in holding that the conduct governed by Section 6920 was not “the business of insurance.”

2. The District Court Erred By Construing the Threshold Requirement Too Narrowly and By Eliminating Conduct Between an Insurer and an Insurance Regulator from “the Business of Insurance”

The District Court's errors arose from improper analysis, even under Sabo/Highmark's four-part test. As an initial matter, the District Court construed the conduct covered by 6920 too narrowly. Despite finding as a fact that Section 6920 relates to the confidential treatment of information that insurers send to the insurance commissioner as part of the application and licensing process, when characterizing that conduct for purposes of the threshold test, the District Court excised all references to insurance. Secondly, the District Court made the determination that the conduct regulated by Section 6920 was not “the business of insurance” because it focused on the relationship between the insurance company and the insurance regulator, rather than between an insurance company and its insureds. This is simply incorrect. If the District Court is correct, substantial portions of state insurance regulation would be eliminated from the protection of reverse-preemption under the McCarran-Ferguson Act.

a. The District Court's Construction of the Threshold Requirement Was Too Narrow

The District Court recognized that the first question under the threshold is “whether the challenged conduct broadly constitutes the 'business of insurance in the first place.” 2021 WL 4453606 at *6 (A013) (quoting Sabo, 137 F.3d at 190) (Emphasis added). This is so because “[i]f the contested activities are wholly unrelated to the insurance business, then the McCarran-Ferguson Act has no place in analyzing federal regulation because only when '[insurance companies] are engaged in the 'business of insurance' does the act apply.'” Id. (citing National Securities, 393 U.S. at 459-60) (emphasis added).

As this Court has cautioned, “the precise characterization of the defendants' conduct can be dispositive.” In re Ins. Brokerage Antitrust Litig., 618 F.3d at 356 (discussing whether conduct was the “business of insurance” in a case based on antitrust exemption). See also, Ticor Title Ins. Co., 998 F.2d at 1142 (Alito, dissenting) (same).

While the District Court quoted the words of the Supreme Court about broad construction, it did exactly the opposite, construing the underlying issue narrowly. This can be first seen in the Court's unduly narrow characterization of the conduct at issue:

“record maintenance” and, more specifically, the dissemination and maintenance of information, documents, and communications maintained by the state.

2021 WL 4453606 at *8 (A015).

The District Court improperly divorced the activities covered by Section 6920 from their context, and its formulation is in stark contrast to the actual finding by the District Court (adopted from the R&R) about the scope of Section 6920: “Section 6920 of the Delaware Insurance Code (“Section 6920”) relates to the confidential treatment of materials and information that captive insurers submit to the state tax [sic] commissioner, either directly or through the DDOI, as part of the application and licensing process.” 2021 WL 4453606, at *2 (A010) (emphasis added).

By contrast, the DDOI suggested that the conduct be characterized as: “receiving, maintaining and restricting the dissemination of application and licensing information of captive insurers” Id. at *7 (A015), which is in line with the District Court's actual factual finding.

The District Court rejected the DDOI's characterization, writing “[t]he problem with DDOI's argument is that the purpose underlying Section 6920 is addressed later in determining whether challenged conduct constitutes the “business of insurance” — i.e., not in simply describing the character of the challenged conduct.” Id. at *8 (A015). The support for this determination was simply: “neither Sabo nor Highmark looked at any statutory purpose to describe the nature of the challenged activity.” Id.

Under the District Court's approach which separates the activities covered by a statute from their context, the conduct in Highmark could be characterized as the submission of papers to a newspaper by a company. For Sabo, it could be communications with agents, advertising and intimidation and harassment. Instead, both referred to how the conduct related to insurance. Sabo, 137 F.3d at 187; Highmark, 276 F.3d at 166. The District Court, by contrast, excised all references to insurance from the characterization of the conduct at issue.

The District Court's analysis was incorrect and unsupported. Neither Sabo nor Highmark can fairly be said to support a proposition that the purpose of the statute is not considered in characterizing the conduct. A further distinction is that in both Sabo and Highmark, what was being characterized was specific insurer conduct set out in a complaint that allegedly violated RICO or the Lanham Act, respectively. In the case at hand, what is being determined is the scope of regulation under Section 6920. Indeed, the District Court held that the conduct “flows directly from the language of Section 6920.” 2021 WL 4453606 at *8 (A015).

An examination of Fabe shows that at least where, as here, the terms of the statute frame the “conduct,” the intent and purpose of the statute must be taken into account. In Fabe, the state statute at issue regulated creditor priority in a dissolution and gave policyholders a higher preference than they received under the federal statute. Under the District Court's reasoning, the “conduct” or “activity” in question would be whether insolvency dissolution was the “business of insurance.” Yet, the Supreme Court did not make that inquiry, instead it noted that the preferencing of policyholders “serves to ensure that, if possible, policyholders ultimately will receive payment on their claims.” 508 U.S. at 506. “Because the [state] statute is 'aimed at protecting or regulating' the performance of an insurance contract . . . it follows that it is a law 'enacted for the purpose of regulating the business of insurance' within the meaning of the first clause of § 2(b).” Id. at 505.

Following the dictates of Fabe, and akin to what was done in Sabo and Highmark, the conduct at issue must be fairly stated so as to include the actual connection to insurance. The District Court's failure to do so was error.

b. The Court's Finding that Conduct Focused on the Relationship Between an Insurer and a Regulator Is Not the Business of Insurance Is Contrary to Established Caselaw

The District Court, relying on the R&R, determined that the conduct at issue was not the “business of insurance” because:

it does not fit within any of the categories of conduct set forth in National Securities, nor is it focused on the relationship between an insurance company and policyholder. (See D.I. 28 at 28-30). Instead, the conduct centers around the governmental treatment of documents provided by captive insurance companies — i.e., whether confidential documents may be disclosed and under what conditions. Id. at 29-30. The focus of the conduct is on the relationship between the captive insurance company and regulator(s), not an insurance company and its insureds. This Court finds no error in that conclusion and has already rejected DDOI's attempts to characterize the conduct as fundamentally being about the licensing of insurance companies. See infra at 15.^[33]

Id. at *9 (A016) (emphasis added).

It would be odd indeed for a first clause case if an insurance regulatory statute which governed conduct between an insurance regulator and an insurer were not “the business of insurance.” The District Court's determination that the conduct covered by Section 6920 was not the business of insurance does exactly what the Supreme Court and this Court cautioned against — reading words (“enacted for the purpose of”) out of the statute.

As discussed in Section I(C)(1), above, Section 6920 plays an integral part in the regulation of captive insurers. The confidentiality is designed to ensure that insurance companies are fully forthcoming, and is also required for Delaware to receive information from other states' insurance departments. The incorrect reasoning of the District Court would consign not only Section 6920, but also vast areas of preexisting insurance regulation by states, to preemption by general federal statutes.

The District Court's determination that conduct should not be considered to be “the business of insurance” where “[t]he focus of the conduct is on the relationship between the captive insurance company and regulator(s), not an insurance company and its insureds” (2021 WL 4433606 at *9 (A016)) is without citation to authority³⁴ and is completely antithetical to the Supreme Court's recognition that the first clause of §1012(b) “was intended to further Congress' primary objective of granting the States broad regulatory authority over the business of insurance.” Fabe, 508 U.S. at 505.³⁵

This Court has long held that the “business of insurance” “encompasses . . . more than making contracts between an insurer and an insured.” In re Ins. Brokerage Antitrust Litig., 618 F.3d at 355 (quoting Owens, 654 F.2d 218, 224 (3d Cir. 1981)). Indeed, the District Court correctly recognized that the Supreme Court has held that “[a]ctivities such as the fixing of insurance rates, selling and advertising of insurance policies, and the licensing of insurance companies and agents are clear examples of the “business of insurance.” 2021 WL 4453606, at * 9 (A016) (citing Nat'l Sec., 393 U.S. at 460).

However, the District Court erred in determining that “the conduct does not fit within any of the categories of conduct set forth in National Securities.” Id. As discussed below, the conduct squarely fits within the “licensing of insurance companies,” as well as another category of conduct which was omitted from the District Court's Opinion: “Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class [the core of the 'business of insurance'].” Nat'l Sec., 440 U.S. at 460.

As discussed in Section I(B)(1)(b) above, the primary objective of Congress was to grant the States broad regulatory authority over the business of insurance. As discussed below, this Court and other courts around the country have recognized the broad areas of insurance regulation, going beyond merely the direct policyholder-insurer contract require McCarran-Ferguson Act reverse-preemption. As this Court has explained:

. . . solvent and healthy insurance coverage is an essential state concern. The McCarran–Ferguson Act specifically provides that it is in the public interest for states to continue serving their traditional role as the preeminent regulators of insurance in the federal system and indicates the special status of insurance in the realm of state sovereignty.

Lac D'Amiante du Quebec, Ltee, 864 F.2d at 1045 (citing Levy v. Lewis, 635 F.2d 960, 963-64 (2d Cir. 1980)) (considering Burford abstention).

c. The District Court's Finding that the Conduct Covered by Section 6920 Was Not “the Business of Insurance” Because that Section Covers More than Just Licensing Was Erroneous

The District Court dismissed the contention that the conduct relates to licensing by stating that it “has already rejected DDOI's attempts to characterize the conduct as fundamentally being about the licensing of insurance companies.” 2021 WL 4453606, at *9 (A016). Its prior discussion, however, was limited to a single sentence stating that Section 6920 protects more than just licensing information. Id. at * 8 (A015). The Court then quoted the portion of the statue which also protects information relating to an examination. Id.³⁶

The District Court appears to be stating that because Section 6920 also provides confidentiality to material relating to a triennial (audit) examination of a captive insurer as well as to application/licensing information, Section 6920 does not relate to licensing and thus is not part of the business of insurance. This proposition fails, both as a matter of logic and as a matter of law.

As a matter of logic, that confidentiality may also be extended by Section 6920 to examinations has no bearing on whether the confidentiality of licensing information is part of the business of insurance.

As a matter of law, there are two problems with the District Court's determination. Most simply, the fact that a statute which includes conduct which constitutes the business of insurance might also cover other conduct which does not constitute the business of insurance is not a basis for determining the portion covering the business of insurance does not preempt federal law under the McCarran-Ferguson Act. Indeed, this was the precise situation in Fabe. There, the Court held that the portion of Ohio's insurance insolvency priority statute which regulated policyholders regulated the business of insurance, while the portion designed to further the interests of other creditors did not. 508 U.S. at 508.

Similarly, in National Securities, the Supreme Court reviewed an Arizona statute requiring the State Director of Insurance to approve mergers involving domestic insurance companies. One provision of the statute “focused . . . attention on stockholder protection; it [was] not attempting to secure the interests of those purchasing insurance policies.” Regulation of this sort, concluded the Court, “is not within the scope of the McCarran–Ferguson Act.” 393 U.S. at 460. Another part of the Arizona law required the Director to ensure that the proposed merger would not “substantially reduce the security of and service to be rendered to policyholders.” Id. at 462. “This section of the statute,” the Court found, “clearly relates to the 'business of insurance.'” Id.

In any event, the District Court's refusal to treat the conduct regulated by Section 6920 as the business of insurance was an error of law because the additional protection for examination materials also constitutes the business of insurance.

II. This Court Can Hold that the McCarran-Ferguson Act Preempts the Summons and No Remand Is Necessary

A. Standard of Review

As discussed in Section I(A) above, questions of reverse-preemption are issues of law which are reviewed de novo. See Weiss, 482 F.3d at 263 (citing Highmark, 276 F.3d at 166).

B. All of the Elements of Reverse-Preemption Are Present As a Matter of Law

As discussed in Section I above, in order to show a federal statute is preempted by the McCarran-Ferguson Act, it must appear that: “(1) the federal law at issue does not specifically relate to the business of insurance; (2) the state law regulating the challenged conduct was enacted for the purpose of regulating the business of insurance; and (3) the application of federal law would invalidate, impair or supersede such state law.” Suter, 223 F.3d at 160; Humana, 525 U.S. at 308.

The District Court should have determined that the undisputed facts and the clear law showed that the three factors mandated a decision that the McCarran-Ferguson Act reverse-preempted Sections 7602 and 6103 of the Tax Code (relating to the Summons), and thus dismissed the Petition.

The first factor, that the IRS statutes relating to a summons do not specifically relate to the business of insurance was not contested by the IRS. (D.I. 23 at pp. 11) (listing factors and addressing all but whether federal law relates to the business of insurance). The Tax Code is a federal statute of general applicability and there can be no argument that either Section 7602 or 6103 “specifically relate” to the business of insurance. There are no express provisions of those sections that “specifically relate” or address in any way the “business of insurance,” nor is there any language in those sections that provide the IRS express authority to avoid preemption.

The second factor, that Section 6920 was enacted for the purpose of regulating the business of insurance is established by the facts and law set forth in Section I above.

Finally, the third factor was also shown as the Summons would “invalidate, impair, [and] supersede” the requirements of Section 6920 as a matter of law. See, Humana, 525 U.S. at 301 (“When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application”). The Summons requires the Insurance Commissioner to do something he is specifically prohibited from doing by statute, which directly conflicts with and would “invalidate, impair [and] supersede” the broad confidentiality requirements of Section 6920(2) and “provide a substitute rule.” c.f. U.S. v. Wisconsin State Circuit Court for Dane County, 767 F. Supp. 2d 980, 984 (2011), vacated on other grounds, 2013 WL 3761295 (W.D. Wis. July 16, 2013) (enforcement of an IRS injunction would “invalidate, impair and supersede” state insurance insolvency laws). The IRS has refused to treat the material confidential as required by Section 6920. (R&R, 2021 WL at *8, n. 9).

As each of the factors are met, as a matter of law, it was error for the District Court to refuse to find that the McCarran-Ferguson Act reverse-preempted Sections 7602 and 6103 of the Tax Code, and to refuse to dismiss the IRS's Petition to Enforce Summons.

CONCLUSION

For all of the above reasons, the Delaware Department of Insurance respectfully requests that this Court reverse the determination of the District Court, and hold that the IRS's Petition to Enforce Summons be dismissed.

Respectfully Submitted,

KATHLEEN P. MAKOWSKI
Deputy Attorney General
1007 Orange Street, Suite 1010
Wilmington, DE 19801
(302) 674-7326
Kathleen.Makowski@Delaware.gov

and

PATRICIA A. DAVIS
Deputy State Solicitor
102 W. Water Street
Dover, DE 19904
(302) 257-3233
PatriciaA.Davis@Delaware.gov

JAMES J. BLACK, III
JEFFREY B. MICELI
MARK W. DRASNIN
Black & Gerngross, P.C.
1617 John F. Kennedy Blvd.
Suite 1575
Philadelphia, PA 19103
Tel. (215) 636-1650
jblack@blackgern.com
jmiceli@blackgern.com
mdrasnin@blackgern.com

Counsel for Respondent-Appellant
Delaware Department of Insurance