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SUBSEQUENT HISTORY: Question certified by Montanya v. Easley, 260 F.3d 622, 2001 U.S. App. LEXIS 13541 (5th Cir. Tex., 2001)

Vacated by, Injunction denied by, Complaint dismissed at Allstate Ins. Co. v. Serio, 2003 U.S. Dist. LEXIS 13541 (S.D.N.Y., May 7, 2003)

 

PRIOR HISTORY: Allstate Ins. Co. v. Serio, 1998 U.S. Dist. LEXIS 12583 (S.D.N.Y., Aug. 10, 1998)

 

DISPOSITION:  [*1]  Plaintiffs' motions for summary judgement granted and Department's cross-motions for summary judgment denied.

 

CASE SUMMARY:

 

 

PROCEDURAL POSTURE: Plaintiff automobile insurers and defendant state insurance agency cross-moved for summary judgment in separate actions seeking a declaration that N.Y. Ins. Law § 2610(b), which prohibited plaintiffs' dissemination of unsolicited information concerning repair shop referrals, violated plaintiffs' right to the free expression of commercial speech under U.S. Const. amend. I.

 

OVERVIEW: Plaintiff automobile insurers, in separate actions, alleged that N.Y. Ins. Law § 2610(b), which prohibited plaintiffs from providing information concerning repair shop referrals unless requested by the insured, was a violation of free speech rights under U.S. Const. amend. I. The court held that plaintiffs had standing to bring the action since defendant insurance agency threatened to take legal action against plaintiffs for violation of the statute, and the continuing harm doctrine precluded a statute of limitations defense. Further, plaintiffs' proposed referral programs constituted commercial speech as communications to their insureds and the statute regulated that speech based on its content rather than regulating the conduct of referring insureds to certain repair shops. Plaintiffs' commercial speech was not misleading, coercive, or unlawful and, even though defendant had a compelling interest in regulating the insurance industry, the statute did not materially advance that interest nor was it narrowly drawn to serve such interest. The statute was thus unconstitutional as applied to plaintiffs.

 

OUTCOME: Summary judgment was granted to plaintiff automobile insurers, and denied to defendant state insurance agency; the statute proscribing the unsolicited communication of information concerning repair shop referrals was an unconstitutional, since the regulation of plaintiffs' commercial speech based on content did not materially advance defendant's compelling interest in insurance regulation.

 

 

COUNSEL: For ALLSTATE INSURANCE COMPANY, plaintiff: Bruce E. Clark, Sullivan & Cromwell, New York, NY.

 

For GREGORY V. SERIO, defendant: Elizabeth A. Forman, Dennis C. Vacco, Attorney General of the State of NY, New York, NY.

 

JUDGES: Richard Conway Casey, U.S.D.J.

 

OPINION BY: Richard Conway Casey

 

OPINION:

OPINION AND ORDER

 

RICHARD CONWAY CASEY, U.S.D.J.:

These companion suits n1 are brought by Allstate Insurance Company ("Allstate"), a corporation organized under the laws of the State of Illinois, with its principal place of business in Northbrook, Illinois, and by Government Employees Insurance Company, GEICO General Insurance Company, GEICO Indemnity Company and GEICO Casualty Company (collectively, "GEICO"), corporations organized under the laws of the State of Maryland with their principal offices in Chevy Chase, Maryland (Allstate and GEICO together referred to herein as "Plaintiffs"), against Gregory V. Serio, in his official capacity as Acting Superintendent of Insurance of the State of New York (the "Department"), n2 claiming that a section of the New York State [*2]  Insurance Law (the "Insurance Law"), specifically, Section 2610(b) of the Insurance Law ("Section 2610(b)"), is unconstitutional. n3

 

n1 Although Allstate and GEICO each filed separate suits against the named defendant, their suits are replete with similar issues and arguments. Therefore, the Court shall address the motions filed in both actions in this Opinion and Order. To the extent arguments are particular to one or the other party it is noted. The Court permitted the introduction of an Amicus Curiae brief of United Policyholders ("Policyholders"), submitted in support of the defendant's motion for summary judgment and in opposition to Allstate's and GEICO's motions for summary judgment. The positions and arguments of Policyholders have been carefully considered by the Court in connection with this Opinion and Order.

 

n2 Gregory V. Serio, the named defendant, is no longer the Acting Superintendent of Insurance of the State of New York. Accordingly, and for ease of reference, the defendant in this combined action is referred to throughout as the "Department."

 

n3 Plaintiffs are property and casualty insurance companies licensed by the State of New York, and engaged in the business of writing motor vehicle insurance policies for New York citizens. For this reason, Plaintiffs are subject to the Insurance Law. N.Y. Ins. Law § 2610 (McKinney's 1995 & Supp.). Section 201 of the Insurance Law vests the Superintendent of Insurance with the power to interpret and enforce the Insurance Law and to supervise all aspects of the insurance business within the State of New York. N.Y. Ins. Law § 201 (McKinney's 1995 & Supp.).

 

 [*3]

Allstate and GEICO have brought before the Court motions for summary judgment, pursuant to Rule 56(c) of the Federal Rules of Civil Procedure, declaring Section 2610(b), and the rules and regulations promulgated thereunder, unconstitutional as applied to Plaintiffs. The Department has brought before the Court cross-motions for summary judgment against Allstate and GEICO, arguing that Section 2610(b) is a valid and constitutional enactment. Allstate also has brought a motion for the preclusion of evidence, pursuant to Federal Rules of Civil Procedure 26, 37 and 56.

Section 2610 prohibits insurers from "steering," that is, requiring insureds to use certain repair shops or giving insureds unsolicited referrals for repair shops that have special arrangements with the insurers. The Department claims that these prohibitions are intended to prevent coercive practices by insurers and to protect consumer choice. Section 2610(b) and the rules and regulations promulgated thereunder apply when an insured makes a claim but does not request a referral. Under this scenario, Section 2610(b) prohibits insurers from providing insureds with information regarding referral programs, from referring them [*4]  to repair shops, and from providing insureds with copies of Section 2610(b). Allstate and GEICO allege that Section 2610(b), as applied to them, is unconstitutional and violates their rights to free speech.

Specifically, Allstate claims the following: (I) that Section 2610(b) violates Allstate's free speech rights under the First and Fourteenth Amendments of the United States Constitution; (II) that Section 2610(b) violates Sections 1 and 8 of Article 1 of the Constitution of the State of New York; (III) that a letter from Allstate to the Department, dated January 31, 1994 (the "Enforcement Letter") and a Department circular letter, dated April 7, 1994 ("Circular 4") impermissibly restrict Allstate's commercial speech under the United States Constitution; and (IV) that the Enforcement Letter and Circular 4 impermissibly restrict Allstate's commercial speech under the Constitution of the State of New York. Therefore, Allstate requests that the Court declare Section 2610(b) unconstitutional, void and unenforceable and declare the Enforcement Letter null and void. Allstate also seeks injunctive relief against the enforcement of Section 2610(b), the Enforcement Letter and Circular 4.  [*5]

Similarly, GEICO claims the following against the Department: (I) that Section 2610(b) impermissibly limits and restrains GEICO's free speech rights under the First and Fourteenth Amendments of the United States Constitution and Section 8 of Article 1 of the Constitution of the State of New York; (II) that the Department's rejection of GEICO's proposed endorsement, which they submitted for approval, pursuant to the Insurance Law Section 2307(b), on April 3, 1996 (the "Endorsement") n4 impermissibly regulates and restrains its commercial speech in violation of the First and Fourteenth Amendments of the United States Constitution and Section 8 of Article 1 of the Constitution of the State of New York. GEICO requests that the Court declare Section 2610(b) unconstitutional as applied by the Department generally, and as applied to GEICO by defendant Gregory Serio's predecessor in rejecting the Endorsement. GEICO also seeks injunctive relief against the enforcement of Section 2610(b), and the rules and regulations promulgated pursuant to Section 2610(b).

 

n4 The Court notes that GEICO submitted two proposed endorsements; one on October 12, 1994 (Affidavit of Elizabeth A. Forman (December 1, 1998) ("Forman Aff."), Volume I, Ex. 7 at 1, 2) (the "1994 Endorsement") and one on April 3, 1996. (Affidavit of William P. Maloney (October 22, 1998) ("Maloney Aff."), Ex. A at 1) (the "1996 Endorsement") (together referred to herein as the "Endorsements"). Unless otherwise indicated, the Court will refer to the "Endorsement," which indicates the more recently rejected 1996 Endorsement. GEICO objects, however, to the Department's rejection of both Endorsements.

 

 [*6]

JURISDICTION

This case is brought pursuant to Title 42 of the United States Code, Section 1983 ("Section 1983") and 1988 ("Section 1988") to redress alleged violations of the First and Fourteenth Amendments to the United States Constitution and Article 1, Sections 1 and 8 of the Constitution of the State of New York. The Court has jurisdiction pursuant to Title 28 of the United States Code Sections 1331 ("Section 1331"), 1343 ("Section 1343") and 1367(a) ("Section 1367(a)"). Venue is proper pursuant to Title 28 of the United States Code Section 1391(b) ("Section 1391(b)") because the Southern District of New York is the district where the defendant Gregory V. Serio resided and because a substantial portion of the events giving rise to Allstate's claims allegedly have occurred and are occurring in the Southern District of New York.

Section 1983 provides that "every person who, under color of any statute . . . of any State . . . subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured [*7]  in an action at law, suit in equity, or other proper proceeding for redress. . . ." 42 U.S.C.A. § 1983. Here, Allstate and GEICO claim that Section 2610(b) deprived them of their right to free speech under the United States Constitution. "One of the Federal Constitutional rights that [Section] 1983 has been used to protect is the right to freedom of speech as guaranteed by the First Amendment to the U.S. Constitution." Davis v. City of Palo Alto, 930 F. Supp. 1375, 1376 (N.D.Ca. 1996); Bell v. Artuz, 1999 U.S. Dist. LEXIS 6117, 1999 WL 253607, at *3 (S.D.N.Y. Apr. 29, 1999); Katz v. Klehammer, 902 F.2d 204, 206 (2d Cir. 1990). Therefore, Plaintiffs must demonstrate that the Department has violated their constitutional rights to succeed under Section 1983.

FACTUAL BACKGROUND

Section 2610(a) of the Insurance Law was enacted in 1973 to "prevent insurers from requiring, as a condition to the payment of losses, that their insureds have collision losses repaired by particular body shops." Governor's Bill Jacket ("GBJ"), 1973 Ch. 909, Affidavit of Penny Shane, (October 2, 1998) ("Shane Aff."), Ex. 11 at 6. Section 2610(b)  [*8]  was enacted in 1974 "to discourage the use of 'referral' body shops by insurers" and to "prevent any insurer, unless expressly requested by the insured, from recommending or suggesting to any claimant that repairs be made in a particular place or shop or by a particular concern." GBJ, 1974 Ch. 743, Shane Aff., Ex. 12 at 3. Section 2610 provides:

 

 

(a) Whenever a motor vehicle collision or comprehensive loss shall have been suffered by an insured, no insurer providing collision or comprehensive coverage therefor shall require that repairs be made to such vehicle in a particular place or shop or by a particular concern.

 

(b) In processing any such claim (other than a claim solely involving window glass), the insurer shall not, unless expressly requested by the insured, recommend or suggest repairs to be made to such vehicle in a particular place or shop or by a particular concern.

 

 

Section 2610(b)'s present language reflects a 1983 amendment that exempted all claims involving window glass. When amending the statute, the legislature recognized that:

 

 

a very substantial number of auto repair claims involve window glass and that the insurer or its local [*9]  agent is in the best position to recommend a reliable repair shop in the community which will perform the work at competitive and reasonable rates. The intended effect of the legislation is to assure competent repairs by reputable shops and prevent unreasonably expensive repairs, the consequences of which would be increased insurance rates for all insureds within the state. The bill does not remove the insured's option to select the repair shop of his or her choice.

 

 

 GBJ, 1983 Ch. 565, Shane Aff., Ex. 14 at 9. The Department recommended approval of the amendment, stating that the expected result of the window glass exception would be lower claim costs, lower premiums and more efficient claims settlement processes for claims involving window glass. Id. at 11. In 1991 the legislature re-examined Section 2610(b), in light of criticism that it regulates the New York insurance industry too stringently. The legislature considered amending such section so that New York would not be "overregulating in any area" of the insurance industry. However, Section 2610(b) has yet to be amended since the window glass exception was added. Deposition Transcript of John P. Gemma [*10]  (April 28, 1998) ("Gemma Tr.") at 124-26.

 

A. Allstate's Claims

Allstate's claims result from the 2610(b)'s prohibition of its Priority Repair Option ("PRO") program that Allstate has implemented in every state in which it conducts business. Under the PRO program, Allstate selects motor vehicle repair shops in each geographical area based on a number of factors, including: safety and quality of repairs; reputation in the community; location; use of unibody repair equipment; properly trained personnel; availability of certain auxiliary services such as loaner vehicles and/or low cost daily rentals; and competitive pricing. Allstate Compl. P 6; Allstate Claims Manual ("Manual"), Shane Aff., Ex. 5 at AS 01547-48. Allstate conducts periodic inspections and monitoring of participating repair shops. Such monitoring includes testing for timeliness of repairs, accuracy of repair estimates and quality of repairs. Id. at AS 01549. Allstate argues that the PRO program results in lower costs, competitive pricing, quality assurance and expeditious repairs, because Allstate does not require a prior inspection of the damaged vehicle by an Allstate representative if an insured elects [*11]  to use PRO repair shops. Allstate Compl. P 7. Allstate guarantees the quality of repairs performed by a PRO repair shop for as long as the insured owns the vehicle. Shane Aff., Ex. 5 at AS 01577. Allstate's Manual expressly states that an insured's decision to use a participating repair shop is voluntary, and that a PRO repair shop should not be used when the insured's vehicle is already at a shop of the insured's choice or if the insured has a preference for a particular shop. Id. at AS 01547. Furthermore, Allstate insureds are informed that they are free to use a shop of their choice. Deposition Transcript of Lori Sandbach (May 29, 1998) ("Sandbach Tr.") at 76.

In most jurisdictions, when an insured brings a claim, an Allstate agent discusses repair options with the insured according to a prepared script provided in the "State Handbook." Id. at 113-15. The State Handbook includes flow charts to ensure that agents conform to differing state laws regarding recommendations to insureds. Upon receiving a claim, an Allstate agent asks the insured if he or she has a preferred shop where he or she would like to have repairs completed. If the insured does not have a preferred shop, [*12]  the State Handbook provides the following script:

 

 

We have selected automobile repair firms due to their reputation for customer service and quality workmanship. Because of their quality work, Allstate offers a written guarantee on repairs due to a covered loss for as long as you own the vehicle. Would you like me to provide the names of Priority Repair Shops in your area?

 

 

Id. at 76.; PRO Scripts ("Scripts"), Shane Aff., Ex. 10 at AS 02151. If the insured invites the recommendation, the agent then provides the names of several repair shops located in a convenient geographic area. Sandbach Tr. at 27, 56.

The New York script differs, in an attempt to comply with Section 2610(b). Only if an insured expresses no preference for a repair shop and requests a recommendation may an Allstate agent mention the existence of the PRO program or offer a recommendation. Scripts, Shane Aff., Ex. 10 at AS 02147, 02152, 02154; Sandbach Tr. at 19. Furthermore, an Allstate agent may not inform the insured of or provide the insured with the text of Section 2610(b). As a result, an insured who does not voluntarily request a recommendation will not be informed of the PRO program or Allstate's [*13]  repair guarantee.

During the Fall of 1992, at certain Allstate drive-in facilities in New York, Allstate posted a sign that advised customers about its repair guarantee. In pertinent part, the sign read:

 

 

ABOUT REPAIRS TO YOUR CAR . . .

It is our mutual interest that you receive prompt and courteous service along with quality repair work at a fair price.

 

If you have a preference for a particular shop, your adjuster will write or approve an estimate of repairs with that shop, based upon competitive prices in the area.

 

If you have no shop preference, your adjuster is prepared to recommend several conveniently located repair shops. After you have selected one of these shops, the adjuster will write or approve an estimate so that repairs can be made to your car. When the work is completed by the recommended shop, you will be protected by the "Allstate Auto Repair Guarantee."

 

Under the provisions of New York law, your adjuster is permitted to recommend a repair facility only if you request this information.

 

 

Allstate Compl. P 13. In September of 1992, the Department commenced a market conduct review, focusing on a number of Rochester, New York automobile insurance [*14]  offices, which had been the subject of alleged complaints from repair shops. n5 See Deposition Transcript of Louis Trager, Volume 1 (February 19, 1998) ("Trager Tr.") at 124-25. Specifically, the Department focused on Allstate's Rochester branch office to determine whether the above notice violated the Insurance Law.

 

n5 A number of insurance companies other than Allstate and GEICO were investigated by the Department. However, the constitutionality of Section 2610(b), as applied to them, will not be discussed or decided here, as they are not parties to either action before the Court.

 

The Department found that the notice and brochures given to Allstate customers that included the above quoted language amounted to "steering," in violation of Section 2610. Allstate Compl. PP 15, 16. The Department objected that "Allstate trys [sic] to 'sell' their program by advertising the guarantee that is involved . . . they do not mention that this guarantee is required by Regulation . . ." and they "make[] the insured [*15]  aware of the program before requesting such advices [sic]." Mem. from Louis Trager, dated January 7, 1993, Shane Aff., Ex. 28 at 7. The Department also took exception to Allstate's use of written materials that, in the Department's view, were "designed to prompt a claimant to ask about Allstate's Pro Shop Program." Dept. Mem., dated March 10, 1993, Shane Aff., Ex. 24 at 2. In early February of 1993, the Department informed Allstate of the conclusions derived from its investigation. Allstate and the Department met to discuss these conclusions and the Department indicated that a fine was appropriate. At this time, "Allstate formally presented its legal position to the Department, arguing that the Department had misinterpreted the statute." Defendant's Mem. in Support of its Motion for Summary Judgment and in Opp. to Allstate's Motion for Summary Judgment ("Dept. Mem. 1 (Allstate)") at 16. The Department offered to forgo all of the fines with which it threatened the Rochester insurance companies if the investigated insurance companies, including Allstate, took:

 

 

prompt action to revise their procedures so as to comply with Section 2610 of the NYIL. In the event the companies [*16]  failed to do so or [did] not implement the changes on a timely basis, a fine would be imposed beginning on the date when they received notice from the Department that their practices were in violation of the NYIL.

 

 

Dept. Mem., dated August 13, 1993, Shane Aff., Ex. 33 at 1. The Department stated that a "circular letter [would] be issued reiterating the Department's position on this issue." Id. at 2. n6 Circular 4 "codified and extended the Enforcement Letter to all insurers, including Allstate." Allstate's Mem. in Further Support of its Motion for Summary Judgment, in Opp. to Defendant's Cross-Motion for Summary Judgment, and in Support of Allstate's Motion to Exclude Certain Proffered Material ("Allstate 2") at 7. Allstate informed the Department on October 5, 1993 that it would discontinue such practices and the Department agreed to settle the alleged violation of Section 2610(b) without a fine. Dept. Mem. 1 (Allstate) at 16. As a result of the Department's threats of fines and further investigations against the insurers unless each agreed in writing to certain changes in their claims processing procedures, Allstate entered into the Enforcement Letter. Letter from [*17]  David R. Leonard, dated November xx, 1993, Shane Aff., Ex. 32 at 3; Dept. Mem., dated August 13, 1993, Shane Aff., Ex. 33 at 1. The Enforcement Letter states the following:

 

 

This refers to our recent discussions with the Department after its market conduct investigation of our automobile claims handling procedures. Although the Companies deny having violated the New York Insurance Law and Insurance Department Regulations, this letter sets forth our new procedures whereby the companies of the Allstate Insurance Group will seek to resolve those issues raised by the New York Insurance Department in the course of its investigation. Specifically:

 

 

1. We acknowledge that once a claim has been reported there can be no referral or recommendation to a specific repair facility or a listing of repair facilities unless a request therefor has been made by the insured or unless a notice of rights letter has been issued pursuant to the requirements of Regulation 64. This includes explanation or distribution of Section 2610 of the New York Insurance Law.

 

2. The Company will continue to maintain its repair program and will continue to prepare and disseminate information and literature [*18]  fully describing the existence and benefits of this program including, but not limited to, prospective customers, applicants and policyholders. Such dissemination to policyholders by the Companies and its agents will only occur in the ordinary course of business (including, but not limited to, any sales marketing activities as well as the mailing and discussions of policy renewals and endorsements) and may, therefore, unintentionally reach a policyholder who has a pending claim. Consistent with paragraph one above, literature referring to any repair facility programs or Company guarantees concerning repairs will not knowingly be distributed to a policyholder once a claim has been reported.

 

3. We agree that signs mentioning the existence of and describing the Company's repair program will not be displayed at any drive-in claim facilities, sales offices or other locations. However, this does not preclude the Companies from having and maintaining material, brochures and other information at those same sites explaining and espousing the Company's repair program which are not publicly displayed. This material, brochures and information cannot be provided or distributed to policyholders [*19]  unless a request therefor has first been made by the policyholder or unless a notice of rights letter has been issued pursuant to the requirements of regulation 64. The restriction in the preceding sentence does not apply to non-policyholders, such as prospective customers and applicants.

 

4. We agree that once the choice of a repair shop has been made by the insured there will be no discussion with the insured regarding that choice unless a subsequent request for a recommendation for a repairer is made, or there are documented complaints about that shop that have been logged by the company or reported to the Department of Motor Vehicles, or a notice of rights letter has been issued pursuant to the requirements of Regulation 64.

 

5. We acknowledge that the above procedures will be implemented on a statewide basis.

 

 

We recognize that failure to adhere to any of the foregoing may be regarded by the Department as a violation of Section 2610 of the New York Insurance Law.

 

 

Enforcement Letter, dated January 31, 1994, Shane Aff., Ex. 34 at 1, 2 (emphasis added). The Enforcement Letter contained no waiver of Allstate's rights. Allstate 1 at 22 (citation omitted).  [*20] 

 

n6 Because Department circular letters are given binding effect if they are interpreting existing law, Circular 4 is binding on New York insurers. See Village of Kiryas Joel Local Dev. Corp. v. Insurance Co of North America, 996 F.2d 1390, 1394 (2d Cir. 1993) ("The Superintendent [of Insurance] has broad authority 'to interpret, clarify and implement the legislative policy' of the Insurance law. . . . Generally, New York cases decline to enforce new extra-statutory obligations imposed via Circular Letters . . . but do give effect to Circular Letters that interpret existing law or categorize insurance policies.").

 

In Circular 4, the Department set forth its current interpretation of Section 2610(b) stating that:

 

 

Once a claim has been reported, there can be no referral or recommendation to a specific repair facility, nor may any listing of repair facilities be given to the insured, unless and until a request is made by the insured [or unless a dispute over the sufficiency of the estimate [*21]  has arisen (as discussed below)] . . . Literature referring to any repair program or insurer guarantees concerning repairs, should not be knowingly distributed to a policyholder once a claim has been reported.

 

No insurer should suggest to their policyholders who present claims that the policyholder should request a recommendation or referral, including by distributing copies of [Section] 2610 itself. For example, signs mentioning or describing an insurer's repair program should not be displayed at any drive-in claim facility, sales office or other insurer locations.

 

 

Circular 4, dated April 7, 1994, Shane Aff., Ex. 1 at 2 (emphasis added). As its basis for Circular 4, the Department referred to a market conduct study and unspecified complaints.

Allstate claims that the terms of Circular 4 and the Enforcement Letter inhibit its freedom to recommend and provide useful information to its customers. Allstate further claims that Section 2610(b), the Department's actions and regulations promulgated thereunder, the Enforcement Letter and Circular 4 are overbroad, unreasonably restrict an insurers' ability to provide information about repair shops, and are not narrowly [*22]  tailored to serve a legitimate state interest. Allstate Compl. P 23. Allstate alleges that Section 2610(b) and the rules and regulations promulgated thereunder only serve the narrow private interests of permitting independent in-state repair shops to minimize competition and maintain high prices. Id. P 24. Additionally, Allstate claims that Section 2610(b) is impermissibly vague because it fails to specify adequately what kind of speech may be interpreted by the Department to be an illegal 'recommendation' or 'suggestion' under the statute. Allstate claims that any legitimate State interests are served by Section 2610(a). Id. PP 25, 26.

 

B. GEICO's Claims

GEICO's claims stem from the Endorsement which they submitted for approval, pursuant to Insurance Law Section 2307(b). The proposed Endorsement provided that

 

 

Plaintiffs' insureds, who purchased the Endorsement, would receive a premium discount in return for requesting, at the time of the inception of the policy or the purchase of the Endorsement, that the Plaintiffs recommend specific body shops for the repair of the vehicle, should damage to an insured vehicle be incurred. Additionally, Plaintiffs would [*23]  guarantee the repair for as long as the insured owned the vehicle.

 

 

GEICO Memorandum in Support of its Motion for Summary Judgment ("GEICO 1") at 4. If approved, GEICO would market the Endorsement in the State of New York. Id. at 5-6. On April 30, 1996, after previously rejecting the 1994 Endorsement, defendant Gregory Serio's predecessor rejected the 1996 Endorsement on the ground that it violated Section 2610 of the Insurance Law. GEICO Compl. PP 6, 7.

GEICO also has developed a repair shop referral program, under which GEICO would recommend a preferred shop and would provide a guarantee to the insured. GEICO 1 at 4. GEICO uses scripts and claim procedures similar to those of other insurers, including Allstate. Defendant's Memorandum of Law in Support of its Motion for Summary Judgment to GEICO's Motion for Summary Judgment ("Dept. Mem. 1 (GEICO)") at 9. GEICO argues that it has not been able to utilize or promote its repair shop program because of the prohibitions in Section 2610(b), as it has been applied to it and as it has been interpreted by the Department. GEICO Mem. 1 at 4. Like Allstate, GEICO claims that the prohibitions in Section 2610(b) result in a lack of [*24]  competition and higher costs, and argues that any legitimate purpose in protecting insureds is accomplished by Section 2610(a). Therefore, GEICO argues, Section 2610(b) is unconstitutional as applied to it by virtue of the Department's rejection of the Endorsements.

DISCUSSION

 

A. Summary Judgment Standard

The Court's role in a motion for summary judgment is not to resolve disputed issues of fact but to determine whether there are any genuine issues of material fact for trial. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). Federal Rule of Civil Procedure 56(c) provides that summary judgment is appropriate:

 

 

if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

 

 

When viewing the evidence, the Court must "assess the record in the light most favorable to the non-movant" and resolve all ambiguities and "draw all reasonable inferences in its favor." Anderson, 477 U.S. at 255; [*25]  American Casualty Co. v. Nordic Leasing, Inc., 42 F.3d 725, 728 (2d Cir. 1994); Delaware & Hudson Railway Co. v. Consolidated Rail Corp., 902 F.2d 174, 177 (2d Cir. 1990).

The movant bears the initial burden of informing the court of the basis for its motion and demonstrating the absence of a genuine issue of material fact.  Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). If the movant meets this burden, the party opposing the motion must come forward with specific evidence demonstrating the existence of a genuine dispute of material fact. Fed. R. Civ. P. 56(e); Anderson, 477 U.S. at 249; Celotex, 477 U.S. at 323-24. Where the non-movant "propounds a reasonable conflicting interpretation of a material disputed fact," summary judgment is inappropriate.  Schering Corp. v. Home Ins. Co., 712 F.2d 4, 9-10 (2d Cir. 1983).

Conversely, the non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). [*26]  Bald assertions or conjecture unsupported by evidence are insufficient to overcome a motion for summary judgment. Carey v. Crescenzi, 923 F.2d 18, 21 (2d Cir. 1991); Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990).

An issue of fact is genuine when "a reasonable jury could return a verdict for the non-moving party," and such contested facts are material to the outcome of the particular litigation if the substantive law at issue so renders them.  Anderson, 477 U.S. at 248. "If, as to the issue on which summary judgment is sought, there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the non-moving party, summary judgment is improper." Chambers v. TRM Copy Centers Corporation, 43 F.3d 29, 37 (2d Cir. 1994). Only when it is apparent that no rational trier of fact "could find in favor of the nonmoving party because the evidence to support its case is so slight" should a court grant summary judgment. Gallo v. Prudential Residential Services, Limited Partnership, 22 F.3d 1219, 1223-24 (2d Cir. 1994).

 

B. Evidentiary   [*27]    Issues

According to Federal Rule of Civil Procedure 56(e), a party that either seeks or opposes summary judgment must present facts, based on personal knowledge, that "would be admissible as evidence," under the Federal Rules of Evidence and to which the source is "competent to testify." Anderson, 477 U.S. at 249-52. Allstate argues that the Department's evidence regarding insureds' alleged vulnerability, preferences and states of mind is inadmissible. Allstate 2 at 28. Allstate argues that these assertions are based on the opinions of the Department's employees, on their characterizations of complaints and other hearsay, and on the self-serving lobbying efforts of repair shops. Allstate also argues that the proffered evidence is subjective, irrelevant and has little if any probative value that would assist the Court in determining the constitutionality of Section 2610(b), as applied to Plaintiffs. The Court notes that Allstate individually challenges the admissibility of approximately 80 documents, many of which include separate submissions within particular documents, including news or promotional articles, repair shop lobby petitions and other lobby materials,  [*28]  solicited letters and forms from insureds and repair shops, a market conduct study and selected alleged complaints from individual repair shops and insureds. See Allstate 2, Mischaracterized and Inadmissible Material Chart (setting forth all challenged materials). The Court has reviewed the proffered materials and has considered their admissibility; however, it will not address each document separately here.

Allstate argues that the Department relied on the opinions of the Department's employees Barry Bistreich ("Bistreich") and Louis Trager ("Trager"), and on their characterizations of insureds' complaints and other hearsay. Allstate 2 at 28. Bistreich's knowledge pertains to his observations in processing consumer complaints made during his 30 years of experience as a Department Examiner. Trager's knowledge pertains to the Department's market conduct studies of Allstate and other insurers and problems enforcing the window glass exception. Dept. Mem. 1 (Allstate) at 21-23 & nn.34-35. The Department concedes that Bistreich and Trager are not experts, therefore, their non-expert witness testimony is governed by Federal Rule of Evidence 701 ("Rule 701"). Rule 701 provides that a [*29]  non-expert witness may testify only to opinions that are "rationally based on the perception of the witness" and that are "helpful to a clear understanding of [the witness'] testimony or the determination of a fact in issue." Fed. R. Evid. 701. Such opinions may not be based on indirect information such as hearsay, the reliability of which is unascertainable, because courts require that non-expert witnesses have a rational basis for their testimony, based on first-hand knowledge or observation. See United States v. Rea, 958 F.2d 1206, 1215 (2d Cir. 1992) (citation omitted). Hearsay is "a statement, other than one made by the declarant while testifying at the trial or hearing, offered to prove the truth of the matter asserted." Fed. R. Evid. 801(c). District courts have great leeway when determining admissibility of lay opinion testimony, therefore, "rulings on the admissibility of lay opinion testimony are reviewed only for 'manifest abuse of discretion.'" United States v. Jackman, 48 F.3d 1, 4 (1st Cir. 1995).

Allstate argues that the proffered testimony regarding insureds' reactions, confusion and feelings about the communications at issue is [*30]  not based on first-hand observations, and "does not fall within the category of allowable opinion testimony." Allstate 2 at 30 (citing United States v. Brown, 938 F.2d 1482 (1st Cir. 1991)). Bistreich's and Trager's opinions, and the market conduct study, among other proffered materials, are hearsay because the statements contained relating to consumer complaints were made by others and are being introduced for their truth. The proffered materials also do not fall under any recognized hearsay exception, because they were not made under circumstances that would otherwise guarantee their reliability. See Fed. R. Evid. 801(d)(1) (setting forth statements which are not hearsay), 801(d)(2) (same); 803 (setting forth hearsay exceptions); 804 (same).

Notably, the Department seems to concede that the proffered evidence is hearsay, and argues that it is admissible simply "because legislatures do not conform their decision-making process to the Federal Rules of Evidence, but may properly act on the basis of the best information available to them and on common sense, 'anecdotal' or 'hearsay' proof is admissible in the present context." Dept. Mem. 1 (Allstate) at 18. This [*31]  is not a recognized exception to hearsay under the Federal Rules of Evidence and the Department has not demonstrated to the Court that such material is otherwise reliable to justify the Court admitting it under the residual exception to hearsay. See Fed. R. Evid. 807.

The Court notes that the Department does not argue that its proffered materials are admissible under any specific, recognized hearsay exception. Although not articulated by the Department, at best, it seems to suggest that the proffered materials are admissible under the business records exception to the hearsay rule. However, the submissions do not qualify for such exception. This is because the materials were not "kept in the course of regularly conducted business activity" and it was not the "regular practice of [the] business activity to make the memorandum, report, record, or data compilation, as shown by the testimony of the custodian or other qualified witness." Fed. R. Evid. 803(6). Furthermore, records or observations made in the "regular course of conduct which may have some relationship to business [do] not put those statements in the class of records made in the regular course of business.  [*32]  . . ." Palmer v. Hoffman, 318 U.S. 109, 113-14, 87 L. Ed. 645, 63 S. Ct. 477 (1943) (emphasis added); Trager Tr. at 124 (stating that the market conduct study was an "out of the norm" review). n7 If that were the case, "the probability of trustworthiness of records because they [are] routine reflections of the day to day operations of a business would be forgotten as the basis of the rule." Palmer, 318 U.S. at 114. The fact that the proffered opinions relate to the insurance business does not offer the Court the reliability that is required by the business records exception. The Court also notes that the repair shop lobby's influence on the market conduct study casts further doubt on its reliability, relevance and probative value.

 

n7 Although the Court holds that the market conduct study and other proffered materials are inadmissible and offer little reliable or relevant evidence, the Court notes that Trager, in reporting the results of the market conduct study, stated that the survey was "mathematically imperfect" and noted that the survey did not question whether insureds felt "coerced or misled," further demonstrating the unreliability of the study. Trager Aff. PP 6, 9. Additionally, the study itself demonstrated that a majority of insureds still choose their own repair facilities rather than going to repair facilities chosen by insurers. For example, in the case of Allstate, three times as many insureds who responded to the survey selected their own repair facilities. Shane Aff., Ex. 28 at NY 01364. In the case of General Accident Insurance Company, insureds chose their own repair facilities five times as often as the insurer chose the repair facilities. Id., Ex. 30 at 006322. In the case of State Farm Insurance Company, insureds chose their own repair facilities in over 90% of the responses to the survey. Id., Ex. 31 at 006239.

 

 [*33]

The Department relies primarily on National Amusements, Inc. v. Town of Dedham, 43 F.3d 731, 742 (1st Cir. 1995) (citing City of Renton v. Playtime Theatres, Inc., 475 U.S. 41, 51-52, 89 L. Ed. 2d 29, 106 S. Ct. 925 (1986)), in which the court stated that

 

 

[a] legislative body can act without first acquiring irrefutable proof. In other words, lawmakers need not . . . confirm each honking horn before acting to abate noise levels. Instead, a legislative body, acting in furtherance of the public interest, is entitled to rely on whatever evidence it reasonably believe[s] to be relevant to the problem at hand.

 

 

Id. The Department's reliance on that case, however, is misplaced, as the facts of that case are readily distinguishable from the case at bar.

In National Amusements, the controversy was whether the state could assert substantial government interests based on residents' complaints aired at meetings with their local representatives.  National Amusements, 43 F.3d at 741. The evidence at issue consisted of direct testimony by residents regarding their own experiences and was provided at public meetings that [*34]  were recorded, the transcriptions of which were provided to the court.  Id. at 741-42. In both National Amusement and City of Renton, the controversies involved the legislatures' motives. Here, in contrast, the Department wants the Court to examine the proffered material for the truth of the matter asserted, namely, that insureds feel and are coerced by insurers' claim procedures.

Allstate objects to the introduction of certain of the Department's documents that it was precluded from examining in connection with discovery in this case, pursuant to a "deliberative process privilege" granted by Magistrate Judge Theodore H. Katz. When seeking this privilege, the Department argued that the privilege outweighed the need for disclosure because "neither the Department's nor its employees' views would or should have any bearing on this Court's constitutional inquiry, . . . . specifically representing that it would not ask the Court to rely on those views." Allstate 2 at 32. Judge Katz stated that Section 2610(b)'s constitutionality could be judged on the basis of "the statutory scheme, the legislative history, other publicly available material, and all of the factual [*35]  material produced by [the Department] related to its enforcement of the statute. . . . Moreover. . . opinion-related documents at issue are neither essential nor highly probative. . . ." Memorandum Opinion and Order, dated August 10, 1998, Shane Aff., Ex. 16 at 11-12. "What individuals in the Insurance Department thought about a statute is not determinative of its constitutionality; that is to be judged on objective, factual information offered to support the purported state justification of the statute." Id. at 13. Nevertheless, the Department now relies on materials for which it sought a privilege. However, such a privilege cannot be used as both a shield and a sword, and the Court would be permitting just that if it admitted this material. See United States v. Bilzerian, 926 F.2d 1285, 1292 (2d Cir. 1991). Furthermore, it is questionable whether such evidence is probative at all. Therefore, the Court shall not consider it in its decision.

Lastly, Allstate challenges submissions from the repair shop industry about the importance of the law from the industry's perspective. The submissions include petitions and customer and competitor repair shop complaints.  [*36]  Allstate argues that this material is inadmissible hearsay which is "doubly unreliable by the participation of self-interested intermediaries." Allstate 2 at 33 (citing Palmer, 318 U.S. at 111-14 (stating that the business records exception to the hearsay rule is inapplicable to the gathering or recording of non-essential information that is not useful in business operation)). The Court agrees that these materials from the repair shop industry are hearsay because they are being offered to prove the truth of the matter asserted, namely, that insurers are engaging in prohibited "steering" and that consumers feel coerced. The Department has not demonstrated the trustworthiness of its submissions so as to otherwise introduce them into evidence. The Court holds that the proffered materials do not fall under any recognized hearsay exception and, therefore, are inadmissible.

The Court examined all of the proffered material to determine admissibility and considered the parties arguments on this issue. The Department has neither demonstrated the admissibility of its proffered evidence nor provided law that supports a conclusion that the challenged material should be admitted [*37]  for the purpose of the parties' motions for summary judgement. To the extent that the materials supplied are inadmissible, the Court did not consider them in its decisions. Although the Court determines that such material should be excluded for the purpose of the parties' motions for summary judgment, the Court notes that, even if it had admitted the proffered material, the Court's ultimate conclusion as to the constitutionality of Section 2610(b), as applied to Plaintiffs, would have been the same.

 

C. Standing and Affirmative Defenses

 

1. Allstate

The Department argues that Allstate lacks standing to challenge the Enforcement Letter, as such a challenge would amount to a suit to rescind its Enforcement Letter with the Department. The Department also argues that the affirmative defenses of estoppel and laches, as well as the statute of limitations, bar Allstate from bringing the present lawsuit. Dept. Mem. (Allstate) at 2. The Department bears the burden of pleading and proving these affirmative defenses.

 

a) Standing

Allstate clearly fulfills the constitutional minimum requirement for standing in an Article III Court. As the Second Circuit explained [*38]  in Jaghory v. New York State Department of Education:

 

 

at an irreducible minimum, Article III requires the party who invokes the court's authority to show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant. . . . The keystone for determining injury in fact is the requirement that it be distinct and palpable, and, conversely, that it not be abstract or conjectural or hypothetical. . . . This injury must be fairly traceable to the challenged action of the defendant. . . .

 

 

 131 F.3d 326, 330 (2d Cir. 1997) (citations omitted).

Allstate suffers a threatened injury because the Department has threatened to fine Allstate, and has threatened Allstate with other legal action, if it enacts a program similar to the PRO program. A "well-founded fear that the law will be enforced" against a party meets Article III's standing requirements. See Virginia v. American Booksellers Asso., 484 U.S. 383, 393, 108 S. Ct. 636, 98 L. Ed. 2d 782 (1988) (citing cases); Virginia v. Booksellers Association, 484 U.S. 383, 384, 98 L. Ed. 2d 782, 108 S. Ct. 636 (1988) ("The pre-enforcement nature of the suit is irrelevant, since plaintiffs [*39]  have alleged an actual and well-founded fear that the statute will be enforced against them, and there is no reason to assume otherwise. Indeed, the statute's alleged danger is, in large measure, one of self-censorship; a harm that can be realized even without an actual prosecution."). The Enforcement Letter and Circular 4 both demonstrate the Department's threat to take action through punishment and censorship against Allstate in the event that Allstate attempts to employ any programs similar to the PRO program. Therefore, there is a causal connection that is "fairly traceable" between the injury and the challenged threat of action by the Department, thereby justifying a holding that Allstate has standing to bring the instant action.

In arguing that Allstate cannot meet the standing requirements, the Department focuses on Allstate's Enforcement Letter, pursuant to which Allstate agreed not to engage in certain practices in return for not being subject to further investigation and possible legal action. Dept. Mem. 1 (Allstate) at 24. The Department argues that Allstate voluntarily entered into the explicit terms of the agreement and was aware of its rights when doing so, and that [*40]  the present lawsuit is merely a contractual suit to rescind the Enforcement Letter, rather than a legitimate lawsuit concerning Allstate's constitutional rights. The Department further argues that, because Allstate agreed in the Enforcement Letter not to engage in certain practices, Section 2610(b) was never applied to it. Therefore, the Department suggests, Allstate cannot maintain an as-applied constitutional challenge, because "if Allstate has been injured, that injury is not 'fairly traceable' to the statute, but, rather, to Allstate's decision to enter into the [Enforcement Letter]." Id. However, even with the existence of the Enforcement Letter, Allstate still is subject to the allegedly unconstitutional Section 2610(b), and may be subject to disciplinary action, including legal action, for violation of such statute. Furthermore, Allstate claims that it entered into the Enforcement Letter because it was faced with a threat of legal action and fines for alleged breach of Section 2610(b). It is important to consider the events leading up to the execution of the Enforcement Letter and to examine the language of the Enforcement Letter itself, when determining its validity.  [*41]

As discussed above, the Enforcement Letter arose out of the Department's allegation of Allstate's violation of Section 2610(b) and was "extracted from Allstate under a threat of penalties for alleged violation of [such section]." Allstate 2 at 1. The Enforcement Letter tracks the language of Section 2610(b) and expressly states that Allstate "recognize[s] that failure to adhere to any of the foregoing may be regarded by the Department as a violation of Section 2610 of the New York Insurance Law." Enforcement Letter, Shane Aff., Ex. 34 at 2. The Enforcement Letter memorialized the Department's interpretation of Section 2610(b) with respect to all insurers. Allstate 1 at 48-49. The Enforcement Letter, Circular 4 and Section 2610(b) must be examined together in order to determine the totality of the limitation on protected commercial speech. The Enforcement Letter is directly and inextricably tied to Section 2610(b) and was drafted in response to the Department's threat of further onerous investigations, fines and possible legal action against Allstate. The Enforcement Letter was, in essence, Allstate's agreement to abide by the existing law, as interpreted by the Department. Therefore,  [*42]  this lawsuit is not merely one to rescind a contract and involves legitimate constitutional rights and concerns. Allstate has demonstrated that it has suffered injury and was threatened with future injury as a result of the application and enforcement of Section 2610(b) against it, and therefore, has satisfied Article III's minimum requirement for standing.

 

b) Estoppel and Laches

The Department also argues that Allstate delayed in bringing this lawsuit, depriving it of standing under the equitable doctrine of laches. To state a valid defense of laches, a party must establish that the other party knew of the alleged misconduct, inexcusably delayed in taking action, and that the party asserting this defense was prejudiced by such delay.  Ikelionwu v. United States, 150 F.3d 233, 237 (2d Cir. 1998).

The Department claims that although Allstate became aware of the claims against it in March of 1993, Allstate did not bring its lawsuit until January 31, 1997. The Department alleges that this delay prejudiced it because it can no longer investigate Allstate's practices that were in place in 1993. Dept. Mem. 1 (Allstate) at 24, 25. However, the Department has not [*43]  shown any substantial damage or change of position based on its alleged reliance on Allstate's decision not to sue in 1993 or 1994. Furthermore, the Department's arguments that it was prejudiced because important evidence has been destroyed due to such reliance is ill-supported and unconvincing. Importantly, the Department acknowledges that it suspected that Section 2610(b) might be challenged in the courts. Dept. Mem., dated February 18, 1993, Shane Aff., Ex. 26 at 1 ("We should proceed under the assumption that steering was taking place and, if necessary, let the courts decide."). It is difficult for the Court to believe that the Department destroyed essential and important evidence on the basis of Allstate's inaction, considering that the Department threatened Allstate with legal action on this issue and indicated its expectation that Section 2610(b) would be challenged in the courts. The Department cannot prove inexcusable delay or prejudice and, therefore, cannot maintain a valid affirmative defense of laches.

The Department's argument that the doctrine of estoppel may be invoked is incorrect, as the doctrine of estoppel finds its basis in contract law, and the Court has held [*44]  that this action is not an action to rescind a contract. Furthermore, to state a valid defense of estoppel, a party must demonstrate material representation, reasonable reliance and substantial damage or change of position.  Lee v. Burkhart, 991 F.2d 1004, 1009 (2d Cir. 1993). As in the case of the Department's laches defense, the Department cannot prove reasonable reliance, damage or change of position, as is required for a meritorious estoppel defense. Therefore, the Department cannot maintain a valid estoppel defense.

 

c) Statute of Limitations

The Department also argues that Allstate's challenge is barred by the statute of limitations, arguing that Section 1983 provides for a three year statute of limitations and that such statute began running on March 17, 1993, when Allstate received notice of the Department's investigations and claims and Allstate's alternatives. Allstate argues that this is a case of a continuing constitutional violation, based on a statute that currently is enforced by the Department and may be enforced against Allstate. The Court agrees that the Department's and Allstate's past exchanges do not justify use of a "single act" limitations [*45]  period. Rather, the doctrine of continuing harm applies. The doctrine of "continuing harm" precludes a statute of limitations defense where the plaintiff suffers a continuing harm. Because Section 2610(b) and its application to Plaintiffs is part of a "continuing policy" Perez v. Laredo Junior College, 706 F.2d 731, 733-34 (5th Cir. 1983), the Departments' statute of limitations defense is without merit.

 

2. GEICO

The Department similarly argues that GEICO does not have standing to bring this challenge because it suffered no injury. Like Allstate, GEICO does not have to show enforcement of the statute against it in order to demonstrate injury in fact.  Virginia, 484 U.S. at 384. The Department's denials of the Endorsements indicate that, in the opinion of the Department, the Endorsements violate Section 2610 because they require that insureds expressly request a repair shop at the time of loss. GEICO 1 at 5. The Department asserts that "by having the consumer agree to 'complete' the repairs at the recommended repair shop, [the Endorsement] removes the right of the insured to choose to take money, rather than repair his or her vehicle, in [*46]  violation of New York Insurance Law [Section] 3411(i)." Dept. Mem. 1 (GEICO) at 7. The language of the Endorsement states that "you agree with us that covered repairs will be completed at a repair shop recommended by us." Aff. of Elizabeth A. Forman, Vol. III (dated December 22, 1998) ("Forman Aff."), Ex. 33 at NY 2437 (emphasis in original). The language "will be completed," however, refers to the "covered repairs" and addresses situations in which the insured decides to actually have the vehicle repaired. The Endorsement does not mandate that the insured have the vehicle repaired rather than accept the money in place of actual repairs. This is evidenced by the language of the Endorsement itself, which states that "if you do not have your auto repaired at a repair facility recommended by us, you will be paid the amount of the estimate prepared by us and/or the preferred repairer." Id. The inclusion of this language in the Endorsement expressly demonstrates that it preserves insureds' right to accept money in place of actual vehicle repairs.

The Department further argues that the basis for its rejection of the Endorsement was that it violates Section 2610(a) because [*47]  it mandates the use of a particular repair shop chosen by the insurer. However, it is clear to the Court that the Department was referring to Section 2610(b), as the language of the denial of the Endorsement tracks that of Section 2610(b). Thus, Section 2610(b) acted as an obstacle to GEICO's desired communication.

Furthermore, Circular Letter 5, dated May 1, 1990 ("Circular 5"), advises all insurers that they should not recommend or suggest that repairs be made in a particular place unless a referral is specifically requested by an insured, and violations of this "would be considered unfair claims settlement practices and subject to disciplinary action" in accordance with the Insurance Law. Circular 5, Shane Aff., Ex. 20 at NY 00028. As discussed above, in the case of Allstate, this "threatened" action amounts to injury in fact under Jaghory, 131 F.3d at 330. Additionally, because Circular 4 interpreted Section 2610(b) and because Section 2610 was the basis for the Department's denial of the Endorsement, the Court rejects the Department's position that GEICO was not injured.

Lastly, the Department argues that "approval of the proposed endorsement would require that [*48]  the Department exceed its delegated authority" because the legislature has declined to pass legislation that would have permitted this kind of endorsement. Dept. Mem. 1 (GEICO) at 8. This reasoning is circular. The Department seems to be arguing simply that it did not approve the Endorsement because of the prohibition in Section 2610(b), which is exactly GEICO's contention. Therefore, the Department's remaining attack on GEICO's standing is without merit.

Accordingly, the Court rejects the Department's standing arguments and finds that it did not meet its burden of proving the affirmative defenses of estoppel, laches and statute of limitations and both Allstate and GEICO have standing to bring this action. Plaintiffs have suffered injuries in fact, and the adjudication of these cases involve concrete legal issues. Therefore, this decision does not amount to an "advisory opinion," and it is proper for the Court to pass upon Section 2610(b)'s constitutionality, as applied to Plaintiffs.  United Public Workers v. Mitchell, 330 U.S. 75, 89-90, 91 L. Ed. 754, 67 S. Ct. 556 (1947).

 

D. Protection of Commercial Speech

Plaintiffs challenge the constitutionality [*49]  of Section 2610(b), which provides that in processing any automobile insurance claim, the insurer shall not, unless expressly requested by the insured, recommend or suggest that repairs be made by a particular repair shop. The Free Speech Clause of the First Amendment provides that "Congress shall make no law . . . abridging the freedom of speech, or of the press. . . ." U.S. Const. Amend. I. The essence of the protection of free speech is that Congress may not regulate speech except in cases of extraordinary need and with the exercise of a special degree of care while not disabling Congress or the states from responding to serious problems. See Federal Communication Commission v. Pacifica Foundation, 438 U.S. 726, 57 L. Ed. 2d 1073, 98 S. Ct. 3026 (1978); Young v. American Mini Theatres, Inc., 427 U.S. 50, 49 L. Ed. 2d 310, 96 S. Ct. 2440 (1976); Chaplinsky v. New Hampshire, 315 U.S. 568, 86 L. Ed. 1031, 62 S. Ct. 766 (1942); Schenck v. United States, 249 U.S. 47, 51-52, 63 L. Ed. 470, 39 S. Ct. 247 (1919). The history of the Supreme Court's First Amendment jurisprudence is one of continual development, as new circumstances [*50]  arise requiring different adaptations, applications and interpretations of the Supreme Court's precedents. See, e.g., New York Times Co. v. Sullivan, 376 U.S. 254, 11 L. Ed. 2d 686, 84 S. Ct. 710 (1964) (allowing criticism of public officials to be regulated by civil libel only if the plaintiff shows actual malice); Red Lion Broadcasting Co. v. Federal Communication Commission, 395 U.S. 367, 23 L. Ed. 2d 371, 89 S. Ct. 1794 (1969) (employing a flexible standard to over-the-air broadcast); Gertz v. Robert Welch, Inc., 418 U.S. 323, 41 L. Ed. 2d 789, 94 S. Ct. 2997 (1974) (allowing greater regulation of speech harming individuals who are not public officials, but still requiring a negligence standard); Central Hudson Gas & Elec. Corp., 447 U.S. 557, 566, 65 L. Ed. 2d 341, 100 S. Ct. 2343 (1980) (restriction on commercial speech cannot be "more extensive than is necessary" to serve a "substantial" government interest); Arkansas Writers' Project, Inc. v. Ragland, 481 U.S. 221, 231-232, 95 L. Ed. 2d 209, 107 S. Ct. 1722 (1987) (requiring a "compelling state interest" and a "narrowly drawn" means in the [*51]  context of differential taxation of media); Sable Communications of California, Inc. v. Federal Communications Commission, 492 U.S. 115, 126, 131, 106 L. Ed. 2d 93, 109 S. Ct. 2829 (1989) (applying "compelling interest," "least restrictive means," and "narrowly tailored" requirements to indecent telephone communications); Turner Broadcasting System, Inc. v. Federal Communication Commission, 512 U.S. 622, 641, 129 L. Ed. 2d 497, 114 S. Ct. 2445 (1994) (using "heightened scrutiny" to address content-neutral regulations of cable system broadcasts).

Constitutional protection for commercial speech is a fairly recent development in the Supreme Court's First Amendment jurisprudence. Until the mid-1970's, the Supreme Court adhered to the broad rule that the Constitution imposes no restraint on governments with respect to purely commercial advertising.  Valentine v. Chrestensen, 316 U.S. 52, 54, 86 L. Ed. 1262, 62 S. Ct. 920 (1942). The Supreme Court has continued to define the appropriate constitutional limitation on commercial speech during the past 25 years. See Florida Bar v. Went For It, 515 U.S. 618, 622-23, 132 L. Ed. 2d 541, 115 S. Ct. 2371 (1995) [*52]  (listing history and holdings of the Court's commercial speech cases). Even today, First Amendment protection of commercial speech is not absolute. "Commercial speech [enjoys] a limited measure of protection, commensurate with its subordinate position on the scale of First Amendment values, and is subject to 'modes of regulation that might be impermissible in the realm of non-commercial expression.'" Board of Trustees of State Univ. of N.Y. v. Fox, 492 U.S. 469, 477, 106 L. Ed. 2d 388, 109 S. Ct. 3028 (1989) (quoting Ohralik v. Ohio State Bar Assn., 436 U.S. 447, 456, 56 L. Ed. 2d 444, 98 S. Ct. 1912 (1978)). n8

 

n8 It should be noted that despite the Department's heavy reliance on the Supreme Court's holding in Ohralik in support of its argument that Section 2610(b) is a constitutional regulation of commercial speech, the facts of that case are very different than the facts of the case at bar. Specifically, Ohralik involved an attorney who provided unsolicited advice to victims of personal injury cases and their family members following accidents or other tragedies.

 

 [*53]

In Central Hudson, the Supreme Court defined "commercial speech" as "expression related solely to the economic interests of the speaker and its audience" and as "speech proposing a commercial transaction." Central Hudson, 447 U.S. at 561-62. The communications and programs at issue, at a minimum, clearly constitute "commercial speech" deserving of First Amendment protection, as they relate to the economic interests of the insurers' business and the insureds' insurance coverage, and propose commercial transactions.  Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 48 L. Ed. 2d 346, 96 S. Ct. 1817 (1976).

 

1. Section 2610(b) Regulates Speech, Not Conduct

The Department argues that Section 2610(b) regulates conduct rather than speech, stating that "there is very little speech within the purview of the statute, but rather, primarily commercial conduct by insurance companies." Dept. Mem. 1(Allstate) at 32. The Department argues that the prohibitions of Section 2610(b), as applied in these cases, effectively enforce the ban on insurers' attempts to require or direct insureds to use particular repair shops. [*54]  In support, the Department argues that, "in essence, all the statute does is recognize that an insurer's 'recommendation' to use a referral service at the time the insured makes a claim . . . may sound awfully similar to a requirement or direction to use that same service, particularly in light of the leverage the insurer has over its policyholder." Id. at 32. Furthermore, the Department argues that "the primary communications at issue are oral, or directed toward inducing an oral communication, and cannot be monitored effectively by a State regulatory agency. . . ." Id. By virtue of this statement, the Department seems to concede that the statute indeed does restrict and regulate speech.

The Court finds these arguments unpersuasive and contrary to the Supreme Court's well-settled law. It is plain to the Court that the statute at issue regulates speech, not action or conduct. The only conduct that the State seeks to punish through the enforcement of Section 2610(b) is the communication and conveyance of a message. However, conduct of that nature is considered to be speech. See Cohen v. California, 403 U.S. 15, 18, 29 L. Ed. 2d 284, 91 S. Ct. 1780 (1971);  [*55]  United States v. O'Brien, 391 U.S. 367, 20 L. Ed. 2d 672, 88 S. Ct. 1673 (1968); Wiegand v. Seaver, 504 F.2d 303, 305 (5th Cir. 1974). Furthermore, with respect to the signs challenged in the Allstate action, the Supreme Court has made it clear that signs are a form of expression entitled to protection by the Free Speech Clause of the First Amendment. See City of Ladue v. Gilleo, 512 U.S. 43, 57-59, 129 L. Ed. 2d 36, 114 S. Ct. 2038 (1994). For the above reasons, the Court holds that Section 2610(b) regulates speech.

 

2. Section 2610(b) Regulates Content

A content-neutral restriction is one that the government has not implemented "because of its message, its ideas, its subject matter or its content." Longo v. United States Postal Service, 953 F.2d 790, 796 (2d Cir. 1992) (quoting Police Dep't v. Mosley, 408 U.S. 92, 95, 33 L. Ed. 2d 212, 92 S. Ct. 2286 (1972)). The Department argues that "so little evidence of 'content' and of a content-based reason for the restriction and administration of the statute at issue appears in the record that the provision fairly may be viewed as a time, place and [*56]  manner restriction." Dept. Mem. 1 (Allstate) at 37.

Content neutral time, place and manner restrictions may be permissible if they are narrowly tailored to serve a substantial government interest and leave ample alternative channels for expression and communication of information.  City of Renton, 475 U.S. at 63. In support of its argument that Section 2610(b) is constitutional, the Department points out that Section 2610(b) does not prohibit all methods of informing insureds of the statute. However, "regulation of a medium inevitably affects communication itself." City of Ladue, 512 U.S. at 48, 55 (expressing concern with laws that foreclose an entire medium of expression) (citations omitted). The principle inquiry in determining content neutrality is whether the government has adopted a regulation of speech because of disagreement with the message it conveys. See Clark v. Community for Creative Non-Violence, 468 U.S. 288, 295, 82 L. Ed. 2d 221, 104 S. Ct. 3065 (1984). Here, the Department has interpreted and enforced Section 2610(b) exactly because of messages that insurers may convey to insureds.

Despite the Department's argument [*57]  to the contrary, the Court finds that Section 2610(b) is clearly a content-based restriction. The Supreme Court has held that "mandating speech that a speaker would not otherwise make necessarily alters the content of the speech," and, therefore, is a content-based regulation of speech.  Riley v. National Federation of the Blind of North Carolina, Inc., 487 U.S. 781, 795, 101 L. Ed. 2d 669, 108 S. Ct. 2667 (1988) (citation omitted). Applying this logic to the instant case, prohibiting speech that a speaker would otherwise make similarly alters and regulates the content of the speech. Through Section 2610(b), the State seeks to control the dialogue insurance companies have with insureds.

Additionally, "regulations . . . that allow expression relative to some topics but not to others, have been held unconstitutional as content-based restrictions." Longo, 953 F.2d at 796 (citations omitted). Here, Section 2610(b) prohibits insurers from engaging in communication regarding the specific topic of insurer-sponsored repair programs, while permitting insurers to discuss the broader subjects of repairs, estimates, inspections, and repair shop choice, among [*58]  other subjects. Allstate argues that the State "requires insurer[s] to tell insureds a partial truth about repair shop choice, by posting a sign setting forth the text of Section 2610(a) (but not Section 2610(b))." Allstate 2 at 13 (emphasis in original). The Court agrees. Because it is clear that the State has applied Section 2610(b) to allow or compel certain messages and to restrict others based on the content of such messages, Section 2610(b) is a content-based regulation of speech.

 

3. Section 2610(b) Regulates Both Commercial and Non-Commercial Speech

Allstate argues that the speech at issue has both commercial and non-commercial elements. The Court agrees. Indeed, "significant speech often comprises both commercial and non-commercial elements." Bolger v. Youngs Drug Products Corp, 463 U.S. 60, 82, 77 L. Ed. 2d 469, 103 S. Ct. 2875 (1983). The Supreme Court's holdings have demonstrated that "the mere fact that [the communications at issue is] conceded to be advertisements clearly does not compel the conclusion that they are commercial speech." Id. at 66 (citing New York Times, 376 U.S. at 265-66). In cases where [*59]  commercial speech is "inextricably intertwined with otherwise fully protected speech [the] level of First Amendment scrutiny must depend upon the nature of the speech taken as a whole. . . ." Id. (internal quotations omitted).  Board of Trustees, 492 U.S. at 474. Here, although the Court finds that the statute restricts some commercial speech and some non-commercial speech, it would be both artificial and impracticable to apply different tests to the various possible scenarios to which Section 2610(b) could apply.  Riley, 487 U.S. at 796 (citation omitted).

Restrictions of non-commercial speech are evaluated under strict scrutiny, which requires that any restriction on speech be narrowly tailored to serve a compelling governmental interest.  Nixon v. Shrink Missouri Government PAC, 528 U.S. 377, 145 L. Ed. 2d 886, 120 S. Ct. 897, 926 (2000). This is a significantly higher standard than the standard used to evaluate restrictions on commercial speech, which require merely that the government interest be "substantial" rather than "compelling." n9 The Department itself interpreted Section 2610(b) as prohibiting the distribution of copies of the [*60]  text of the statute. Circular 4, Shane Aff., Ex. 1 at 01615. Prohibiting the distribution of the language of a statute is clearly not a restriction of purely commercial speech and this prohibition is not narrowly tailored to serve a compelling government interest. Indeed, this prohibition thwarts the State's asserted interest in protecting insureds and informing the public of its rights. See Board of Trustees, 492 U.S. at 482 (noting that a university regulation that prohibited tutoring, legal advice and medical consultation, in addition to certain commercial speech, affected non-commercial speech).

 

n9 See discussion infra Part D.4 (discussing the standard for restrictions on commercial speech).

 

The above notwithstanding, for the purposes of deciding this case, the Court assumes that all of the speech at issue is what the Supreme Court has labeled "core commercial speech," and is subject to the protection afforded it. As discussed herein, the Court holds that Section 2610(b) does not [*61]  withstand the less-rigorous test for evaluating restrictions on commercial speech. Therefore, it is unnecessary for the Court to examine the statute under the stricter standard applied to non-commercial speech. n10

 

n10 Allstate also challenges Section 2610(b) on overbreadth grounds. The Supreme Court has recognized that "the overbreadth doctrine does not apply to commercial speech" and is only applicable to non-commercial speech First Amendment challenges.  Hoffman v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 497, 71 L. Ed. 2d 362, 102 S. Ct. 1186 (1982).

In Board of Trustees, the Supreme Court explained the similarities and important distinctions between an as-applied and an overbreadth challenge to a statute that regulates commercial speech. The last prong of an as-applied challenge, which requires that a statute that regulates commercial speech be "narrowly tailored" to achieve the asserted substantial government interest, prevents a statute from being overbroad.  Board of Trustees, 492 U.S. at 482. "The overbreadth doctrine differs from that rule principally in this: The person invoking the commercial-speech narrow-tailoring rule asserts that the acts of his that are the subject of the litigation fall outside what a properly drawn prohibition could cover." Id. Furthermore, in cases "where an overbreadth challenge is successful, the statute is obviously invalid in all its applications, since every person to whom it is applied can defend on the basis of the same overbreadth. A successful attack upon a commercial speech restriction on [as-applied] grounds, by contrast, does not assure a defense to those whose own commercial solicitation can be constitutionally proscribed -- though obviously the rationale of the narrow-tailoring holding may be so broad as to render the statute effectively unenforceable." Id. at 483. As the Supreme Court explained, overbreadth challenges provide a cause of action for those who have not sustained injury themselves.

The Supreme Court explained that "the First Amendment doctrine of overbreadth was designed as a "departure from traditional rules of standing, [in order] to enable persons who are themselves unharmed by the defect in a statute nevertheless to challenge that statute on the ground that it may conceivably be applied unconstitutionally to others, in other situations not before the Court." Id. at 484. The Supreme Court explains that in cases where a party can attack an overbreadth challenge directly, via the third prong of the Central Hudson test for as-applied challenges (requiring that a statute be narrowly drawn to serve the asserted government interest), the party cannot then invoke the overbreadth doctrine. Applying this reasoning, the Court finds that Plaintiffs have valid as-applied challenges to Section 2610(b). As the Court finds that Section 2610(b) violates Plaintiffs right to commercial free speech, it is inappropriate to partake in an overbreadth analysis here.

 

 [*62]

 

4. Level of Scrutiny Afforded Commercial Speech

A presumption of constitutionality attaches to legislative enactments, and a party challenging a statute bears the burden of overcoming this presumption.  Schilb v. Kuebel, 404 U.S. 357, 30 L. Ed. 2d 502, 92 S. Ct. 479 (1971). Restrictions on commercial speech are analyzed under the "intermediate scrutiny" framework set forth by the Supreme Court in Central Hudson in order to determine whether a challenged restriction is unconstitutional as-applied to a particular plaintiff or plaintiffs. Under Central Hudson, a government may freely regulate commercial speech that concerns unlawful activity or is misleading. 447 U.S. at 563-564. Commercial speech that is neither unlawful nor misleading may be regulated by a government only if: (1) the government asserts a substantial interest in support of its regulation; (2) the government demonstrates that the restriction on commercial speech directly and materially advances that interest; and (3) the regulation is "'narrowly drawn'" and not more extensive than necessary to serve the substantial government interest. Id. at 564-565.

In [*63]  the case of Allstate, the Department argues that the communications at issue are made under circumstances that may make them intrinsically coercive, deceptive or misleading, suggesting that the PRO program's language makes it difficult for a consumer to distinguish between requiring and recommending a repair shop. The PRO program leaves open the opportunity for insureds to choose their own repair shop. The fact that Allstate guarantees the work of the repair shops associated with their service does not mislead insureds and does not interfere with insureds' right to choose a non-participating repair shop. Rather, it simply provides the consumer with the added protection of a guarantee and an additional opportunity and choice. This is not misleading, coercive, or illegal.

The Department argues that the speech at issue in the GEICO case is misleading, coercive and unlawful because it fails to preserve consumers' rights to choose a repair facility (as required by Section 2610(a)) and to take the cash value of damage to his or her car (as required by Insurance Law Section 3411(i)), and is "coercive in that it forces the insured to believe he or she . . . must trade his or her right to [*64]  choose a repair facility in return for favorable rates." Dept. Mem. 1 (GEICO) at 23. Lastly, the Department argues that the proposed Endorsement is unfairly discriminatory, because it "gives economic advantage to those who accept it, even though they must retain the exact same right to choose a repair facility as other consumers (who do not accept the endorsement)." Id. at 25.

Contrary to the Department's arguments, under both the Allstate and the GEICO plans, consumers still have choices available to them. Although the State does have a legitimate interest in protecting consumers, the Court does not accept the notion that consumers' lack of intelligence requires the State to deprive them of options or limit their choices to those which the State thinks are acceptable. "Bans against truthful, non-misleading commercial speech rarely seek to protect consumers from either deception or overreaching, [rather,] they usually rest solely on the offensive assumption that the public will respond 'irrationally' to the truth." Central Hudson, 447 U.S. at 603. The Supreme Court spoke on this precise issue, stating that "a state legislature does not have the broad discretion [*65]  to suppress truthful, non-misleading information for paternalistic purposes. . . ." 44 Liquormart Inc. v. State of Rhode Island, 517 U.S. 484, 510, 134 L. Ed. 2d 711, 116 S. Ct. 1495 (1996).

The Court finds that the programs offered to Allstate's and GEICO's insureds afford them additional opportunities, protection and truthful information. The speech at issue is not deceptive, misleading, or illegal. See Allstate Insurance Company v. State of South Dakota, 871 F. Supp. 355, 358 (D.S.Dk.1994) (where there is no harm to the policyholder, "the speech is not deceptive or misleading so as to be subject to a ban"). Therefore, the challenged communications are afforded the protection of the First Amendment because they constitute commercial speech, and Section 2610(b) must be examined under the three-prong test set forth in Central Hudson to determine whether it is constitutional as applied to Plaintiffs.

 

a) Substantial Government Interest

A government bears the burden of identifying a substantial interest when justifying a challenged restriction on commercial speech. Edenfield v. Fane, 507 U.S. 761, 770, 123 L. Ed. 2d 543, 113 S. Ct. 1792 (1993); [*66]  Board of Trustees, 492 U.S. at 480; Bolger, 463 U.S. at 71, & n.20. The Supreme Court has recognized that the "states have a compelling interest in the practice of professions within their boundaries, and . . . as part of their power to protect the public health, safety, and other valid interests they have broad power to establish standards for licensing practitioners and regulating the practice of professions." Goldfarb v. Virginia State Bar, 421 U.S. 773, 792, 44 L. Ed. 2d 572, 95 S. Ct. 2004 (1975); see also Ohralik, 436 U.S. at 460; Cohen v. Hurley, 366 U.S. 117, 124, 6 L. Ed. 2d 156, 81 S. Ct. 954 (1961).

Here, the Department argues that it has a substantial interest in regulating the insurance industry. "As interpreted by the Department, and borne out by the facts that surround the referral process, the primary purpose of [the] restriction in Section 2610(b) of the Insurance Law is to protect the ability of consumers to choose the repair shops preferred by each individual consumer -- for whatever reason -- at the time when they make claims for automobile insurance coverage." Dept. Mem. 1 (Allstate)  [*67]  at 39. Specifically, the Department argues that the State has a substantial interest in: protecting consumer choice; permitting consumers to use independent repair shops; and protecting the existing business of smaller, independent repair shops, including shops which do not choose to or have to conform to insurer demands regarding parts, labor rates and discounts. Id. at 12. The Department asserts that it has an interest in preventing or regulating "practices on the part of insurers that, at the time of making a claim for automotive damage, impinge on the insured's ability to make a choice of an independent repair shop on the basis of convenience, quality, or other criteria deemed important by the individual insured." Department's Supplemental Responses to Interrogatories, Shane Aff., Ex. 3 at 5. The Department stated that:

 

 

The legislative history concerning Section [] 2610 reveals that the law was enacted to protect the public from coercive "steering" tactics practiced by some insurers and to ensure that the policyholder had complete freedom of choice in selecting a repair shop. . . . [An] insurer [uses] economic coercion by offering the insured who chooses the option [*68]  an economic advantage over other policyholders as an incentive for giving up his/her freedom of choice -- this is exactly the evil the statute seeks to avoid.

 

 

Department Memorandum of Law in In the Matter of Progressive Northeastern Ins. Co., et al., dated Aug. 29, Shane Aff., Ex. 35 at 5-6.

The sponsors of Section 2610(b) supported the bill, in part, because:

 

 

the setting in a collision claim is basically one of unsurness [sic] and uniqueness by [sic] the insured. In effect it does not happen that often and the insured is probably a victim of exploitation by highhanded insurance companies. This exploitation could be brought about by the insured being given [an estimate] and the insured although not requesting it is taken advantage of in his naivety by the insurance company directing the insured to an auto repairer . . . . It has been found that some of the shops to which the consumer is directed are inferior in repair and the end result is the consumer has inferior compensation.

 

 

 GBJ, 1974 Ch. 743, Shane Aff., Ex. 12 at 51-52. The Department also argues that it was concerned that insurers might use referral shops as bargaining devices [*69]  to reduce the amounts for which collision claims are settled, and that referral shops' incentives might be to satisfy insurers, presenting a possible danger to insureds. However, the Department presented no evidence in support of these concerns.

The State's Consumer Protection Board recommended approval of Section 2610(b) on the asserted ground that it would "prohibit[] a practice which has been reported to the Board wherein an insurer, having a tie in agreement with an auto body repair shop, will unduly coerce a consumer to have the repairs effected at a shop selected by the insurer." Id. at 5. The Division of the Budget supported Section 2610(b) because "many individuals are not aware of" Section 2610(a). Therefore, "the most effective means of ensuring that an insured is not forced or coerced by the insurer to take his car to a particular shop is to specifically prohibit carriers from making a suggestion concerning a particular shop unless such a recommendation is expressly requested by the insured." Id. at 15.

The Supreme Court acknowledged that a state's interest in regulating practices that may exert "undue influence" over the public is legitimate and important.  [*70]  44 Liquormart, 517 U.S. at 498; Ohralik, 436 U.S. at 462. For the reasons set forth by the Department and summarized above, the Court finds that the State has a substantial interest in regulating the insurance industry and in protecting consumers.

 

b) Interest Advanced

Because the Court has determined that the State has a substantial interest in regulating the automobile insurance industry, the Department must demonstrate that the challenged statute, as it is applied to Plaintiffs, "advances the Government's interest 'in a direct and material way,'" and the burden is on the State to do so.  Rubin v. Coors Brewing Co., 514 U.S. 476, 487, 131 L. Ed. 2d 532, 115 S. Ct. 1585 (1995) (quoting Edenfield, 507 U.S. at 767). The Department has failed to meet this burden.

It is well-settled that a "regulation may not be sustained if it provides only ineffective or remote support for the government's purpose." Central Hudson, 447 U.S. at 564. The Supreme Court has stressed that "this requirement is critical; otherwise, 'a State could with ease restrict commercial speech in the service of other objectives that could [*71]  not themselves justify a burden on commercial expression.'" Rubin, 514 U.S. at 487 (quoting Edenfield, 507 U.S. at 771).

The power to prohibit or to regulate particular conduct does not necessarily include the power to prohibit or regulate speech about such conduct. The Department cannot satisfy its burden of proving that Section 2610(b) advances the State interests "by mere speculation or conjecture; rather, a governmental body seeking to sustain a restriction on commercial speech must demonstrate that the harms it recites are real and that its restriction will in fact alleviate them to a material degree." Rubin, 514 U.S. at 487 (quoting Edenfield, 507 U.S. at 770-71).

Section 2610(b)'s requirement that insurers provide insureds with copies of Section 2610(a) and prohibiting insurers from providing insureds with copies of Section 2610(b) does not serve the asserted State interest of protecting consumers. Rather, the statute's provisions actually lead to consumers receiving misleading information. It is obvious to the Court that the glaring omission of 2610(b) from the available information to the insureds, in effect,  [*72]  keeps insureds in the dark about their rights and provides them with a half-truth. Although the Department expressly addresses this in a footnote, stating that "the purpose of the ban is not to keep consumers from learning about their rights, but rather, to keep Allstate, through the use of props, from forcing an otherwise uninvited sales pitch on an unwilling claimant," the end result is that the statute does keep consumers from learning about their rights. Dept. Mem. 1 (Allstate) at 47 n.38. It is particularly noteworthy that Policyholders, in their Amicus brief in support of the Department, stated that they "have a vital interest in seeing that policyholders have unlimited access to information so they can make informed decisions regarding the safe repair of their automobiles." Policyholders at 2 (emphasis added). In contrast, limited access to information is precisely the result of the application of Section 2610(b), as interpreted by the Department, on policy-holding consumers.

Furthermore, Plaintiffs have the expertise to distinguish among repair shops, and may be in the best position to assist customers in this decision. The New York State Legislature acknowledged [*73]  this fact when it created the window glass exception to Section 2610(b). The same reasoning that applied to that situation seems equally applicable here. The Supreme Court noted that "it is a matter of public interest that [economic decisions], in the aggregate, be intelligent and well informed. To this end the free flow of commercial information is indispensable." Virginia State Board of Pharmacy, 425 U.S. at 765. It appears that programs similar to the PRO program and the Endorsement may provide valuable assistance to consumers, including information regarding efficient, cost effective and expeditious manners of obtaining auto body repair services, which assistance is prevented from reaching them due to the application of Section 2610(b).

The Department's concession that "the abuse sought to be cured by this bill rarely, if ever occurs" demonstrates that the Department does not advance its interest in a direct and material way through the application of Section 2610(b), because there is little or no harm or abuse for the statute to address. Department Mem., dated June 11, 1973, Ex. 11 at 8; Department Mem., dated April 4, 1974, Ex. 13 at 1. Furthermore, Allstate [*74]  claims and the Department does not refute that "steering" complaints are reported in only .0077% of claims processed each year. Allstate 2 at 37. The Department set forth no reliable proof that consumers experience any confusion about their rights in the repair shop selection process, or in any way feel coerced or intimidated by insurers. Trager Tr. at 147-50 (stating that the questionnaire sent out as part of the market conduct review did not elicit information regarding whether insureds felt "required" to go to particular repair shops). Under both the Allstate and the GEICO programs, insureds remain free to select their own repair shops and the Department recognized that the PRO program has increased consumer satisfaction and has provided efficient, reliable service. Dept. Mem., dated March 10, 1993, Shane Aff., Ex. 24 at 2; Handwritten Mem. from Deborah Johnson, dated March 4, 1991, Shane Aff., Ex. 25 at 5.

The Department presents no sound proof that Section 2610(b) and the rules and regulations promulgated thereunder directly and materially advance the State interests. The Court finds nothing in the record to substantiate the Department's allegations of harm and potential harm [*75]  to insureds. See Florida Bar v. Went For It, 515 U.S. 618, 626, 132 L. Ed. 2d 541, 115 S. Ct. 2371 (1995). As the Court finds that the harms recited by the Department are not supported by reliable evidence and the challenged statute does not serve the State interests of alleviating the alleged harms to a material degree, the Court holds that Section 2610(b), as applied to Allstate and GEICO, does not materially advance the asserted State interests and therefore fails this prong of the Central Hudson test. On this ground, the Court finds as a matter of law that Section 2610(b) is unconstitutional as applied to Allstate and GEICO. n11

 

n11 The Court notes that both Allstate and GEICO argue that Section 2610(b) also violates Sections 1 and 8 of Article 1, the Free Speech Clause, of the Constitution of the State of New York. Because the Court finds that Section 2610(b) violates the United States Constitution, it is unnecessary for the Court to examine whether it is unconstitutional under the Constitution of the State of New York.

 

 [*76]

 

c) Narrowly Drawn

Because the Court finds that Section 2610(b) does not satisfy the second prong of the Central Hudson analysis, and can conclude on that ground alone that the statute is unconstitutional, it is unnecessary for the Court to turn the third prong of the Central Hudson analysis. Assuming, however, that Section 2610(b) did satisfy the second prong, it would still be unconstitutional as applied to Allstate and GEICO because it is not narrowly tailored to serve the asserted State interests.

The third prong of the Central Hudson test requires that the challenged statute be narrowly tailored to advance the asserted State interests. The Supreme Court defined such narrow tailoring as "a fit that is not necessarily perfect, but reasonable; that represents not necessarily the single best disposition but one whose scope is in proportion to the interest served." Board of Trustees, 492 U.S. at 480 (internal quotations omitted); see 44 Liquormart, 517 U.S. at 529 (O'Connor, J., concurring). This narrow tailoring does not require the State to employ the least restrictive means available. Rather, the challenged statute must indicate that its [*77]  proponent "'carefully calculated' the costs and benefits associated with the burden on speech imposed by its prohibition." Cincinnati v. Discovery Network, Inc., 507 U.S. 410, 417, 123 L. Ed. 2d 99, 113 S. Ct. 1505 (1993) (quoting Board of Trustees, 492 U.S. at 480).

In Rubin, the Supreme Court concluded that the effect of the challenged restriction on commercial speech had to be evaluated in the context of the entire regulatory scheme, rather than in isolation. The Supreme Court invalidated the challenged restriction in that case based on the "overall irrationality of the Government's regulatory scheme." Rubin, 514 U.S. at 488. Here, when considering the substantial State interests that the Department seeks to protect, it is clear that such interests are sufficiently served by Section 2610(a), which prohibits an insurer from requiring the use of a particular repair shop. See Allstate Insurance Company, 871 F. Supp. at 358 (invalidating similar statute, relying on the fact that "the State has . . . had legislation in place preventing an insurer from requiring the use of a particular . . . repair or replacement [*78]  business"). Consequently, the "fit" of Section 2610(b)'s application to Allstate and GEICO is not in proportion to the interest served and it is unnecessarily and disproportionately broad in the scope of the communication it prohibits.

With respect to the asserted interest in promoting competition and protecting the private repair shop industry, state antitrust laws provide a better "fit" in terms of the State interest in promoting and protecting competition. It is noteworthy that the Department concedes that

 

 

an antitrust consent order was entered barring certain insurance companies from practices which boycotted, coerced and intimidated automotive damage appraisers and repair shops to depress repair costs. . . . In 1977, for example, the repair industry also mounted an antitrust action to challenge insurer referral arrangements. And in the New York legislature, numerous and ongoing attempts have been made to introduce legislation on this subject.

 

 

Dept. Mem. 1 (Allstate) at 5 n.4. Even if an insurer enjoys reduced costs at the expense of independent repair shops, as the Department suggests, this does not affect the asserted State interest of protecting consumer insureds. [*79]

Plaintiffs argue that Section 2610(b) is overinclusive, in part, because it prohibits insurers from informing insureds of their programs and the insurers' ability to provide lists of monitored repair shops, and, in particular, because it prohibits insurers from informing insureds even of the existence of these prohibitions and the text of Section 2610(b). As the rejected Endorsement in GEICO demonstrates, Section 2610(b) does not permit an insurer to inform an insured of a repair-shop program at the time of policy purchase. As the Department's response to Allstate's PRO program and the Department's threats of action against Allstate for violation of Section 2610(b) demonstrate, Section 2610(b) does not permit insurers to inform insureds of such program at the time of an insurer loss. Plaintiffs can only provide information to insureds about similar programs if insureds specifically ask about referral programs or request a referral. The restrictions in Section 2610(b) do not leave open sufficient channels for communication and advertisement of the availability of repair shop programs to insureds. GEICO 1 at 17-18 (citing Virginia Pharmacy Board, 425 U.S. at 771). [*80] 

For all of the above reasons, the Court holds that Section 2610(b) violates the third prong of the Central Hudson test because it is overinclusive, restricts more speech then necessary and is not narrowly tailored to serve the asserted State interests. Therefore, the Court finds as a matter of law that Section 2610(b) is unconstitutional as applied to Allstate and GEICO on this ground, as well.

CONCLUSION

After reviewing the materials submitted in connection with these motions, including the Amicus submission, the Court concludes that the justifications offered by the Department are insufficient to support the prohibitions found in Section 2610(b). The Court finds as a matter of law that Section 2610(b) and the rules and regulations promulgated thereunder, the Enforcement Letter and Circular 4, are unconstitutional under the United States Constitution and under the Constitution of the State of New York, as applied to Allstate and GEICO. Accordingly, Plaintiffs' motions for summary judgement are granted and the Department's cross-motions for summary judgment are denied.

Accordingly, declaratory judgment is awarded to Plaintiffs. n12 The New York State Department [*81]  of Insurance is prohibited and enjoined from enforcing Section 2610(b) and the rules and regulations promulgated thereunder, including Circular 4, against Allstate and GEICO, as they unconstitutionally restricts commercial speech, as applied to Allstate and GEICO. Furthermore, the Enforcement Letter is hereby declared null and void, and is unenforceable against Allstate.

 

n12 For a court to have subject matter jurisdiction over a declaratory judgment action, there must be a substantial controversy between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. Furthermore, district courts possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act.  28 U.S.C.A. § 2201(a). In this combined action, for the reasons expounded upon herein, there is a substantial controversy regarding constitutionally protected commercial speech between parties with adverse legal interests, and such controversy is of sufficient immediacy. In the discretion of the Court, declaratory judgment is appropriate.

 

 [*82]

SO ORDERED.

Richard Conway Casey, U.S.D.J.

 

New York, New York

 

Dated: May 4, 2000