Allstate Insurance Co. v. Abbott

Full title: ALLSTATE INSURANCE CO. and STERLING COLLISION CENTERS, INC., Plaintiffs…

Court: United States District Court, N.D. Texas, Dallas Division

Date published: Mar 9, 2006

Civil Action No. 3:03-CV-2187-K (N.D. Tex. Mar. 9, 2006)

Opinion

Civil Action No. 3:03-CV-2187-K.

March 9, 2006

FINDINGS OF FACT AND CONCLUSIONS OF LAW

ED KINKEADE, District Judge

This case involves a dispute between Allstate Insurance Co. and Sterling Collision Centers, Inc. as Plaintiffs, Greg Abbott and Carol Keeton Strayhorn as Defendants in their official capacities as Attorney General of Texas and Texas Comptroller of Public Accounts, and the Automotive Service Association and Consumer Choice in Autobody Repair as Intervenors. Plaintiffs challenge a Texas law known as House Bill 1131 (codified as Tex. Occ. Code § 2306.002) as a violation of their rights to free commercial speech, and under the dormant commerce clause of the United States Constitution. The law generally prohibits insurance companies from owning a financial interest in autobody repair facilities. In these findings of fact and conclusions of law, the court will refer to the statute as H.B. 1131, as the parties have done throughout this litigation.

After a hearing held in November 2003, the court entered a preliminary injunction preventing the enforcement of H.B. 1131's speech restrictions. This matter then came before the court for a bench trial that was completed in October 2004. Having received and considered the evidence presented, and having heard the testimony of witnesses and the argument of counsel, the court finds that H.B. 1131 is constitutional, except for subsections (3), (4), (6) and (9) of Tex. Occ. Code § 2306.006, which violate the First Amendment of the United States Constitution. The court hereby renders the following Findings of Fact and Conclusions of Law. As permitted by Federal Rule of Civil Procedure 52(a), the court sets out its findings and conclusions as follows:

I. Findings of Fact

A. The Parties

1. Plaintiff Allstate Insurance Company ("Allstate") is an automobile insurer holding a market share of approximately 13% nationally and 15% in the state of Texas.

2. Plaintiff Sterling Collision Centers, Inc. ("Sterling") is a wholly-owned subsidiary of Allstate Non-Insurance Holdings, Inc., an indirect affiliate of Allstate. Sterling is a multi-state chain of collision repair facilities.

3. Defendant Greg Abbott ("Abbott") is the Attorney General of the State of Texas, and is being sued in his official capacity as an officer charged with the enforcement of Texas statutes.

4. Defendant Carol Keeton Strayhorn ("Strayhorn") is being sued in her official capacity as Comptroller of Public Accounts. Under Texas law, the Comptroller has authority to deposit civil penalties in the Texas general fund. Because the statute at issue in this case authorizes civil penalties, Strayhorn's role in enforcing and depositing such penalties depends upon the constitutionality of H.B. 1131.

5. Intervenor Automotive Service Association ("ASA") is a national organization of autobody shops.

6. Intervenor Consumers for Choice in Autobody Repair ("CCAR") is a group formed contemporaneously with the lobbying effort to pass H.B. 1131.

B. The Role of Insurance Companies in the Collision Repair Market

7. Due to the prevalence of automobile insurance, and the numerous state laws requiring motorists to maintain insurance, insurance companies play a significant role in funding automobile repairs. Insurance companies pay for approximately 90% of all collision repairs.

8. In many cases, the insurance company is the first point of contact for a customer after a collision. Allstate's consumer surveys confirmed that "because individuals typically do not know what to do after an automobile accident or where to take the car for repair, they frequently expect to get information from their agent." Allstate's consumer surveys further state that "an agent's recommendation holds a lot of weight with customers. Many say they have built a relationship over time and trust the agent's recommendation." As a result, insurance companies have the ability and market power to exert substantial influence and control over where its customer will take a wrecked car for repairs.

9. The role of the insurance company in the repair market creates tension, because there is an inherent conflict of interest between the insurance company's desire to make a profit for its shareholders, and thus to keep its costs of repair low, with the insurance company's obligation to provide its insured with a high quality and safe repair in accordance with the terms of its applicable insurance contracts.

10. The conflict between the insurance company and its customer has materialized on many levels, and is illustrated by the push to use non-OEM parts in connection with autobody repairs. OEM parts are "original equipment manufacturer" parts that are the same parts manufactured and used on a vehicle as originally built by the manufacturer. Often, however, repair shops use non-OEM parts, which include salvaged parts, recycled parts, used parts, and parts manufactured by third parties other than the original equipment manufacturer. OEM parts tend to be a better fit into a vehicle because those parts are the ones specifically designed for a particular vehicle. Non-OEM parts may not fit correctly, and often require significant time and effort to modify the parts for use in a vehicle. OEM parts are often of a higher quality, and may have a longer life span. But, OEM parts generally cost more than non-OEM parts.

11. Vehicle owners and repair shops often prefer to use OEM parts due to their better fit and quality. As a result, there is a natural tension between the interests of the insurance company and the consumer.

12. At trial, Allstate and Sterling contended that Sterling gives its customers the right to choose the type of parts that will be used to repair that customer's vehicle. On the authorization form completed by Sterling's customers, the choice that Sterling actually gives its customers is a choice between "Aftermarket Crash Parts" and "OEM Crash Parts." This form does not give Sterling's customers the option to require the use of new OEM parts for the repair of their cars.

C. Allstate's Role in the Collision Repair Services Process

13. The claims settlement process significantly impacts Allstate's ability to compete in the auto insurance market. Claims costs represent a large majority of an insurer's expenditures. Allstate pays approximately $5 billion in auto repair claims annually. These costs impact insurance premiums.

14. Allstate says consumer surveys indicate that a policyholder's experience with the claims process is integral to overall policyholder satisfaction. Although Allstate has not shown the court the actual survey results, a summary of these surveys provided by Allstate shows that a strong relationship exists between claims satisfaction and rates of policyholder defection to other insurance carriers. However, Allstate's research also shows that completely satisfied claimants are still the majority of policyholders who "defect" to another insurance carrier.

15. Claims handling satisfaction is important to Allstate because 90 percent of its auto insurance business comes from policyholders who renew their policies with Allstate.

16. To encourage policyholder renewals, Allstate wants to ensure that its policyholders are satisfied with the entire claims process and that the process runs as smoothly and efficiently as possible.

17. For repairable vehicles, Allstate policyholders may choose to accept payment from Allstate for the reasonable cost of the repair (allowing the customer to either retain the money or choose a shop of his or her choice) or go to a recommended collision repair shop with which Allstate has an ongoing relationship. For this latter form of settlement, Allstate becomes the direct purchaser — and payor — for the repair services.

18. Regardless of the outcome of this case, policyholders will still be able to choose either option.

19. By obtaining efficient, high-quality repairs, Allstate is able to satisfy its claimants and compete effectively in the car insurance market.

D. Allstate's Experience in the Collision Repair Market

20. Allstate's single largest operating cost as an automobile insurer is the cost of auto collision and accident repairs.

21. The interests of autobody repair shops and insurance companies are often in conflict, because the collision repair shops must make a profit, whereas insurance companies are trying to minimize costs while guaranteeing that their customers are satisfied with the repairs. This situation can lead to collision repair fraud.

22. According to Allstate, collision repair fraud occurs most often in the following ways:

• Repairing an autobody part, yet charging for a replacement part;

• Charging for one type of part, like an OEM part, but instead installing a less expensive or salvaged part;

• Charging for labor and services not provided;

• Charging for repairing non-existing damage; and

• Charging for repairing pre-existing damage.

23. Detection of such fraud and waste is difficult, expensive, and ineffective. Fraudulent repairs of a vehicle may not surface immediately. An owner may be unaware that his or her vehicle is improperly repaired due to his or her lack of knowledge of car repair, or the fact that some improper repairs do not manifest themselves right away.

24. Collision repair waste and fraud hurts both consumers and insurance companies. Inflated claims costs hurt the insurers, who pay for waste and fraud, and the policyholders, who see their premiums rise.

25. In addition to issues related to waste and fraud, Allstate also was concerned about the high levels of customer dissatisfaction with the collision repair industry. Industry studies have found common complaints include repairs that take too long, cost too much, and lack in quality. Allstate's internal marketing research revealed that over twenty percent of policyholders are dissatisfied with their collision repair experience.

26. Claimants routinely complain to Allstate about poor repair quality.

27. Claimants value fast turnaround on autobody repairs.

28. Some of the smaller autobody repair shops do not track timeliness of repairs.

29. Customer dissatisfaction also arises from body shops' failure to adhere to consistent quality control processes.

30. Many body shops have no established quality control procedures.

E. Inefficiencies Allstate Faced in the Autobody Repair Market

31. Nationwide, Allstate's experience with autobody repairs was that repairs were inefficient because local repair shops gave cost estimates that were too high, concerns about fraudulent work were present, and the local body shops did not employ efficient techniques in the division and specialization of labor.

32. Allstate believed repairs done through local body shops were less efficient than they could be, because these shops lacked state-of-the-art equipment that would permit a higher volume of repairs, thus spreading the fixed cost of repairs over a larger base and lowering the cost of repairs per car.

33. Allstate found that independent repair shops had no incentive to provide speed and quality of repairs to a one-time customer, because they were being paid for repairs at cost-plus pricing on parts and a flat hourly rate for labor. Therefore, these shops had no economic incentive to save time.

F. The PRO Program

34. Allstate and other insurers have attempted to combat waste and fraud by autobody repairers through complex systems of review and monitoring of repair estimates. Even with these efforts, it is difficult to systematically identify waste and fraud in this manner, because the damage to each car is different and there are thousands of different makes and models of vehicles on the road. Attempting to combat waste and fraud this way also causes insurers to incur significant monitoring costs.

35. Believing that fraud by various autobody shops engaged to perform those repairs was inflating autobody repair expenses substantially, Allstate instituted a number of programs designed to combat and reduce such fraud, including an inspection system to detect shoddy or unnecessary repairs.

36. Both prior to and after Allstate's acquisition of Sterling, Allstate has had preferred provider agreements with various independently owned and operated autobody repair facilities. Using these preferred facilities was an effort to identify the shops with the best repair techniques both in quality and timeliness of repairs.

37. These facilities provided repairs to Allstate policyholders through Allstate's Priority Repair Option or "PRO" program.

38. The PRO program is a "Direct Repair Program" developed by Allstate in the 1970s.

39. Allstate found that many consumers sought its advice as to where to get their cars repaired. Therefore, the PRO program was established as a direct relationship between Allstate and body shops, through which Allstate recommends body shops to its insureds and claimants.

40. Allstate's recommendations through the PRO program led to higher volume for the recommended shops.

41. Although the PRO program was an effort by Allstate to resolve the inefficiencies caused by using independent autobody repair shops to repair its customers' cars, it has failed to completely resolve the problem. Even though Allstate provided the PRO shops with a greater volume of cars to repair, only modest increases in efficiency were achieved.

42. Allstate found that at PRO shops who received more than four Allstate estimates per week, and where more than 20 percent of the shops' total repair volume came from Allstate insured cars, the average cost to repair a vehicle at those shops was four percent lower than at other shops.

43. By early 2000, Allstate had concluded that insurer volume arrangements like the PRO program, which were a simple volume promise in exchange for discounts, only provided marginal benefits. Also, those agreements did not spur the development of large, modern and efficient repair shops, since the PRO shops were hesitant to make large capital investments for fear of losing key insurer relationships, which apparently lacked long term agreements.

44. Therefore, Allstate decided to explore other alternatives in addition to the PRO program.

G. Allstate's Acquisition of Sterling

45. Allstate felt that it had achieved maximum efficiencies through the PRO program and monitoring, but still wanted to achieve further reductions in costs and to provide the customer with a high-quality, quick, cost-effective and hassle-free car repair.

46. Allstate believes only nationwide repair shops or automobile manufacturers could achieve this goal of a lower cost, faster and consistently high quality autobody repair.

47. Allstate thought autobody repair costs could be reduced by building "greenfields" — modern assembly line type operations that would provide cost savings through a nationwide network of buying power and a nationwide standard of quality and timeliness in completion of repairs.

48. After a comprehensive review of its claims settlement strategy in 2000, Allstate concluded that it could gain a competitive advantage for itself and its policyholders by deepening its relationships with autobody shops. Allstate thus explored a new strategy: the creation of a large Allstate-owned interstate collision repair chain that would improve the car repair business for the benefit of Allstate's customers, and thereby enhance the Allstate brand.

49. Allstate reviewed and evaluated several interstate autobody repair consolidators, including ABRA, AutoNation, the Boyd Group, Caliber, CTA, True 2 Form, and M2, as well as Sterling.

50. To achieve its goal of a lower-cost, higher-quality autobody repair, Allstate bought Sterling in 2001. Sterling operates approximately 60 autobody repair shops in 14 states, including 15 shops in Texas.

51. As of 2001, Sterling had been in business for four years. From the beginning, Sterling focused on its "team" approach to autobody repairs, under which multiple technicians would work on a single vehicle. Sterling also created flow processes through which it believed it could provide a more efficient and timely repair process.

52. The "Sterling model" for collision repair was implemented long before Allstate purchased Sterling. The purported Sterling benefits, including guaranteed completion dates, lifetime guarantees, clean vehicles, and "kaizen zero" events all existed before Allstate purchased Sterling.

53. After Sterling was formed in 1997, its initial growth was by acquisition of existing non-assembly line "Mom and Pop" body shops (known as "brownfields"). Sterling's first 32 shops were added to the chain through acquisition. However, Sterling found that the acquisition of existing shops gave rise to inefficiencies, and wasted expense. Sterling also inherited preexisting customer service issues from some of these shops.

54. Sterling found it difficult to integrate the differing brownfield operations to form one efficient network, and it was expensive to acquire the brownfield shops because it had to pay for existing good will and customer volume. By the time the shops were converted from typical local body shops to a piece of a large network, the value of the acquisitions were diminished.

55. Sterling then migrated to building new shops (known as "greenfields") rather than acquiring them. Greenfields were new shops that relied on the team model and assembly line efficiencies to achieve savings and quality.

56. Under the greenfield model, Sterling would identify markets, population centers where the company could be relatively confident there would be sufficient repair volume. The new repair shop would be built and outfitted with state-of-the-art equipment and employees would be trained "the Sterling way" through Sterling's training programs. Managers would be trained in Sterling management processes.

57. Each new greenfield shop opened by Sterling required a sizeable capital investment and a new book of business. For Sterling alone, entering the market with this business model was difficult, because it did not have the volume of business associated with insurer referrals.

58. After the purchase of Sterling in 2001, Allstate has provided Sterling with the needed capital and a supply of customers. Allstate's Richard Bledsoe admitted that Sterling employees have an incentive to keep Allstate happy.

H. Allstate Attempts to Combat Inefficiency Through Sterling

59. By acquiring Sterling, Allstate intended to take advantage of the economies of scale that were available in the Sterling shops. The Sterling shops are larger than typical independently owned and operated autobody repair shops, and therefore offer advantages and economies of scale provided by things like modern, state-of-the-art equipment, specially trained technicians who can be dedicated to specific types of repairs, load leveling (a practice in which cars are moved from one repair facility to another, allowing Sterling to efficiently manage capacity, thus avoiding downtime or delays in completing repairs), and spreading administrative labor costs (which do not increase proportionally with shop size) over a broader base. Additionally, Sterling shops employ a team model, where specialized technicians each repair part of the car, moving the vehicle through a multi-step process and using skilled labor efficiently.

60. Much of the state-of-the-art equipment used at Sterling is expensive. Allstate has invested more than $2.6 million per shop in order to keep Sterling up-to-date with such equipment and further upgrade Sterling's facilities.

I. Allstate's Communications With its Customers Regarding Sterling

61. Allstate believes that consumers care about having a repair option such as Sterling because they desire quality repairs, faster service and lower premiums.

62. After its acquisition of Sterling, Allstate implemented the following script to be used for policyholder calls regarding autobody repairs:

Mr./Mrs._______________, of course you are always free to choose any repair shop and are under no obligation or requirement to use a shop we recommend, however, I would like to make you aware of the benefits of Sterling Autobody Centers, which are affiliated with the Allstate Corporation.

Sterling Autobody Centers are highly respected and provide exceptional customer service. Sterling provides a lifetime guarantee as long as you own your vehicle on both parts and labor. In addition, they will handle all the paper work, keep you updated throughout the repair process, guarantee a completion date, and, even, professionally clean your vehicle inside and out. They can also assist with rental arrangements on site and will pay for additional rental expenses if the guaranteed delivery date is missed.

63. Although Allstate has utilized this script to promote and encourage policy holders to try Sterling, Sterling holds less than 5% of the collision repair market in Texas.

64. Both Sterling and PRO shops provide a lifetime guarantee on parts and labor for so long as the policyholder owns his or her car.

65. Sterling shops also provide customers with a guaranteed completion date, clean the customer's vehicle both inside and out, and will pay for additional automobile rental expenses, if its guaranteed delivery date for the customer's car is missed.

66. Although some of the PRO shops also provide some of these additional benefits, they are not uniformly provided by PRO shops.

67. Following the acquisition of Sterling, Allstate began using the above script to first offer the services of the Sterling shops to its policyholders, without offering its PRO shops directly to the customer as it had previously.

68. The PRO program has continued, but Allstate continues to refer policyholders to PRO shops only when asked.

69. Allstate also features the PRO program on its website, immediately under the information regarding Sterling.

70. Like the script it uses in telephone calls, Allstate's website makes clear to customers that they are also free to use the repair shop of their choice, if they do not want to use either Sterling or the PRO program shops.

71. The court finds that Allstate's script is not false or misleading. From the script, it is clear to Allstate's customers that they are free to use any autobody repair shop they choose. It is also clear from the script that Allstate is advertising Sterling's services because Allstate is affiliated with Sterling.

72. The legislative history to H.B. 1131 shows no claim that Allstate's speech regarding Sterling is deceptive or untruthful.

73. There is no evidence that any consumers have been deceived by the speech H.B. 1131 regulates.

J. Allstate Struggles to Make Sterling Successful

74. Currently, approximately 60% of Allstate's policyholders choose not to have their cars repaired by Sterling, even when Sterling is offered.

75. Although Allstate anticipated increased customer satisfaction with Sterling, an Allstate consumer follow-up survey conducted in 2002 showed that overall, consumers were less satisfied with Sterling than non-Sterling repairs. In May 2003, Allstate admitted that it had "hard evidence" of quality issues related to Sterling. Despite its awareness of these customer satisfaction and quality problems, Allstate continued to refer its policyholders to Sterling.

76. At trial, Allstate and Sterling attempted to downplay the impact of these quality issues, blaming the problems primarily on the brownfield stores, versus the newer greenfield stores. However, when promoting Sterling to customers, Allstate made no distinction between brownfield and greenfield stores and continued to refer customers to Sterling without regard to the quality and performance of the particular shop recommended.

77. Undeterred, Allstate continued to try and improve Sterling's operations. Allstate and its consultants analyzed the market, particularly with reference to other collision repair shops with whom Allstate did business, to determine how to adjust Sterling's costs and processes. Sterling's Mr. Daly testified:

Q. So what you do is go to the PRO marketplace and find this average or find this benchmark, however, you do it and you want to call it, and then you take the information over and then that's what Sterling charges.

A. That's right.

Through its PRO program, Allstate had access to significant information from Sterling's competitors, including information regarding technician pay, labor costs, hours worked on a repair, profits, and the cost of parts and repairs. Sterling's competitors, such as Herb's, do not want Allstate to share their business information with Sterling to help Sterling make decisions on how to compete against them.

78. Allstate used confidential information obtained from PRO shops to make decisions as to how Sterling should run its repair shops. For example, Allstate maintained its "Paris" database, which included significant pricing information relating to PRO shops. That information includes data down to the specific claims paid by Allstate to its PRO shops.

79. Allstate used that information to compare PRO shop performance to Sterling's performance as part of its ongoing efforts to improve operations at Sterling. Indeed, Allstate even shared the information in the Paris database with Sterling leadership, meaning that Sterling was receiving the benefit of adjusting its operations based upon information Allstate knew about Sterling's competitors. Senator Carona identified this practice and the ability to share confidential information with Sterling as a type of anti-competitive conduct that he intended to prohibit through H.B. 1131.

80. Of course, Allstate did not share the same sensitive business information about Sterling or the market with any of Sterling's competitors. Indeed, in this case, Allstate and Sterling insisted on a strict protective order that precludes Sterling's competitors from seeing much of the information produced in this lawsuit.

81. To increase opportunities for referral to Sterling shops, Allstate removed some independent repair shops from its PRO network. For example, in September 2001, an Allstate representative stated that Allstate had "dialed down some fairly large PRO players that surround the North Houston stores as a first attack on volume." Other PRO shops were also eliminated from the PRO program because of their location close to a Sterling shop.

82. For example, Herb's Paint Body Shop in Garland, Texas, which had a high customer approval rating, was one such victim after a Sterling shop opened less than one mile away.

83. Larry Stafford, the owner of RiverCity Collision, Inc. in Austin, Texas, was informed that his repair shop was being removed from the PRO network because, in the words of a local Allstate representative, his shop was located in the "circle of death."

84. Sterling's CEO Jon McNeill also emphasized that Allstate needed to "right-size" the number of PRO shops located within 10 miles of Sterling shops in order to increase business for Sterling and make the Allstate-Sterling relationship successful. In April 2002, McNeill stated that:

the next chronological step is the right-sizing of PRO within 10 miles of Sterling stores. This step is critical, but also painful in the local market. It can't be avoided though as this step has the single most positive impact on volume.

Sterling's Mr. Daly also admitted that adjustments were made to PRO to increase Sterling's volume of business:

Q. To ensure the viability of the Sterling business you had to make adjustments? That means you took PRO shops out?

A. In some cases, in some markets.

85. When Allstate reduced the size of its PRO network, Allstate did not remove any Sterling stores from that network, even when those shops experienced quality problems. Allstate placed its own financial interests in Sterling above those of its policyholders who often turned to Allstate for guidance and recommendations about where to take their vehicles for repair following an accident.

K. Vertical Integration Between Insurers and Repair Shops Creates a Conflict of Interest That is Harmful to Consumers

86. Allstate and Sterling have stated that their goal was to align the incentives between insurance companies and repair shops to provide lower cost repairs. Evidence and experience have shown that aligning those incentives places the repair shop in the unfortunate position of having to decide whether to be an advocate for the accident victim (its customer) or an arm of the insurance company keeping the costs of repair down. Thus, vertical integration of an insurance company into the autobody repair industry creates an inherent conflict of interest.

87. The consumers Allstate surveyed before acquiring Sterling in 2001 informed Allstate of this very issue. They were concerned that Allstate ownership of autobody repair facilities would lead to a situation in which Sterling would place Allstate's financial interests ahead of those of Sterling's customers. Consumers were concerned about repair shops cutting corners to save repair costs at the request of their parent insurance company.

1. Edmundo Fulgencio

88. At trial, Defendants and Intervenors offered evidence regarding Edmundo Fulgencio's experience with Sterling. Fulgencio purchased a new Dodge truck from Goodson Dodge in Houston in 2001. Goodson Dodge is owned by United Auto Group, an interstate chain of car dealerships that operates many collision repair shops. Shortly after purchasing the new truck, Fulgencio was involved in an accident. The driver who hit Fulgencio in that accident was insured by Allstate. Fulgencio brought his truck to Goodson's collision repair center, and Allstate covered the costs of his repairs.

89. Fulgencio was involved in a second accident in January 2003. Fulgencio was insured by Allstate, who recommended that he use Sterling's West Little York store in Houston for the repair. Sterling's West Little York location had received failing marks for repair quality in an internal audit Allstate conducted in August 2002.

90. Initially, Fulgencio inquired about having his truck repaired at Expert Collision Repair, an independent autobody shop near his home; however, that shop advised him that it would not be able to start work on his vehicle for approximately two weeks. Fulgencio then decided to use Sterling.

91. When Fulgencio went to pick up his vehicle from Sterling, he noticed that not all of the repairs were complete. After driving the truck, he believed it was out of alignment. He told store manager Jana Ordonez that he was unhappy with the repairs and asked why Sterling had not done all the repairs needed. Ordonez replied that Sterling had done all the repairs authorized by Allstate and that it was not up to her what repairs should be done. According to Ordonez, she could do nothing more for him. Ordonez referred Fulgencio to Steve Dunn, Allstate's field inspector.

92. Ultimately, Rick van Boxtel, the owner of Expert Collision Repair, inspected Fulgencio's vehicle and assisted in explaining to Sterling the repairs that were still needed. Sterling continued trying to repair Fulgencio's truck, but eventually admitted they could not fix the alignment and authorized Fulgencio to take his truck elsewhere for repairs. Ordonez stated that Sterling would pay the shop of Fulgencio's choice for those repairs.

93. Fulgencio took his truck to Expert Collision Repair to have the alignment corrected. Fulgencio was happy with the alignment on his truck after Expert Collision Repair worked on it. Sterling did not pay Expert Collision Repair for the repair as promised.

2. Allstate August 2002 Internal Review of Sterling Stores

94. In August 2002, Allstate conducted an internal review of the Sterling network of stores, and found (among other things), that the repair quality at Sterling was below PRO standards in 60% of its stores. In particular, Sterling's Houston stores were given failing marks.

95. Despite these findings, Allstate continued to refer its customers to Sterling.

L. Passage of H.B. 1131

96. Allstate and Sterling contend that H.B. 1131 was passed in order to shift autobody collision repair business from interstate companies such as Sterling to local body shops operating solely in Texas. To support this assertion, they rely on evidence that Intervenor ASA and various independent autobody shops pushed for the passage of H.B. 1131 before the Texas legislature. Allstate and Sterling have also presented facts showing that this effort flowed from the concerns of local independent shops that they would lose business to insurer-owned autobody shops.

97. If H.B. 1131 is upheld, and Sterling is unable to further expand its network of shops in Texas, collision repair work that may have been done by Sterling will go to either locally-owned autobody repair shops or interstate collision repair chains (including interstate auto dealerships that operate collision repair facilities). Allstate and Sterling contend that because the number of interstate collision repair businesses that will continue to operate in Texas is relatively few (about 5), H.B. 1131 will have a "chilling effect" on interstate commerce.

98. Countering Allstate and Sterling's position that H.B. 1131 was passed for protectionist reasons, Defendants and Intervenors assert that H.B. 1131 is a regulation of the way insurance companies handle claims and provide services to their insureds.

99. Defendants and Intervenors have shown that Rep. Kino Flores, one of the bill's sponsors, was concerned that tied repair shops created a conflict of interest that would hurt consumers by eliminating their voice and their advocate (the independent repair facility) in the auto repair process, stating that:

[b]y eliminating the only independent voice that the car owner has in the repair process, that of an independent body shop owner, insurance companies control both the money to pay for damage to a claimant's car and the person who will decide what repairs need to be made to get the car out of the door.

Because publicly traded insurance companies have a responsibility to stockholders to seek the highest premium possible and pay the lowest claims for which they can negotiate, the consumer, caught in the middle of that equation, becomes irrelevant.

* * *

What this bill seeks to do, Mr. Chairman and members of the committee, is to ensure that, number one, that the consumer has a choice.

100. On the House floor, Rep. Flores further explained: "we are trying to address an issue that deals strictly with conflict of interest."

101. Defendants and Intervenors have offered proof that other legislators also voiced similar concerns regarding conflicts of interest, worrying about the influence of insurance companies who are able to steer their policyholders toward tied repair shops.

102. Rep. Nixon explained:

There's only one reason for them to have an auto shop is that it's for them to direct your banged-up vehicle to their shop so they can make an extra buck off you. That's it.

103. Rep. Puente concluded that:

Essentially what we're trying to do with this bill is to look at conflicts of interest, make sure insurance companies that have control over body shops don't steer business towards them so they can earn a premium twice.

104. Senator John Carona, who offered H.B. 1131 in the Texas Senate, also explained that his chief motivation in supporting H.B. 1131 was to eliminate the obvious conflict of interest that arises when an insurance company also owns the repair facility.

105. The Texas House Committee on Licensing heard testimony about anti-competitive and anti-consumer conduct that was occurring as a direct result of insurers owning repair facilities. Witnesses testified that:

• Insurance companies "force repairers to use cheaper, more inferior parts, place caps on the prices that can be charged . . . or steer business away from specific shops."

• They gave low estimates of what it cost to make repairs, making it more difficult to obtain competitive bids from shop Allstate did not control.

• Insurers forced the repair of vehicles under circumstances in which qualified repair shops concluded that the vehicle was a "structural total."

• Allstate directed repair facilities to perform only partial repairs or to cut corners when they could get away with it.

• Sterling did not engage in significant advertising but, instead, relied upon Allstate for referrals. Sterling employees even admitted they relied upon Allstate agents to guide customers to Sterling locations.

• Allstate terminated repair facilities from their PRO program that were near Sterling shops to increase the business available to Sterling.

• Mr. Shoemaker, owner of Toyota of Irving, testified that after Allstate opened a Sterling facility down the road from Toyota of Irving, that dealership became overwhelmed by the scrutiny and processing demands placed upon it by Allstate when it worked on Allstate vehicles. Toyota of Irving's Mr. Shoemaker testified: "they were out to drive us out of the market, and that was their intent for the shops up and down the street."

These concerns are also reflected in the bill analysis that was prepared by the House Research Organization on April 8, 2003, at the time H.B. 1131 was under consideration.

106. Allstate and Sterling exercised their rights before the Texas house, presented numerous witnesses, and attempted to persuade legislators that there is no harm arising from ownership of autobody repair facilities by insurance companies.

Allstate's position before the legislature was that it wanted to curb fraud through its ownership of Sterling.

107. Although Allstate and Sterling contend there is no conflict of interest in an insurance company owning an autobody repair shop, consumer surveys that Allstate conducted prior to purchasing Sterling show that those consumers surveyed expressed the same concerns as the legislators did regarding conflicts of interest, cost-cutting, compromised quality and other issues. Consumers were concerned that Allstate would use its influence over Sterling to cut corners on auto repairs to save money and earn additional profits for Allstate. Indeed, while some consumers had no quarrel with such ownership, others consumers surveyed by Allstate stated:

• "There's too much probability of cost-cutting."

• "If Allstate owns the shops, are the workers working for me or for Allstate?"

• "I'm concerned about the quality of the staff and the work in a `captive company.'"

• "Profitability might become too important."

• "It's a conflict of interest. They're saving money at my expense."

• "It's like an HMO. I don't want Allstate to have total control."

• Nearly half of the consumers involved in one of the surveys believed that Allstate should not own body shops because Allstate should be "sticking to insurance" and because of the potential for a "conflict of interest."

108. Further, the record shows that after H.B. 1131 was proposed, Allstate and Sterling had ample opportunity to resolve the legislators' concerns and convince them of the benefits offered by the Allstate/Sterling relationship. However, Allstate and Sterling failed to persuade the Texas legislature and H.B. 1131 was passed.

109. H.B. 1131 stopped Allstate and any other insurer from owning any autobody repair shops in Texas. It was passed on May 27, 2003 and was codified as Tex. Occ. Code § 2306.002(a), which states:

Sec. 2306.002. INSURER INTERESTS.

(a) Except as provided by this section, an insurer may not own or acquire an interest in a repair facility.

(Emphasis added).

110. H.B. 1131 took effect on September 1, 2003.

111. Under H.B. 1131, insurers are further barred from providing a "recommendation," "referral," or "access" to insurer-owned autobody shops "that is not provided on identical terms to other . . . facilities." Tex. Occ. Code § 2306.006(4).

112. Insurers are also prohibited from "[a]uthoriz[ing] or allow[ing] a person representing the insurer . . . to recommend . . . that the policyholder . . . obtain repairs at a tied repair facility, except to the extent that the person recommends other . . . facilities." Insurers and autobody shops are prohibited from engaging in joint marketing, and insurers are banned from giving insurer-owned autobody shops preferential access to their names or logos. Tex. Occ. Code § 2306.006(3), (6), (9).

113. The statute provides an exception for facilities like Sterling that were already open for business or upon which construction had begun as of April 15, 2003, Tex. Occ. Code § 2306.002(b), although additional restrictions were also placed on those excepted insurer-owned facilities (referred to as "tied repair facilities") in sections 2306.004 through 2306.008 of the statute. These restrictions, and the effect they have had on the Allstate — Sterling relationship, are outlined in more detail below ( See ¶ 120, supra).

114. Under H.B. 1131, only Sterling shops open for business or under construction as of April 15, 2003 could continue to do business in Texas. Thus, as enacted, H.B. 1131 restricts any additional insurer-owned shops from entering the Texas market.

115. H.B. 1131 limits the efficiencies Sterling could achieve through networked greenfield shops.

116. Because Sterling's operations in Texas are limited to the 15 shops it had opened prior to April 15, 2003, Sterling's costs of doing business in Texas are increased.

117. Sterling has also lost certain competitive advantages under H.B. 1131. Under Tex. Occ. Code § 2306.006(2), Allstate is barred from sharing information with Sterling that it does not make available to other repairers with which it has a favored facility agreement.

118. Additionally, section 2306.006(7) of the statute restricts Allstate from "subsidiz[ing] the business activities or operating expenses of a tied repair facility." Therefore, Allstate cannot subsidize Sterling's business through capital investments in Sterling's stores, requiring Sterling to absorb these costs and raising Sterling's cost of doing business in Texas. On average, Allstate has invested $2.6 million per store for improvements to existing Sterling stores or for building new "greenfield" stores.

119. H.B. 1131 also prevents Allstate from assisting in Sterling's efforts to generate business and increase its car volume, because Allstate may not recommend or refer its customers to Sterling in any way that is not provided identically to the repair shops in the PRO program. Tex. Occ. Code § 2306.006(4)-(5). Additionally, Allstate and Sterling may not engage in a joint marketing program and Sterling may not use Allstate's trademarks or logos in any way that the PRO shops are not also permitted to use them. Tex. Occ. Code § 2306.006(3), (6).

120. H.B. 1131's full list of prohibitions on insurers who own an interest in an auto repair facility (referred to as a "tied repair facility") is as follows. The prohibitions affecting the Allstate/Sterling relationship that are at issue in this case are italicized below:

Sec. 2306.006. PROHIBITIONS. An insurer may not:

(1) condition the provision of a product, service, insurance policy renewal, pricing, or other benefit on the purchase of any good or service from its tied repair facilities;

(2) share information with its tied repair facilities that is not made available on identical terms and conditions to other repair facilities with which the insurer has entered into a favored facility agreement;

(3) engage in a joint marketing program with its tied repair facilities;

(4) provide its tied repair facilities a recommendation, referral, description, advantage, or access to its policyholders or other beneficiaries under its insurance policies that is not provided on identical terms to other repair facilities with which the insurer has entered into a favored facility agreement;

(5) provide a tied repair facility access to the insurer's products or services on terms and conditions different from those under which the insurer provides access to the same products or services to another repair facility with which the insurer has entered into a favored facility agreement;

(6) allow a tied repair facility to use the insurer's name, trademark, tradename, brand, or logo in a manner different than that allowed for any other favored facility;

(7) subsidize the business activities or operating expenses of a tied repair facility;

(8) directly or indirectly require a policyholder of the insurer or other beneficiary under the insurer's policy to obtain a damage estimate on a vehicle covered by the insurance policy at a tied repair facility;

(9) authorize or allow a person representing the insurer, whether an employee or an independent contractor, to recommend to a policyholder or other beneficiary under the insurance policy that the policyholder or other beneficiary obtain repairs at a tied repair facility, except to the same extent that the person recommends other repair facilities with whom the insurer has entered into a favored facility agreement;

(10) require a policyholder or beneficiary to use a claims center located on the premises of a tied repair facility;

(11) enter into a favored facility agreement exclusively with its tied repair facilities;

(12) retaliate or discriminate against a person who: (A) files an action as provided by this chapter; or (B) assists or participates in any manner in an investigation, judicial proceeding, or other action brought or maintained as provided by this chapter; or

(13) include earnings or losses of a tied repair facility in a rate filing made under Chapter 5, Insurance Code.

(Emphasis added).

M. Impact of H.B. 1131 on Allstate and Sterling

121. Since the enactment of H.B. 1131, Sterling has experienced a 50 percent drop in monthly volume, closed three stores in Houston and relocated others. Sterling has also laid off some employees.

122. H.B. 1131 has also caused Allstate and Sterling to incur certain business redesign costs, including technology and other system changes. Because of H.B. 1131's requirement that Allstate treat Sterling the same as it treats other shops in its PRO program, Allstate also overhauled its PRO program in Texas and established a new program with more oversight dubbed ERO. As part of the overhaul, Allstate changed its inspection system by assigning each of its Damage Evaluators to fewer shops. In creating the ERO model, Allstate spent approximately $500,000 on staffing costs alone for the first 90 days of the program.

123. H.B. 1131's ban on expansion has also made it more difficult or impossible for Sterling to reduce costs through "load leveling," or shifting cars from one Sterling facility to another to increase the efficient utilization of capacity. Sterling is not able to take advantage of load leveling in certain markets like Austin, where it has only one store.

124. In the last four months of 2003, following the enactment of H.B. 1131, Sterling's Texas shops went from turning $2 million in profit to losing $2 million in earnings.

125. When Allstate acquired Sterling, Sterling lost its source of referrals from other auto insurers who dropped Sterling from their preferred provider programs.

126. Other insurers who continue to collectively hold 85% of the automobile insurance market in Texas will continue to rely upon non-Sterling independent autobody shops to repair their policyholders' cars.

127. Even though Allstate owns Sterling, its customers have the option of choosing another body shop, so Allstate cannot realistically expect all of its customers to use Sterling.

N. Allstate's Results with Sterling to Date, and Expert Opinions

128. The evidence shows that Allstate's acquisition of Sterling has produced mixed results to date, and has had problems achieving its goal of reducing costs in autobody repairs. Allstate attributes these inefficiencies to a number of factors including a) the immediate cessation of Sterling business from any other insurer after the date of the Allstate purchase; b) the passage of H.B. 1131, which chilled further expansion of its network of Sterling shops in Texas; and c) lower than anticipated volume from Allstate customers.

129. At trial, Allstate offered the testimony of its economist, Professor Scott Harrington. Professor Harrington discussed the "potential" efficiencies that could be achieved through the vertical integration of Allstate and Sterling. Professor Harrington did not testify before the Texas legislature prior to the passage of H.B. 1131. Professor Harrington believes that the Allstate/Sterling relationship was an "experiment" that should be allowed to go forward.

130. Professor Harrington's opinion that Allstate and Sterling should continue their relationship lies primarily in "possible" or "potential" economies to be realized by the two companies, including lower monitoring, quality assurance and administrative costs, improved capacity utilization (including "load leveling"), allocating particular employees to particular tasks, and the use of modern repair equipment. Regardless of Professor Harrington's vision of the potential benefits of the Allstate/Sterling integration, the court finds that on the current factual record, Allstate has not yet realized the efficiencies he identifies. Further, the court notes that Allstate's Jeff Brask testified in July 2004 that Sterling's performance had been "disappointing" and that Sterling needed to improve its pricing (which had been 10-15 percent above PRO), gross margins and earnings.

131. Other evidence in this case shows that year after year of operations, the costs of repairs at Sterling tended to be higher than similar shops in the PRO network. Moreover, Allstate inspections of Sterling facilities showed repair quality lower than PRO standard in 60% of Sterling's stores. Knowing that these issues existed, Allstate nonetheless continued to refer its customers to Sterling.

132. The court finds the expert testimony of Dr. Donald House offered by Defendants and Intervenors to be credible. Dr. House has explained that there is no evidence to show that the vertical integration of insurance companies into the collision repair industry creates economies of scale. Dr. House believes, and the court agrees, that Allstate's ownership of Sterling gives Sterling economic incentives to under-repair vehicles, so that the costs paid by Allstate for repairs are reduced.

133. Despite these mixed results, Allstate claims to be committed to this project, because it believes the Sterling shops are the only way to achieve its goals of quality and lowered costs on a nationwide basis.

II. Conclusions of Law

1. Allstate and Sterling have challenged H.B. 1131 under the dormant Commerce Clause and First Amendment of the United States Constitution. Prior to trial, the court entered a preliminary injunction against the enforcement of portions of H.B. 1131's code of conduct, specifically Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9), on First Amendment grounds. Allstate and Sterling have alternatively asserted that the trademark provisions of H.B. 1131 violate the Constitution's Supremacy Clause and are preempted by the Lanham Act, 15 U.S.C. § 1127.

2. Defendants and Intervenors maintain that H.B. 1131 is constitutional under both the dormant Commerce Clause and the First Amendment. They have further argued that Allstate and Sterling's constitutional challenges to H.B. 1131 are barred by the doctrine of constitutional estoppel, and that Allstate and Sterling's Commerce Clause claim is barred by the McCarran-Ferguson Act.

A. Commerce Clause Challenge

1. McCarran-Ferguson Act

3. Defendants and Intervenors contend that Allstate and Sterling's Commerce Clause attack on H.B. 1131 is barred by the McCarran-Ferguson Act. In the McCarran-Ferguson Act, Congress granted the several states the primary authority to enact legislation that relates to the regulation or taxation of the business of insurance. See 15 U.S.C. §§ 1011, 1012(a). In doing so, Congress insulated state regulations relating to the "business of insurance" from any challenge under the Commerce Clause (dormant or exercised) of the United States Constitution. American Ins. Ass'n v. Garamendi, 539 U.S. 396, 428 (2003); Western Southern Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648, 653 (1981); Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 429-30 (1946).

4. Section 2(a) of the McCarran-Ferguson Act provides as follows:

The business of insurance, and every person engaged therein, shall be subject to the laws of the several states which relate to the regulation or taxation of such business.

15 U.S.C. § 1012(a). The Supreme Court has stated that the principal focus of the regulatory authority reserved to the states by McCarran-Ferguson was "the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws regulating the `business of insurance.'" SEC v. National Securities, Inc., 393 U.S. 453, 460 (1969). However, the McCarran-Ferguson Act does not "purport to make the states supreme in regulating all the activities of insurance companies . . . only when they are engaged in the `business of insurance' does the statute apply." U.S. Life Corp. v. U.S. Life Ins. Co., 560 F. Supp. 1302, 1306-07 (N.D. Tex. 1983), quoting National Securities, 393 U.S. at 459-60. Accordingly, the court must determine whether H.B. 1131 regulates "the business of insurance" as intended by the McCarran-Ferguson Act.

5. The court must consider three factors in evaluating whether H.B. 1131 regulates "the business of insurance": 1) whether the practice in question has the effect of transferring or spreading a policyholder's risk; 2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and 3) whether the practice is limited to entities within the insurance industry. Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982); American Bankers Ins. Co. of Florida v. Inman, 436 F.3d 490, 493 (5^th Cir. 2006); Munich American Reinsurance Co. v. Crawford, 141 F.3d 585, 590-91 (5^th Cir.), cert. denied, 525 U.S. 1016 (1998). None of the three factors is determinative, but examination of the factors may lead to a determination whether a state law regulates "the business of insurance." Pireno, 458 U.S. at 129.

a. Transfer or Spread of Policyholder Risk

6. In Group Life Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 209 (1979), an insurance company ("Blue Shield") entered into agreements with certain "participating pharmacies" who capped the price of prescription drugs paid by Blue Shield. A group of independent non-participating pharmacies sued Blue Shield under the Sherman Act, 15 U.S.C. § 1. Id. at 207. Blue Shield argued that the participating pharmacy agreements were "the business of insurance" and thus were exempt from the antitrust laws under the McCarran-Ferguson Act. Id.

7. The Supreme Court considered whether the pharmacy agreements involved any underwriting or spreading of risk, and held that the agreements did not. Id. at 214. The Court stated that the agreements enabled Blue Shield to minimize costs and maximize profits, holding that "[s]uch cost-savings arrangements may well be sound business practice, and may well inure ultimately to the benefit of policyholders in the form of lower premiums, but they are not the `business of insurance.'" Id. The Court described the pharmacy agreements as "legally indistinguishable" from "countless" business arrangements that insurance companies may make to reduce costs. Id. at 215. Notably, the Court further observed that if Blue Shield had decided to acquire a drug store chain in order to further lower its costs of meeting its obligations to its policyholders, such an acquisition would not be "the business of insurance" as contemplated by the McCarran-Ferguson Act. Id., citing National Securities, 393 U.S. 453.

8. Here, Allstate's ownership of Sterling does not transfer or spread a policyholder's risk. The evidence in this case shows that Allstate acquired Sterling with the intent of lowering its costs to repair cars and therefore increasing its profits. Although it is possible that any cost savings achieved by Allstate through its ownership of Sterling could result in lower premiums for Allstate's customers, this factor does not favor a finding that Allstate's ownership of Sterling is "the business of insurance" as required by the McCarran-Ferguson Act. Pireno, 458 U.S. at 128, citing Royal Drug, 440 U.S. at 214.

b. Effect of the Practice on the Insurer-Insured Relationship

9. Next, the court must examine whether Allstate's ownership of Sterling is a practice integral to its relationship with its policyholders. Pireno, 458 U.S. at 129. The Supreme Court has noted that in enacting the McCarran-Ferguson Act, Congress was concerned with "`the relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement — these were the core of the "business of insurance."'" Id. at 128, quoting National Securities, 393 U.S. at 460.

10. In Royal Drug, Blue Shield argued that its pharmacy agreements were closely related to its policy relationship with its insureds, an argument the Supreme Court rejected. The Court noted that the pharmacy agreements were not agreements between Blue Shield and its insureds, but were separate contractual arrangements for the provision of goods and services other than insurance. 440 U.S. at 216. Further, the Court observed that at most, the pharmacy agreements resulted in cost savings that might be passed on to customers in the form of lowered premiums. Id. at 216.

11. However, the Court stated that even if this tangential relationship to customers is found, it does not confirm that the practice at issue constitutes "the business of insurance." Id. at 216. The Court recognized that in that sense, every business decision made by an insurance company has some impact on its reliability, its ratemaking, and its status as a reliable insurer, and if the insurer — insured relationship is construed broadly, almost every business decision of an insurance company could be included in "the business of insurance." Id. at 216-17. "Such a result would be plainly contrary to the statutory language, which exempts the `business of insurance' and not the `business of insurance companies.'" Id. at 217.

12. Here, Allstate's ownership of Sterling involves the sale of collision repair services — a business separate and apart from the sale of insurance policies. It is undisputed that although Allstate would prefer that its customers use Sterling to repair their vehicles, Allstate does not require its insurance customers to use Sterling for their collision repairs as a part of the insurer-insured relationship. Despite the fact that H.B. 1131 was passed in large part due to concerns raised about the conflict of interest arising in the repair of vehicles by shops owned by the policyholder's insurance company, the "take it or leave it" nature of the Sterling repair option does not make Allstate's ownership of Sterling integral to the insurer-insured relationship.

13. The record further shows that Allstate decided to enter the collision repair industry in order to reduce its collision repair costs and increase its profits. Although this practice by Allstate could conceivably lead to reduced premiums for its car insurance customers, under the Royal Drug and Pireno decisions this fact does not show that by owning Sterling, Allstate is engaged in "the business of insurance" under the McCarran-Ferguson Act. Pireno, 458 U.S. at 128; Royal Drug, 440 U.S. at 216-17.

14. Moreover, H.B. 1131 explicitly concerns matters of a much broader scope than the relationship between auto insurance companies and their policyholders. Under H.B. 1131, insurance companies are restricted as to subsidiaries they cannot own and what lines of business they cannot go into other than insurance — how they run their businesses beyond the confines of the insurance contract with their customers. This factor also does not support a finding that Allstate is in the "business of insurance" by owning Sterling.

15. For all of these reasons, the court finds that Allstate's ownership of Sterling is not an "integral part" of its relationship with its policyholders.

c. Whether the Practice is Limited to Entities Within the Insurance Industry

16. Finally, under the third Royal Drug/Pireno criterion, the court must consider whether the disputed practice is limited to entities within the insurance industry. Pireno, 458 U.S. at 129; Royal Drug, 440 U.S. at 231. In enacting the McCarran-Ferguson Act, Congress was concerned that the cooperative ratemaking efforts of insurance companies be exempt from the antitrust laws, because it is "difficult to underwrite risks in an informed and responsible way without intra-industry cooperation." Pireno, 458 U.S. at 129, quoting Royal Drug, 440 U.S. at 221. In situations involving the purchase or sale of goods and services from entities outside the insurance industry, the legislative history of the McCarran Ferguson Act does not support a finding that such arrangements are "the business of insurance." Id. at 129.

17. In this case, Allstate has entered into a business outside the insurance industry. Although the insurance industry is a customer of the collision repair industry, the collision repair industry is outside the insurance industry, much like the pharmacies in Royal Drug. Even the fact that Sterling receives the majority of its business through referrals from Allstate does not mean that Allstate's ownership of Sterling is the "business of insurance." "The attempted use of an established insurance market to secure an additional market in some non-insurance product or service is not, by itself, a part of the business of insurance." Zelson v. Phoenix Mutual Life Ins. Co., 549 F.2d 62, 68 (8^th Cir. 1977). Thus, this factor also does not show that Allstate's ownership of Sterling is "the business of insurance" as contemplated by the McCarran-Ferguson Act. The court therefore holds that the McCarran-Ferguson Act does not exempt H.B. 1131 from Allstate and Sterling's dormant Commerce Clause challenge.

2. Dormant Commerce Clause

18. Allstate and Sterling's principal attack on H.B. 1131 arises under the dormant Commerce Clause. This aspect of the Commerce Clause is known as the dormant or "negative" aspect of that clause, because the United States Supreme Court has interpreted it to prohibit economic protectionism. West Lynn Creamery v. Healy, 512 U.S. 186, 193 n. 9 (1994). They assert that H.B. 1131 is unconstitutional because it discriminates against interstate commerce, and that even if the statute is facially valid, the burden imposed by H.B. 1131 on interstate commerce clearly exceeds any local benefits it provides.

a. Applicable Law

19. The Commerce Clause of the United States Constitution provides that "[t]he Congress shall have Power . . . [t]o regulate Commerce . . . among the several States." Art. I, § 8, cl. 3. Thus, the Constitution specifically grants to Congress the power to regulate interstate commerce. Ford Motor Co. v. Texas Dept. of Transportation, 264 F.3d 493, 499 (5^th Cir. 2001). Where a state law conflicts with a federal law governing commerce, the Supremacy Clause mandates that the state law be invalidated. Id. In matters not governed by federal legislation, "the Clause has long been understood to have a `negative' aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce." Id., quoting Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93, 98 (1994).

20. The dormant Commerce Clause prohibits states from engaging in economic protectionism through discrimination against interstate commerce. Intl. Truck and Engine Corp. v. Bray, 372 F.3d 717, 724-25 (5^th Cir. 2004); Dickerson v. Bailey, 336 F.3d 388, 395 (5^th Cir. 2003). Although the dormant commerce clause protects the interstate market, it does not exist to protect individual interstate companies or a "particular structure or methods of operation . . . in a market." Intl. Truck, 372 F.2d at 727, citing Exxon Corp. v. Maryland, 437 U.S. 117, 127-28 (1978) and CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 93-94 (1987).

b. Constitutional Tests for Dormant Commerce Clause Challenges

21. A dormant Commerce Clause analysis begins with the question whether the statute at issue either 1) facially, 2) purposefully, or 3) effectually discriminates against interstate commerce or out-of-state interests, or whether the statute regulates evenhandedly with only incidental effects on interstate commerce. Intl. Truck, 372 F.3d at 725, citing Ford, 264 F.3d at 499; Lenscrafters v. Robinson, 403 F.3d 798, 802 (6^th Cir. 2005). If the statute is found to discriminate, then it is valid only if the state "can demonstrate, under a rigorous scrutiny test, that it has no other means to advance a legitimate local interest." C A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383, 392 (1994), cited in Intl. Truck, 372 F.3d at 725. If the statute does not discriminate, then the statute is valid under the Pike test unless the burden imposed on interstate commerce is "clearly excessive" in relation to the putative local benefits. Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970); Intl. Truck, 372 F.3d at 725; Lenscrafters, 403 F.3d at 802.

22. In the Commerce Clause context, the term "discrimination" means "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Intl. Truck, 372 F.3d at 725, quoting Or. Waste Sys., Inc. v. Dept. of Environmental Quality, 511 U.S. 93, 99 (1994). Discrimination may be found based on evidence of either discriminatory effect or discriminatory purpose. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270 (1984). However, discrimination does not include all instances in which a state law burdens an out-of-state interest while benefitting some in-state interest. Intl. Truck, 372 F.3d at 725; Ford, 264 F.3d at 500.

23. "The mere fact that a statute has the effect of benefitting a local industry while burdening a separate interstate industry does not in itself establish that the statute is discriminatory." Tex. Manufactured Hous. Assn. v. City of Nederland, 101 F.3d 1095, 1102 (5^th Cir. 1996). A state statute discriminates "only when a state discriminates among similarly situated in-state and out-of-state interests." Ford, 264 F.3d at 500. That the challenged law affects only out-of-state interests does not tend to prove discrimination, unless it discriminates between similarly situated in-state and out-of-state interests. Exxon, 437 U.S. at 125-26; Intl. Truck, 372 F.3d at 725 n. 9 (citations omitted).

c. Dormant Commerce Clause Analysis

24. Allstate and Sterling bear the burden of proof to show that H.B. 1131 violates the dormant commerce clause. Lenscrafters, 403 F.3d at 803; USA Recycling, Inc. v. Town of Babylon, 66 F.3d 1272, 1281 (2d Cir. 1995), citing Hughes v. Oklahoma, 441 U.S. 322, 336 (1979). The threshold question under the dormant Commerce Clause is whether the challenged statute is discriminatory. Intl. Truck, 372 F.3d at 725; Lenscrafters, 403 F.3d at 802. A statute can discriminate in three ways: 1) on its face; 2) purposefully; or 3) in practical effect. Wyoming v. Oklahoma, 502 U.S. 437, 454-55 (1992); Lenscrafters, 403 F.3d at 802.

i. Facial Discrimination

25. The statutory text of Tex. Occ. Code 2306.002 refers to and restricts the ownership in an auto repair facility by "an insurer." On its face, the statute makes no distinction between in-state and out-of-state insurers owning auto repair facilities, so there is no facial discrimination present. To resolve the dormant Commerce Clause question, the court must look to the other two ways to discriminate and examine whether H.B. 1131 has either a discriminatory purpose or effect.

ii. Discriminatory Purpose

26. "When a party seeks to present circumstantial evidence of a discriminatory purpose pursuant to a dormant Commerce Clause challenge, it is the duty of that party to show the effect of that evidence on the challenged statute." Lenscrafters, 403 F.3d at 803, quoting E. Ky. Res. v. Fiscal Court of Magoffin County, Ky., 127 F.3d 532, 542-43 (6^th Cir. 1997). Allstate and Sterling contend that H.B. 1131 was created in order to discriminate against out-of-state insurance companies. In support of their position, they rely on 1) statements made by legislators who sponsored, voted for, or drafted the legislation; 2) that local competitors, rather than consumers, sought the legislation; and 3) irregularities in the drafting process. Allstate and Sterling do not offer any evidence of irregularities in the drafting process, so the court will not address this issue.

27. The court agrees that the record contains numerous references to statements by various local competitors of Sterling expressing their concerns that insurer-owned collision repair chains like Sterling would divert business from the independently-owned body shops in Allstate's PRO program. The record further shows that the drafting and enactment of H.B. 1131 was largely spurred by a coalition of the small business owners who compete with larger autobody repair chains like Sterling. Evidence was also offered from new car dealers that backed H.B. 1131.

28. Regardless of this evidence, the court has also found the trial record replete with proof that the members of the Texas legislature were concerned with the lack of independence and conflicts of interest that arise when a consumer repairs his or her vehicle at an autobody shop owned by his or her insurance company. Witnesses testified to support these concerns, such as insurance companies cutting costs on repairs, approving only partial repairs, requiring that cars be repaired instead of "totaled," trying to steer customers to insurer-owned shops, and Allstate terminating PRO shops in order to increase business for Sterling.

29. Based upon this evidence, the court cannot find that the purpose of the bill was to discriminate between in-state and out-of-state businesses, a finding that must anchor a successful Commerce Clause challenge. See Ford, 264 F.3d at 500 (to be constitutionally impermissible, statute must discriminate between similarly situated in-state and out-of-state interests). The evidence offered by Allstate and Sterling to show purposeful interstate discrimination tends to show that the purpose of H.B. 1131 was to discriminate between two differing business models — independently-owned autobody repair shops (which include "Mom and Pop" shops, multistate collision repair chains, and new car dealers) versus autobody repair shops owned by automobile insurance companies.

30. The evidence further suggests that the purpose of H.B. 1131 was to apply its prohibitions evenhandedly, to both in-state and out-of-state automobile insurers. The concerns raised about insurance companies owning autobody repair facilities apply regardless of whether those shops are owned by in-state or out-of-state automobile insurers. See Lenscrafters, 403 F.3d at 803 (purpose was non-discriminatory where legislation's proponents were concerned with optometrists practicing in conjunction with retail eyewear providers, whether or not those retailers were owned by in-state or out-of-state interests).

31. While the facts do support a finding that H.B. 1131's purpose was to protect one business model over another by favoring independent autobody shops over those owned by insurers, this purpose does not affect the dormant Commerce Clause. It is well established that the Commerce Clause does not protect a particular business structure or method of operation in a market, but only protects interstate commerce from prohibitive or burdensome regulations. CTS Corp., 481 U.S. at 93-94; Exxon, 437 U.S. at 127; Intl. Truck, 372 F.3d at 727. Accordingly, Allstate and Sterling have not shown that H.B. 1131 has a discriminatory purpose violative of the Commerce Clause.

iii. Discriminatory Effect

32. The final possible way a statute can discriminate in the practical effect the statute has on the interstate commerce of the industry involved. Allstate and Sterling contend that in addition to a discriminatory purpose, H.B. 1131 has a discriminatory effect on interstate commerce. The court disagrees.

33. Allstate and Sterling's primary argument regarding practical effect is that Sterling is currently the only insurer-owned autobody repair chain operating in Texas. They maintain that H.B. 1131 discriminates against interstate commerce in its practical effect by disproportionately impacting them as out-of-state companies. In prior decisions, both the Fifth Circuit and the United States Supreme Court have rejected this argument. Intl. Truck, 372 F.3d at 726, citing Exxon, 437 U.S. at 126; Ford, 264 F.3d at 502; see also Lenscrafters, 403 F.3d at 805. "That all or most affected businesses are located out-of-state does not tend to prove that a statute is discriminatory." Intl. Truck, 372 F.3d at 726.

34. The burden of H.B. 1131 affects in-state and out-of-state automobile insurance companies equally, in that the statute permits no automobile insurer, regardless of whether they are domiciled in Texas or elsewhere, to own and operate autobody repair facilities. If the statute causes any shifting of business from insurer-owned to independent repair shops, the burden of that shift will fall on all insurer-owned facilities, not just those owned by out-of-state entities. H.B. 1131 does not prohibit nor adversely affect non-insurer owned interstate collision repair chains from operating in Texas. The chains of interstate collision repair shops that operate in Texas may operate outside the effects of H.B. 1131. In addition, those chains may be owned by any entity except an automobile insurance company.

35. If there is any shift in business from Sterling to other autobody repairers, some of that business should shift toward these other interstate companies. H.B. 1131's regulatory burden falls equally on both in-state and out-of-state automobile insurance companies, and is not discriminatory. See Intl. Truck, 372 F.3d at 727 (where the burden of the statute could fall on both in-state and out-of-state manufacturers, statute is non-discriminatory); Ford, 264 F.3d at 502 (statute that only prevented manufacturers, regardless of their domicile, from entering the retail market protected dealers from manufacturers, not out-of-state competition); Lenscrafters, 403 F.3d at 805 (law prohibiting all optical retailers from leasing space to optometrists did not discriminate among in-state and out-of-state companies wishing to sell eyewear).

36. Citing Exxon, Allstate and Sterling assert that when an interstate firm loses more business due to a state regulation than in-state firms do, and that loss of business is not "promptly replaced" by other interstate firms, the regulation violates the dormant Commerce Clause. See Exxon, 417 U.S. at 127. Allstate and Sterling refer to this alleged standard as Exxon's "business shifting test." In the court's view, Allstate and Sterling have read the phrase "promptly replaced" somewhat out of context.

37. In Exxon, the regulation at issue prohibited oil refiners from owning and operating retail gas stations within the State of Maryland. 437 U.S. at 119. There, like here, the refiners argued that the effect of the statute was to protect independent dealers from out-of-state competition, and pointed out that in actuality, the entire burden of the law would fall on out-of-state companies. Id. at 125. The Supreme Court rejected the notion that a burden falling singularly on out-of-state companies necessarily shows discrimination against interstate commerce, stating that "this fact does not lead, either logically or as a practical matter, to a conclusion that the State is discriminating against interstate commerce at the retail level." Id.

38. The Court noted that the act at issue raised no barriers whatsoever to interstate independent dealers who were not also refiners of petroleum products. Id. at 126. It further stated that the act "creates no barriers whatsoever against interstate independent dealers; it does not prohibit the flow of interstate goods, place added costs upon them, or distinguish between in-state and out-of-state companies in the retail market." Id. It concluded that "[t]he absence of any of these factors fully distinguishes this case from those in which a State has been found to have discriminated against interstate commerce." Id.

39. Despite the absence of discrimination, the refiners in Exxon argued that the act burdened interstate commerce because certain refiners would stop selling in Maryland, depriving consumers of "special services" provided by the company-owned retail gas stations. Id. at 127. The Court determined that even if both of these facts were presumed true, "neither warrants a finding that the statute burdens interstate commerce." Id.

40. In rejecting this argument, the Court further noted that even if some refiners completely withdrew from the Maryland market, it expected that those refiners' share of the entire supply would be "promptly replaced" by other interstate refiners. Id. Significantly, the Court noted in Exxon that no petroleum products were actually produced or refined in Maryland. Id. at 123. Accordingly, the Court's observation that any gaps left in the wholesale petroleum market would be filled by another interstate supplier is not a particularly significant part of the analysis, since in that case the only source of supply at the wholesale level was the interstate market. Therefore, the court disagrees with Allstate and Sterling that this language is a "business shifting test" to be strictly applied in determining whether a statute has a discriminatory effect on interstate commerce.

41. More importantly, when the "promptly replaced" language is read in context, it is clear that the Court did not articulate a requirement that any shift of business away from an interstate supplier must only go to another interstate supplier to be constitutional under the Commerce Clause. Instead, the plain language of the opinion merely rejects the refiners' contention that interstate commerce was impermissibly burdened by the shifting of business from certain interstate suppliers to other interstate suppliers. Id. at 127. Therefore, this court declines to read into Exxon a per se rule that any "business shifting" flowing from a state regulation must only occur between interstate entities to avoid an unconstitutional discriminatory effect on interstate commerce. See Exxon, 437 U.S. at 125-27.

42. "If the effect of a state regulation is to cause local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share" of the market, "the regulation may have a discriminatory effect on interstate commerce." Id. at 126 n. 16 (emphasis added). If Sterling were to leave the Texas market, it is impossible to predict precisely where its current share of the market would be reallocated. However, since the market is currently composed of both intrastate and interstate firms, it is reasonable to expect that some of Sterling's business would go to intrastate repair shops, and some would go to interstate repair shops. Allstate and Sterling have not shown otherwise — i.e., that the statute will necessarily cause a discriminatory shift in business to intrastate entities.

43. Restrictions on vertical integration have been consistently upheld in analogous cases. See Exxon, 437 U.S. 117 (finding that the statute was not discriminatory against plaintiff because its treatment by the law was based on its status as an oil refiner and not on its contacts with Maryland); Intl. Truck, 372 F.3d at 726 (finding that the law was not discriminatory for commerce clause purposes since it was not discriminatory against plaintiff because of its state of origin); Ford, 264 F.3d at 502 (finding that, for commerce clause purposes, the statute was not discriminatory against plaintiff because its treatment by the law was based on its status as a manufacturer and not on its contacts with Texas); Ford Motor Co. v. Ins. Comm'r, 874 F.2d 926, 942-43 (3d Cir. 1989) (finding that, for commerce clause purposes, the statute was not discriminatory against plaintiff because its treatment by the law was based on its status as an insurer and not on its contacts with Pennsylvania).

44. The court finds that the present challenge to H.B. 1131 is analytically indistinguishable from the challenges rejected by the courts in Exxon, the Ford cases, and Intl. Truck. Because the statute does not discriminate 1) facially, 2) purposefully, or 3) effectually, the court concludes that H.B. 1131 does not discriminate against interstate commerce.

iv. Pike Balancing Test

45. Because the court has determined that H.B. 1131 is not discriminatory, the well-known Pike balancing test must be applied. Intl. Truck, 372 F.3d at 727; Ford, 264 F.3d at 503. Under the Pike test the statute is valid unless Allstate and Sterling show by a preponderance of the evidence that the burden imposed on interstate commerce is "clearly excessive" in relation to the statute's putative local benefits. 397 U.S. at 142; Intl. Truck, 372 F.3d at 727.

46. A statute burdens interstate commerce when it inhibits the flow of goods interstate. Intl. Truck, 372 F.3d at 727; Ford, 264 F.3d at 503. Allstate and Sterling have not demonstrated that H.B. 1131 inhibits the flow of collision repair services from out-of-state providers into Texas. It is undisputed that the law does not prohibit interstate collision repair chains from operating in or entering the Texas market, and evidence was presented at trial to show that interstate firms such as the Boyd Group, CarStar, VT, Inc., Automotive Investment Group, Sonic, Group One, AutoNation, and all interstate new car dealers that have repair shops have been operating and continue to operate here. Allstate and Sterling's entire argument regarding the supposed burden H.B. 1131 places upon interstate commerce actually revolves around the burden that H.B. 1131 places upon only Allstate, Sterling, and other insurer-owned repair shops. While this burden on Allstate and Sterling is obvious, the dormant Commerce Clause protects the interstate market, not particular interstate firms. Exxon, 437 U.S. at 127-28 (emphasis added).

47. To support their argument, Allstate and Sterling urge the court to rely upon Lewis v. BT Investment Managers, Inc., 447 U.S. 27 (1980), a case in which the United States Supreme Court determined that a Florida regulation prohibiting out-of-state companies from owning or controlling a business within the state that furnished investment advisory services directly burdened interstate commerce and violated the dormant Commerce Clause. However, in Lewis the plain language of the statute prohibited out-of-state-owned banks, but not Florida-owned banks, from owning banks or trust companies that furnished investment advisory services within the state. 447 U.S. at 32 n. 2.

48. The Court found the non-evenhanded nature of the state statute "highly significant" for purposes of its Commerce Clause analysis. Id. at 42. The Court further emphasized that the Florida statute discriminated " among affected business entities according to the extent of their contacts with the local economy." Id. (Emphasis in original). Thus, this key factor "significantly alter[ed]" the law's Commerce Clause status. Id. For this reason, the Court determined that despite some legitimate local concerns, the disproportionate burden the statute placed on out-of-state bank holding companies could not be justified by those concerns, and ruled that the statute did burden interstate commerce in a way that "contravene[d] the Commerce Clause's implicit limitation on state power." Id. at 42-44.

49. Here, the court has already determined that H.B. 1131 regulates evenhandedly, placing the same prohibitions on insurer ownership of collision repair shops on all automobile insurance companies, regardless of their domicile within or without Texas. Therefore, H.B. 1131 is dissimilar to the statute at issue in Lewis because H.B. 1131 treats all similarly situated business entities the same.

50. By contrast, the Court in Lewis held that the statute at issue there was " not evenhanded" because it prohibited only "banks, bank holding companies, and trust companies with principal operations outside Florida" from operating investment subsidiaries or giving investment advice within the State." Id. at 42 (emphasis in original). There, the Court held that the statute at issue did discriminate " among affected business entities according to the extent of their contacts with the local economy." Id. The Court further cited Exxon, and noted that "the absence of a similar discrimination between interstate and local producer-refiners was a most critical factor" in its decision that the statute at issue there did not discriminate. Id. (emphasis added).

51. For this same reason, the court views this case as much more apposite to Exxon, and does not consider Lewis controlling or persuasive on the facts presented here. Unlike the facts in Lewis, Allstate and Sterling have not shown that H.B. 1131 burdens interstate commerce by inhibiting the overall flow of collision repair services into Texas, rather than just the negative effects on themselves and any other insurance company-owned shops. H.B. 1131 does not discriminate or adversely impact the interstate market; it merely limits the manner in which insurers may participate in the autobody repair industry.

52. For example, if H.B. 1131 provided that only Texas-based insurance companies could vertically integrate with autobody repair facilities then this would bring H.B. 1131 under Lewis. However, the record is clear that H.B. 1131 does not differentiate between similarly situated in-state and out-of-state interests. Under H.B. 1131, Texas-based USAA and Texas county mutuals, including Allstate County Mutual, are treated the same as Allstate or any other out-of-state insurance company doing business in Texas.

53. Finally, even if the absence of Allstate and Sterling's autobody repair services from the Texas market did impose a minimal burden on interstate commerce, that burden would not be excessive in light of the statute's putative local benefits. In assessing H.B. 1131's putative local benefits, the court cannot "second guess the empirical judgments of lawmakers concerning the utility of the legislation." Intl. Truck, 372 F.3d at 728, quoting CTS, 481 U.S. at 92. The court must credit a putative local benefit "so long as an examination of the evidence before or available to the lawmaker indicates that the regulation is not wholly irrational in light of its purposes." Ford, 264 F.3d at 504, quoting Kassell v. Consolidated Freightways Corp., 450 U.S. 662, 680-81 (1981); see also Intl. Truck, 372 F.3d at 728 (same).

54. The record shows that when the Texas legislators considered H.B. 1131, they considered concerns of the possible conflicts of interest and lack of independence of the body shops that could arise if automobile insurers were permitted to own body shops. They further heard from witnesses who provided information regarding anti-competitive and anti-consumer conduct by insurance companies (including Allstate), such as forcing repairers to use cheaper parts, giving low estimates that made it difficult to obtain competitive bids from shops not controlled by Allstate, directing repair facilities to perform only partial repairs, and terminating PRO shops located near Sterling shops to increase business for Sterling. The record shows that various Texas legislators supported H.B. 1131 in order to preclude a conflict of interest between automobile insurers and their insureds and customers.

55. The Fifth Circuit has held that the prevention of vertical integration to stop vertically integrated companies from taking advantage of their market position, and preventing frauds, unfair practices, discrimination, impositions and other abuses of its citizens are legitimate state interests. Ford, 264 F.3d at 503. In this case, based upon the facts presented to the Texas legislature, a reasonable legislator could rationally have believed that H.B. 1131 would further the state's legitimate interests in the prevention of unfair competition and consumer protection. Therefore, the court must find that H.B. 1131 advances these putative local benefits. Ford, 264 F.3d at 504; Intl. Truck, 372 F.3d at 728.

56. When H.B. 1131 was under consideration, evidence supporting its stated concerns as to conflict of interest, lack of independence, loss of a "voice" for the consumer in the repair process, and anti-competitive and anti-consumer conduct taken by Allstate and other insurance carriers were all before the legislators. The court cannot find that the passage of H.B. 1131 by the Texas legislature was "wholly irrational in light of its purposes." H.B. 1131 thus survives the Pike balancing test, and the court holds that it does not violate the dormant Commerce Clause.

B. First Amendment Claims

57. Allstate and Sterling challenge four specific restrictions found in section 2306.006 of the statute on the grounds that such restrictions are unconstitutional in that they unlawfully restrict Plaintiffs' First Amendment freedom of speech. See Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9).

58. The First Amendment, as applied to the states through the Fourteenth Amendment, protects commercial speech from unwarranted governmental regulation. Central Hudson Gas Electric Corp. v. Public Svc. Comm. of New York, 447 U.S. 557, 561 (1980); Virginia Pharmacy Bd. v. Virginia Citizens Consumer Council, 425 U.S. 748, 761-62 (1976). "Commercial expression not only serves the economic interest of the speaker, but also assists consumers and furthers the societal interest in the fullest possible dissemination of information." Central Hudson, 447 U.S. at 561-62.

59. Specifically, Plaintiffs challenge on First Amendment grounds the statute's prohibitions on:

• engaging in a joint marketing program with a tied repair facility;

• providing tied repair facilities a recommendation, referral or description not provided on identical terms to other preferred repair facilities (here, PRO program shops);

• allowing a tied repair facility to use its name in a manner different from that allowed for any PRO shops; and

• recommending that policyholders have their vehicles repaired at a tied repair facility, except to the same extent it recommends PRO repair facilities.

Tex. Occ. Code §§ 2306.006 (3), (4), (6) and (9).

60. The Supreme Court has stated that speech proposing a commercial transaction is entitled to the protections of the First Amendment. 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 502 (1996). Plaintiffs argue that under the First Amendment analysis laid out by the Supreme Court in Central Hudson, 447 U.S. at 566, the restrictions imposed by subsections 2306.006 (3), (4), (6) and (9) of the statute are unconstitutional because they violate their First Amendment right to free commercial speech.

61. Defendants and Intervenors argue that the challenged statutory provisions compel rather than restrict speech, and thus they urge the court to apply the more deferential standard articulated in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626, 651 (1985), which provides that a statute compelling commercial speech must be upheld if it is reasonably related to the state's interest and is not unduly burdensome. Id. The court finds, however, that Zauderer is distinguishable from the speech at issue in this case.

62. In Zauderer, an attorney placed an advertisement seeking clients who had been injured by using a contraceptive known as the Dalkon Shield Intrauterine Device, stating that such cases would be handled by his firm on a contingent fee basis and that "[i]f there is no recovery, no legal fees are owed by our clients." 471 U.S. at 630. He was then disciplined by the state bar for failing to disclose in the advertisement that if a client's lawsuit was unsuccessful, the client could still be responsible for litigation costs and expenses. Id. at 633.

63. The court held that because the extension of First Amendment protection to commercial speech was principally justified by the value to consumers of the information such speech provides, the attorney's constitutionally-protected interest in not providing this factual information was minimal. Id. at 651, citing Virginia Pharmacy Bd., 425 U.S. 748. The attorney urged the Court to apply a "least restrictive means" analysis to the disclosure requirement. Id. at 651 n. 14. Under a "least restrictive means" standard, a statute should be struck down if there are other "less restrictive" means by which the state's purposes may be served. Id. The Court refused, noting that while it had applied such analysis to an outright prohibition on speech, compelled disclosures implicated a "substantially weaker" First Amendment interest, and thus the level of scrutiny articulated in Central Hudson and other cases involving actual suppression of speech was too high. Id., citing Central Hudson, 447 U.S. at 565.

64. In the instant case, Defendants and Intervenors have never cited to anything in Allstate's script that is false or misleading, and the court has found that the content of Allstate's script is not false or misleading. Allstate's script tells its customers directly that they may choose any autobody repairer they wish. Although Allstate encourages its policyholders to use Sterling, it also discloses its affiliation with Sterling, allowing the customer to determine whether they are comfortable with using a repair facility with a corporate connection to their insurance company.

65. Rather, Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) restrict Plaintiffs from speaking about Sterling at all, unless PRO shops are also mentioned on the same terms as Sterling.

66. These restrictions on Plaintiffs' speech regarding Sterling do not prevent or correct any potential misapprehension or deception as was the case in Zauderer. Furthermore, H.B. 1131 does not force Allstate to disclose its relationship with Sterling, because Allstate already makes that disclosure.

67. The court holds that this is not a "compelled speech" case within the purview of Zauderer, but a "restricted speech" case under Central Hudson. "If the communication is neither misleading nor related to unlawful activity, the government's power is more circumscribed." Central Hudson, 447 U.S. at 564. The court has found that the speech at issue is neither misleading nor related to unlawful activity. Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) suppress Allstate's commercial speech rather than forcing it to make a disclosure for the purpose of correcting or avoiding a potential deception or misapprehension. For these reasons, the court must employ the Central Hudson analysis in analyzing the constitutionality of Tex. Occ. Code §§ 2306.006 (3), (4), (6) and (9). Zauderer, 471 U.S. at 651 n. 14; see also Central Hudson, 447 U.S. at 564-66.

68. Allstate's ownership and operation of existing Sterling repair shops, at least to the extent they existed or were under construction as of April 15, 2003, is lawful under the act. Tex. Occ. Code § 2306.002(b). Therefore, the court's First Amendment analysis of the statute applies to Allstate and Sterling's continued ownership and operation of these 15 stores.

69. Defendants and Intervenors argue that the restrictions in Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) are merely incidental to a valid governmental restriction on conduct, relying on Pittsburgh Press Co. v. Pittsburgh Commission on Human Relations, 413 U.S. 376, 389 (1973) and Ford, 264 F.3d at 506. Pittsburgh Press and Ford both hold that any First Amendment interest is absent when the commercial activity itself is illegal, thus making the restrictions on speech merely incidental to a valid limitation on economic activity. 413 U.S. at 389; 264 F.3d at 506. However, The Fifth Circuit has confirmed that the intermediate scrutiny of the Central Hudson analysis is applicable to the regulation of speech related to lawful commercial activity, as is the case here. Ford, 264 F.3d at 506.

70. Therefore, Defendants and Intervenors' reliance on these cases is misplaced, as they are distinguishable from the instant case. Here, Allstate's ownership of the 15 Sterling autobody repair shops it currently operates in Texas is expressly made lawful under Tex. Occ. Code § 2306.002(b). Therefore, §§ 2306.006(3), (4), (6) and (9)'s regulation of commercial speech is not incidental to the regulation of unlawful commercial activity. See Ford, 264 F.3d at 506 (finding that restriction on plaintiff's ability to advertise motor vehicles for sale was incidental to prohibition on sale of such vehicles, but stating that "[i]n contrast, if § 5.02C(e) prohibited advertising the sale of motor vehicles by licensed dealers, a commercial activity lawful in Texas, the regulation would invoke the protections of the First Amendment and be subjected to the intermediate scrutiny outlined in Hudson.").

71. Under Central Hudson, the court must determine whether (1) the disputed speech is false or misleading; (2) whether the state has a substantial interest in regulating the speech; (3) whether the restriction on speech directly advances the state interest involved; and (4) whether the state's interest could be equally well served by a more limited restriction on commercial speech. 447 U.S. at 566.

1. Whether the Speech is False or Misleading

72. Plaintiffs have satisfied the first prong of the Central Hudson test, in that nothing in the disputed commercial speech is false or misleading. Therefore, to regulate truthful and non-deceptive speech, Defendants and Intervenors bear the ultimate burden of proving that the state has a substantial interest, that the statute directly and materially advances this interest, and the regulation is narrowly drawn. Bailey v. Morales, 190 F.3d 320, 323 (5^th Cir. 1999).

2. Legitimacy of State Interest

73. Defendants and Intervenors assert that Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) meet the second prong of the Central Hudson test because the state has a legitimate interest in consumer protection and the promotion of fair competition. See Ohralik v. Ohio State Bar Assn., 436 U.S. 447, 460 (1978) (state clearly has an interest in consumer protection); Ford, 264 F.3d at 503 (preventing vertically integrated companies from taking advantage of their incongruous market position and "`to prevent frauds, unfair practices, discrimination, impositions, and other abuses of our citizens' — are legitimate state interests"). The court agrees that both of these objectives are legitimate state interests, and therefore Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) meet the second element of the Central Hudson test.

3. Whether the Regulations Directly and Materially Advance the State's Asserted Interest

74. As stated above, it is Defendants' position that the challenged subsections of Tex. Occ. Code § 2306.006 accomplish the state's goals of consumer protection and the promotion of fair competition. The court disagrees, because Defendants have not shown that restricting truthful speech about the benefits of using a Sterling repair shop benefits consumers. See Central Hudson, 447 U.S. at 567 (suppression of advertising reduces the information available for consumer decisions and is contrary to the purpose of the First Amendment).

a. Protecting Consumers

75. Consumers benefit from more, rather than less, information. Attempting to control the outcome of the consumer decisions following such communications by restricting lawful commercial speech is not an appropriate way to advance a state interest in protecting consumers. Thompson v. Western States Medical Center, 535 U.S. 357, 374 (2002).

76. In its communications with customers, Allstate makes clear that they may use any body shop they wish. Specifically, the script Allstate uses when its customers call to report damage to their vehicles states that "you are always free to choose any repair shop of your choice and are under no obligation or requirement to use a shop we recommend . . ." However, Allstate goes on to provide additional information about the benefits of using Sterling, while also disclosing that Sterling is an affiliated company. The court sees no "consumer benefit" to restricting Allstate's ability to advertise and promote Sterling to its customers.

77. Whether or not consumers make better or worse choices when provided with such truthful, non-misleading information does not justify action by the state to interfere with or deprive consumers of their lawful options. Allstate Ins. Co. v. Serio, 2000 WL 554221, *21, *23 (S.D.N.Y. 2000), question certified by 261 F.3d 143 (2d Cir. 2001), answered by 746 N.Y.S.2d 416 (N.Y. 2002); 44 Liquormart, 517 U.S. at 510.

78. If using a Sterling shop does, in reality, harm consumers, consumers may bring litigation against Sterling and/or Allstate to pursue their legal remedies. Additionally, consumers can refuse to use Sterling in the future. Finally, poor experiences with Sterling may also generate negative word of mouth that would keep some consumers from choosing a Sterling shop for their autobody repairs. Therefore, the court holds that preventing Allstate from speaking to customers about Sterling would merely steer business away from Sterling rather than protect consumers, who may or may not choose to use Sterling even after being informed of its advantages, and who may have a good rather than bad experience if they do choose to use Sterling.

b. Promoting Fair Competition

79. Next, Defendants argue that Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) directly and materially advance the state's objective of promoting fair competition.

80. Early in this case, Defendants and Intervenors asserted that PRO shops should be featured in Allstate's speech in a manner that "levels the playing field" between Sterling and the PRO shops. Defendants and Intervenors have now re-worded this assertion, stating that Allstate must make recommendations "on a fair basis among all of the autobody repair shops that qualify under Allstate's chosen criteria for receiving a recommendation or referral."

81. The court disagrees that the speech restrictions in Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) will truly combat unfair competition. First, Allstate's speech promoting Sterling is simply advertising — a fundamental component of competition in most industries. The fact that Sterling may have "raised the bar" by claiming to provide additional and/or superior products and services should only spur further competition by the PRO and other independent autobody repair shops rather than inhibit it.

82. Further, although Defendants and Intervenors may contend that it is permissible to require Allstate, in its commercial speech, to promote equally all autobody repair shops "that qualify under Allstate's chosen criteria for receiving a recommendation or referral," language promoting shops that have proven themselves to Allstate as good collision repairers (the PRO shops) only extends an advantage on a wider number of shops, not all shops in Texas equally. In Defendants and Intervenors' view, this advantage that they seek for the PRO shops is "unfair" when it only includes Sterling, but somehow evolves into "fair competition" when the circle of advantaged shops is widened to include the PRO shops, although non-PRO shops are still excluded.

83. Thus, Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) do not truly make competition equal for all autobody shops statewide. Rather, they only protect the interests of those shops who participate in Allstate's PRO program. Overall fair competition is not advanced by these speech restrictions. For these reasons, the court finds that Tex. Occ. Code §§ 2306.006 (3), (4), (6) and (9) do not materially and substantially advance the state interests of consumer protection and promoting fair competition.

4. Whether the Restriction on Commercial Speech is Narrowly Tailored to the State Interest Advanced

84. The restrictions on commercial speech imposed by Tex. Occ. Code §§ 2306.006 (3), (4), (6) and (9) are not narrowly tailored to meet the asserted objectives of consumer protection and promotion of fair competition. First, the restriction prohibiting the promotion of Sterling may deprive consumers of information that could be beneficial to them. Also, consumers already have the protection of Texas's anti-steering law. Finally, the restrictions of Tex. Occ. Code §§ 2306.006 (3), (4), (6) and (9) do not sufficiently promote the state's interest in fair competition, since they restore a competitive advantage lost only by Allstate's PRO shops, not all autobody shops statewide.

a. Consumer Protection

85. A ban on Plaintiffs' speech promoting Sterling inhibits the dissemination of information that may benefit consumers and thus is not narrowly tailored to protect them.

86. Consumers are already protected by the Texas anti-steering statute, which prohibits insurers such as Allstate from requiring policyholders to use a certain autobody shop for their repairs to be covered. See Tex. Ins. Code § 5.07-1(b)(2); see also Allstate Ins. Co. v. State of South Dakota, 871 F. Supp. 355, 358 (D.S.D. 1994) (restrictions on referral to preferred auto glass replacement services not narrowly tailored where anti-steering statute was in place preventing insurers from requiring policyholders to use a particular auto glass repair or replacement business). Allstate's script makes it clear to consumers that they may use any car repair facility they choose; however, Allstate is promoting Sterling, an affiliated company.

87. Requiring disclosures regarding Allstate's ownership of Sterling (which the court notes that Allstate is already making to its policyholders) would have appropriately served the state's stated interests in consumer protection, and functioned as a less-restrictive mechanism than banning Allstate from recommending Sterling without providing an equivalent recommendation of other independent repair facilities.

b. Promotion of Fair Competition

88. Additionally, Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) are not narrowly tailored to serve the state's interest in promoting fair competition. The requirements of the statute that essentially force Allstate to promote its PRO shops on an equal footing with Sterling shops merely allows the PRO shops to regain a competitive advantage that may have been diminished with Allstate's acquisition of Sterling.

89. There has been no showing that the restoration of this advantage for the PRO shops through H.B. 1131 would have a positive effect on competition overall, as those shops not included in the PRO program would not be blessed with any increased ability to compete.

90. Since Sterling holds only about a 2% share of the Texas autobody repair market, this court doubts that Sterling's presence in the Texas marketplace, and privileged position vis-a-vis other body shops to which Allstate may have referred its customers, have resulted in unfair competition.

91. Finally, an additional benefit of the anti-steering law already in place is that it protects competition by giving Texas auto policyholders the freedom to choose any repair facility for their collision repairs. Allstate follows the anti-steering law and makes it clear to customers that they are "free to choose" their own repair shop, both in their telephone scripts and on the company's website.

92. Because the record does not show that consumers lack sufficient information about their repair rights and options, or that Allstate's promotion of Sterling has a negative effect on competition, the court finds that the restrictions imposed by subsections (3), (4), (6) and (9) of Tex. Occ. Code § 2306.006, which restrict Plaintiffs' speech about Sterling's products and services are not narrowly tailored, meaning that they are more extensive than necessary to serve the interests claimed by the state.

93. The state can find (and has found, in the case of the anti-steering statute) less restrictive means of protecting consumers and fair competition in the marketplace. For the above-stated reasons, the court finds that Plaintiffs have established that subsections (3), (4), (6) and (9) of Tex. Occ. Code § 2306.006 do not survive the constitutional scrutiny of Central Hudson, because the restrictions imposed by H.B. 1131 on Allstate's truthful commercial speech do not directly advance the state's interests in consumer protection and promotion of fair competition, and they are not narrowly tailored (or no more restrictive than necessary) to promote these asserted state interests. The court finds that Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) violate Plaintiffs' First Amendment right to free commercial speech and are unconstitutional.

C. Severability

94. Because the court has upheld H.B. 1131's overall prohibition on insurer ownership of repair shops under the dormant Commerce Clause, but has invalidated Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) as unconstitutional under the First Amendment, the court must determine whether the invalid portions of the statute are severable.

95. H.B. 1131 contains no express severability clause. In the absence of an express severability clause, the test for severability turns on the intent of the state legislature. Assn. of Texas Professional Educators v. Kirby, 788 S.W.2d 827, 830 (Tex. 1990); Tex. Govt. Code § 312.013(b). Where part of a statute is unconstitutional, valid portions of the statute will still stand if they are so "clearly independent" of the unconstitutional provisions that the Legislature would have passed them absent the unconstitutional provisions. Kirby, 788 S.W.2d at 830. Otherwise, if all of the provisions of the statute are so connected that it is apparent that the Legislature would not have passed the act, except as a whole, then the entire statute must fall. Id. at 830-31.

96. The Texas Government Code also states that if a provision of a statute is held invalid, the invalidity does not affect other provisions of the statute that can be given effect without the invalid provision, and to this end the provisions of the statute are severable. Tex. Govt. Code §§ 311.032(c), 312.013(a).

97. Here, the other sections of H.B. 1131 can still be given effect even if the speech restrictions contained in Tex. Occ. Code §§ 2306.006 (3), (4), (6) and (9) are held invalid and severed. These restrictions apply to 15 Sterling stores which were grandfathered under Tex. Occ. Code § 2306.002(b). Under that section of the statute, Allstate will still be legally permitted to continue owning those 15 Sterling locations, whether or not the speech restrictions in section 2306.006(3), (4), (6) and (9) continue to apply.

98. Even though the restrictions in Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9) are constitutionally invalid, H.B. 1131's prohibition on insurer ownership of collision repair shops, if standing by itself, would still be valid. The validity of H.B. 1131's overall prohibition of ownership does not depend upon the speech restrictions. These provisions are clearly independent of each other, and the court believes that the Texas legislature would still have passed H.B. 1131 had the speech restrictions been omitted. The court finds that section 2306.006(3), (4), (6) and (9) are severable from the remainder of the statute.

D. Supremacy Clause and Lanham Act Preemption

99. Allstate and Sterling have alternatively argued that Tex. Occ. Code § 2306.006(6), which regulates the use of Allstate's name, trademark, tradename, brand or logo is unconstitutional under the Supremacy Clause and preempted by the Lanham Act, 15 U.S.C. § 1127. Because the court has determined that this provision of H.B. 1131 is unconstitutional under the First Amendment, it does not reach these arguments and makes no ruling thereupon.

E. Constitutional Estoppel

100. Defendants and Intervenors contend that because Allstate and Sterling have received the benefit of H.B. 1131's grandfather clause, which permits them to continue operating any Sterling stores that were open or under construction as of April 15, 2003 ( see Tex. Occ. Code § 2306.002(b)), they cannot challenge H.B. 1131 on constitutional grounds. According to Defendants and Intervenors, H.B. 1131 was compromise legislation that provided a benefit to insurance companies such as Allstate who had acquired an interest in autobody repair shops, permitting them to avoid divestiture. Defendants and Intervenors argue that Allstate and Sterling voluntarily accepted the benefit provided by Tex. Occ. Code § 2306.002(b), and therefore are estopped from bringing a constitutional challenge against the statute.

101. The doctrine of constitutional estoppel provides that "one may not retain the benefits of the Act while attacking the constitutionality of one of its important conditions." Fahey v. Mallonee, 332 U.S. 245, 255 (1947). However, this rule has not been strictly applied, and has rather been applied on a case-by-case basis. Alliant Energy Corp. v. Bie, 330 F.3d 904, 909 (7^th Cir. 2003), citing Kadrmas v. Dickinson Pub. Sch., 487 U.S. 450, 456-57 (1988).

102. In cases where constitutional estoppel has been applied to preclude a constitutional challenge to a statute, courts have consistently held that the party being estopped "owed its existence" to the benefits provided by the challenged statute. See Fahey, 332 U.S. at 256 (appropriate to apply constitutional estoppel where savings and loan association created under the challenged act utilized the act itself to "gain advantages of corporate existence"); Medical Waste Assoc. Ltd. Partnership v. Mayor and City Council of Baltimore, 966 F.2d 148, 152 (4^th Cir. 1992) (plaintiff's medical waste incinerator would not have existed if not for passage of ordinance which plaintiff actively pursued). However, courts have also held that parties who "are not the creatures of any statute" are not forbidden to challenge a statute simply because they have derived some benefit from it. Kadrmas, 487 U.S. at 456-57; S.J. Groves Sons Co. v. Fulton County, 920 F.2d 752, 769 (11^th Cir. 1991).

103. Although Allstate and Sterling have availed themselves of the benefits of Tex. Occ. Code § 2306.002(b), they are not "the creatures" of that statute and do not owe their existence to it. Both Allstate and Sterling enjoyed their corporate existence prior to the passage of H.B. 1131, and presumably that existence will continue whether or not H.B. 1131 is either completely upheld or, as the court has determined here, partially invalidated. Furthermore, even though the grandfather clause benefits Allstate and Sterling somewhat, the remainder of H.B. 1131 is highly disadvantageous to them. The record is clear that unlike the plaintiffs in Fahey and Medical Waste, Allstate and Sterling fought against, rather than supported, the passage of H.B. 1131. The court is not convinced that the small benefit Allstate and Sterling received at the end of the legislative process justifies the application of constitutional estoppel here. The court holds that Allstate and Sterling are not constitutionally estopped from challenging H.B. 1131.

F. 42 U.S.C. § 1983

104. Tex. Occ. Code § 2306 does not authorize a state agency to enforce its provisions; rather, it creates a private right of action for persons aggrieved by a violation of the statute. Tex. Occ. Code § 2306.009.

105. 42 U.S.C. § 1983 provides a remedy for deprivations of rights secured by the Constitution and laws of the United States, when that deprivation occurs "under color of any statute, ordinance, regulation, custom or usage, or any State or Territory . . ." Lugar v. Edmondson Oil Co., 457 U.S. 922, 924 (1982).

106. Allstate and Sterling must show that Defendants Abbott and Strayhorn (who are sued in their official capacities as officers of the State of Texas) acted under color of law. Adickes v. S.H. Kress Co., 398 U.S. 144, 150 (1970). Acting under color of state law is defined as the "[m]isuse of power possessed by virtue of state law and made possible only because the wrongdoer is clothed with authority of state law." Monroe v. Pape, 365 U.S. 167, 184 (1961). Unexercised authority under state law is not action under color of state law. Brown v. Chaffee, 612 F.2d 497, 501 (10^th Cir. 1979). It is undisputed that Abbott or Strayhorn have not taken any action against Allstate and Sterling to enforce H.B. 1131. Accordingly, Allstate and Sterling have not established a violation of section 1983.

III. Conclusion

For the foregoing reasons, the court concludes that H.B. 1131 does not violate the dormant Commerce Clause and is constitutional, with the exception of the speech restrictions found in Tex. Occ. Code §§ 2306.006(3), (4), (6) and (9), which the court has concluded do violate the First Amendment to the United States Constitution. The court will enter judgment consistent with these findings of fact and conclusions of law by separate document.

SO ORDERED.