Commercial Litigation and Arbitration

Extraterritoriality of New York Law

Global Reinsurance Corp. v. Equitas Ltd., 2012 WL 995268 (N.Y. Ct. App. Mar. 27, 2012):

At issue is the sufficiency and extra-territorial reach of plaintiff’s claim under New York State’s antitrust statute, commonly known as the Donnelly Act (General Business Law § 340 et seq.).

Plaintiff is a New York branch of a German reinsurance corporation. Defendants (hereinafter collectively referred to as “Equitas”) are London, England based entities engaged in the business of providing retrocessionary reinsurance. Retrocessionary reinsurers, or retrocessionaires as they are known, write coverage for risks ceded to them by reinsurers, in this transactional context referred to as “cedents.”

According to the complaint, this action arises from practices employed in connection with the handling of claims made under retrocessional reinsurance treaties providing what is known as “non-life” coverage. ***

Over the years, Lloyd’s of London, an insurance marketplace composed of numerous competing insurance syndicates, themselves composed of individual underwriting participants (natural persons referred to as “Names”), issued, through its syndicates substantial non-life retrocessional coverage. By the early 1990s, it became evident that the liabilities arising under this coverage were mounting at an alarming rate and would soon outstrip the syndicates’ reserves.

The syndicates individually proved unable to respond to this impending crisis, in significant part because in competing with each other for prospective business it was their practice to pay retrocessionary claims without haggling and without imposing onerous administrative burdens on their cedents. It was thus proposed that, since individual action by the syndicates to limit liability by more closely scrutinizing claims would be commercially unviable, the Names should agree to repose decision making with respect to the handling of certain liabilities arising under pre–1993 Lloyd’s non-life retrocessionary coverage, in a newly created entity—a reinsurer that would, because it would be in perpetual “run-off” (i.e., merely concluding obligations under existing coverage and not soliciting new business), be free to adopt a more aggressive approach to the handling of claims. This proposal, as set forth by the governing body of Lloyd’s in a “Reconstruction and Renewal (R & R) Plan” was approved by the Names and subsequently reviewed and found unobjectionable by United Kingdom and EU antitrust regulatory authorities, i.e., the United Kingdom Department of Trade and Industry and the European Commission.

It was pursuant to the R & R plan that Equitas was created in 1996 to reinsure the otherwise uninsurable non-life retrocessionary obligations of the Lloyd’s syndicates. And, in accordance with a Reinsurance and Runoff Contract (RROC), the Names reinsured with Equitas their risks under the Lloyd’s syndicates’ pre–1993 non-life retrocessionary treaties. The consideration for this coverage was comprised of some $14.7 billion in assets (premiums paid for the subject coverage) held by the syndicates and significant additional contributions by the Names individually, and by Lloyd’s and its functionaries. Although subsequent to these transfers and until 20092 the Names remained severally liable under the coverage extended by the syndicates, pursuant to the RROC Equitas was given plenary power to manage claims arising under the subject pre–1993 coverage. The Names were concomitantly barred from reaching the funds transferred in exchange for the reinsurance provided by Equitas.

*** According to plaintiff, Equitas adopted a “hard-nosed” approach to the handling of its claims, involving among other practices, holding payments due hostage to concessions by plaintiff and imposing extraordinarily onerous documentation requirements. In addition to commencing arbitration proceedings against the underwriters in which it sought damages for these alleged abuses under the governing insurance treaties, plaintiff filed this action in March 2007, asserting in its original complaint a Donnelly Act claim as well as one sounding in tortious interference with contractual relations. ***

The *** Second Amended Complaint, the pleading now at issue, alleges in support of the Donnelly Act claim that prior to the R & R plan and the consequent creation of Equitas, retrocessional non-life claims handling with respect to pre–1993 Lloyd’s coverage was performed by the individual Lloyd’s syndicates which, because they competed with each other for new business and were thus anxious to curry favor with potential cedents, were disposed to settle claims expeditiously and fairly. Following the R & R plan and the centralizing of all decision making respecting the handling of the subject category of claims in Equitas pursuant to the RROC, there ceased to be any competitive disincentive to the adoption of sharp claims management practices-Equitas had no interest in attracting prospective business; its sole mission was to marshal its fund with the considerable amount of parsimony necessary to cover the avalanche of liabilities that had led to its existence. The complaint further alleged that Lloyd’s concentration of claims management decision making power in Equitas would operate to suppress competition in the delivery of a crucial component of the retrocessional non-life coverage product, namely, claims management, and that it would do so not only within the Lloyd’s marketplace, but in the world. ***

An antitrust claim under the Donnelly Act, or under its essentially similar federal progenitor, Section 1 of the Sherman Act (15 USC § 1 et seq.) (see Anheuser–Busch, Inc. v. Abrams, 71 N.Y.2d 327, 335 [1988]; Mobil Oil Corp., 38 at 463), must allege both concerted action by two or more entities and a consequent restraint of trade within an identified relevant product market (see e.g. Home Town Muffler v. Cole Muffler, 202 A.D.2d 764, 765 [3d Dept 1994]; Creative Trading, 136 A.D.2d at 462; Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., 996 F.2d 537, 542–543 [2d Cir1993], cert denied 510 U.S. 947 [1993] ). Equitas argues that the Second Amended Complaint fails sufficiently to allege either element.

For present purposes, we assume, without deciding, that a conspiracy is alleged. *** Although there are situations in which a fully integrated entity that takes over and consolidates economic functions formerly performed competitively will be deemed sufficiently autonomous in its subsequent operations to preclude their characterization as conspiratorial within the meaning of the antitrust laws (see e.g. Texaco Inc. v. Dagher, 547 U.S. 1 [2006] ), the pertinent inquiry in determining whether there is concerted or unilateral activity is one of substance and not form (American Needle, Inc. v. National Football League, 560 U.S. ––––, 130 S Ct 2201, 2211–2012 [2010] ); what is important is how the parties to the alleged anticompetitive conduct actually operate (id. at 2209). Here, there is discernible from the pleading a perhaps colorable claim that Equitas was engaged in concerted activity when it exercised in place of and on behalf of the co-existing Lloyd’s syndicates consolidated decision making authority over the management of the syndicates’ pre–1993 retrocessional non-life liabilities.

The substantive problem with this action is rather that although a worldwide market is nominally alleged, as is evidently essential since it is clear that the retrocessional non-life product is available globally and that there is no distinct legally cognizable submarket, there is no allegation of any anticompetitive effect attributable to the posited conspiracy beyond the Lloyd’s marketplace.

Ordinarily, a Donnelly or Sherman Act plaintiff, to survive a motion to dismiss in a rule of reason case, such as this one, must minimally allege that conspirators possessed power within the relevant market to produce a market-wide anticompetitive effect (see Capital Imaging, 996 F.2d at 546). Defined in the context of sales, market power is the ability to raise prices significantly without losing business (see CDC Techs., 186 F3d at 81), but more generally may be understood as the capacity to impose onerous economic terms without suffering competitive detriment. Here, there is no allegation of any such power in the relevant worldwide market. While the Lloyd’s syndicates were capable of insulating themselves from each other’s competitive behavior in the area of claims management and could by that device attempt to cap their liabilities under certain previously issued coverage, there are no allegations from which it is possible to gather that they were capable of avoiding the business consequences of this approach in the global market. Recognizing that on a CPLR 3211 motion to dismiss the allegations of the complaint must be accepted as true and construed liberally in the plaintiff’s favor (Cron v. Hargro Fabrics, 91 N.Y.2d 362, 366 [1998] ), and that in the antitrust context courts are “hesitant” to dismiss complaints on the pleadings based on the sufficiency of product market allegations (Todd, 275 F3d at 200), it is nonetheless the case that there is no per se rule barring dismissal where the complaint simply does not allege a conspirator’s basic capacity to inflict market-wide anticompetitive injury (see id.). Here, there is no dispute as to the relevant market and, accordingly, no need for factual development on that point. The pertinent analytic focus is instead upon whether the complaint alleges the requisite power within the relevant worldwide market on the part of the claimed conspirators. We cannot conclude that it does.***

Even if this pleading deficiency could be cured—and we perceive no reason to suppose that the formidable hurdle of alleging market power could be surmounted by plaintiff—there would remain as an immovable obstacle to the action’s maintenance, the circumstance that the Donnelly Act cannot be understood to extend to the foreign conspiracy plaintiff purports to describe.

The complaint alleges, essentially, that a German reinsurer through its New York branch purchased retrocessional coverage in a London marketplace and consequently sustained economic injury when retrocessional claims management services were by agreement within that London marketplace consolidated so as to eliminate competition over their delivery. Injury so inflicted, attributable primarily to foreign, government approved transactions having no particular New York orientation and occasioning injury here only by reason of the circumstance that plaintiff’s purchasing branch happens to be situated here, is not redressable under New York State’s antitrust statute. That this is so, is demonstrable when the Donnelly Act is considered in the context of federal antitrust law.

Assuming that the extraterritorial reach of the Donnelly Act is as extensive as that of its federal counterpart, the Sherman Act—an assumption that we do not ultimately embrace—it seems fairly clear that the Sherman Act would not reach a competitive restraint, imposed by participants in a British marketplace, that only incidently affected commerce in this country.

The Sherman Act’s extraterritorial reach is limited under the Foreign Trade Antitrust Improvements Act (FTAIA) of 1982 (15 USC § 6a), which provides that the Sherman Act “shall not apply to conduct involving [non-import] trade or commerce ... with foreign nations.” The only ground for excepting to this general rule of inapplicability where imports are not involved is where the conduct has a “direct, substantial, and reasonably foreseeable effect” on domestic commerce, and “such effect gives rise to a [Sherman Act] claim” (15 USC § 6a [1][A], [2]; F. Hoffmann–La Roche Ltd v. Empagran S.A., 542 U.S. 155, 162 [2004] ). The London conspiracy here alleged was, according to the complaint, worldwide in its orientation; there is nothing in the pleadings to justify an inference that it targeted United States commerce specially or that its effect upon commerce in this country was substantial. Even if there were, however, the viability of a Sherman Act claim would still finally depend upon whether the domestic effect of the foreign conspiracy would itself “give rise” to a claim under the Sherman Act (id.). Plaintiff, although alleging individual injury in New York, has not alleged harm to competition in this country (see E & L Consulting, Ltd. v. Doman Indus., 472 F3d 23, 28 n. 3 [2d Cir2006], cert denied 552 U.S. 816 [2007] [“It should go without saying ... that a party cannot establish antitrust injury without establishing a violation of the antitrust laws, which, under Section 1 [of the Sherman Act], must involve an injury to competition”] ). The only harm to competition alleged is within a particular London reinsurance marketplace. It seems clear that even if plaintiff had an otherwise viable Sherman Act claim based on harm to competition in the relevant global market, which it does not, it still would not, premised on its allegations of domestic harm, have a jurisdictional predicate for that claim. It is not necessary to know precisely the extent of the Donnelly Act’s extra-territorial reach to understand that it cannot reach foreign conduct deliberately placed by Congress beyond the Sherman Act’s jurisdiction. The federal limitation upon the reach of the Sherman Act, predicated upon and an expression of the essentially federal power to regulate foreign commerce, would be undone if states remained free to authorize “little Sherman Act” claims that went beyond it. The established presumption is, of course, against the extra-territorial operation of New York law (see McKinney’s Consolidated Laws of NY, Book 1, Statutes § 149), and we do not see how it could be overcome in a situation where the analogue federal claim would be barred by congressional enactment.

It is not an answer to this analysis to observe, as plaintiff does, that under the McCarran–Ferguson Act (15 USC § 1011 et seq.) regulation of the “business of insurance” is committed to the states (15 USC § 1012[b] ). What is at issue here is not in the main the regulation of the “business of insurance,” a matter within the special competence and jurisdictional reach of domestic state regulators, but the address of a purported foreign conspiracy to restrain trade, a matter to be dealt with, if at all, under the significantly distinct antitrust rubric (see Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 210–211 [1979] ). The question now before us—as to the extra-territorial reach of our state antitrust law—is, then, not one as to which the McCarran–Ferguson Act commitment is relevant. What is instead highly relevant is that the Donnelly Act’s reach must be understood as part of a jurisdictional continuum whose outermost extension is defined by federal antitrust law. While it is true that the scope of federal subject matter jurisdiction under the Sherman Act, as limited by the FTAIA and federal decisions following Empagran (542 U.S. 155 [2004], supra ) is frequently far from obvious, we think it sufficiently evident that the Sherman Act would not reach the purely foreign conspiracy here claimed, the anticompetitive effect of which beyond the Lloyd’s marketplace is not made out.

Nonetheless, we do not ultimately ground our determination that the Donnelly Act does not reach the presently claimed conspiracy upon the FTAIA. Even if the Sherman Act could reach the purported conspiracy, it would not follow that the Donnelly Act should be viewed as coextensive. For a Donnelly Act claim to reach a purely extra-territorial conspiracy, there would, we think, have to be a very close nexus between the conspiracy and injury to competition in this State. That additional element is not discernible from the pleadings before us. It would be a very great, and we think unwarranted, supposition that the authors of the Donnelly Act intended to allow, on a predicate such as the one here alleged, the sort of highly intrusive international projection of state regulatory power now proposed.

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