United States v. State of Delaware Department o ( 2023 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 21-3008
_____________
UNITED STATES OF AMERICA
v.
STATE OF DELAWARE DEPARTMENT OF
INSURANCE,
Appellant
_______________
On Appeal from the United States District Court
For the District of Delaware
(D.C. No. 1-20-cv-0829)
District Judge: Honorable Maryellen Noreika
_______________
Argued
November 8, 2022
Before: JORDAN, SCIRICA, and RENDELL, Circuit
Judges
(Filed April 21, 2023 )
_______________
James J. Black, III [ARGUED]
Mark W. Drasnin
Jeffrey B. Miceli
Black & Gerngross
1617 John F. Kennedy Blvd.
Suite 1575
Philadelphia, PA 19103
Patricia A. Davis
Office of Attorney General of Delaware
Delaware Department of Justice
102 West Water Street – 3rd Floor
Dover, DE 19904
Kathleen P. Makowski
Office of Attorney General of Delaware
Department of Justice
820 N. French Street – Suite 1010
Wilmington, DE 19801
Counsel for Appellants
Travis S. Hunter
Richards Layton & Finger
920 N. King Street
One Rodney Square
Wilmington, DE 19801
Counsel for Amicus Appellants
2
Ward W. Benson
Kyle L. Bishop
United States Department of Justice
Tax Division
P.O. Box 227
Ben Franklin Station
Washington, DC 20044
Michael J. Haungs
Lauren E. Hume
Francesca Ugolini [ARGUED]
United States Department of Justice
Tax Division
950 Pennsylvania Avenue
P.O. Box 502
Washington, DC 20044
Counsel for Appellee
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
This case pits Delaware’s authority to protect corporate
privacy against the power of the IRS to enforce the tax laws of
the United States. The dispute arises from the refusal of the
Delaware Department of Insurance (the “Department”) to
comply with an IRS summons. The Department relies on Title
18, Section 6920 of the Delaware Code, which generally
prohibits the Department from disclosing certain information
about captive insurance companies to anyone, including the
3
federal government, absent the companies’ consent.1 But
§ 6920 does allow disclosure to the federal government if it
agrees in writing to keep the disclosed information
confidential. The government did not and instead petitioned
the District Court to enforce its summons. The Court granted
that petition. The Department argues that, under the
McCarran-Ferguson Act (“MFA”), 15 U.S.C. § 1011 et seq.,
Delaware law as embodied in § 6920 overrides the IRS’s
statutory authority to issue and enforce summonses, so the
District Court’s order should be reversed.
While the MFA does protect state insurance laws from
intrusive federal action when certain requirements are met, the
District Court concluded that, before any such reverse-
preemption occurs, our precedent requires that the conduct at
issue – in this case, the refusal to produce summonsed
documents – must constitute the “business of insurance” within
the meaning of the MFA. [J.A. at 008, 012-17, 024-33.] The
District Court held that this threshold requirement was not met
here, and we agree. We will therefore affirm.
I. BACKGROUND
A. Origin of the McCarran-Ferguson Act and Its
Relevant Text
The MFA was Congress’s response to the Supreme
Court’s decision in United States v. South-Eastern
Underwriters Ass’n, 322 U.S. 533 (1944). Before that
1
A captive insurance company is an insurance company
that is wholly owned and controlled by its insureds. Avrahami
v. Comm’r of Internal Revenue, 149 T.C. 144, 176 (T.C. 2017).
4
decision, “it had been assumed that ‘[i]ssuing a policy of
insurance [wa]s not a transaction of commerce,’ subject to
federal regulation.” U.S. Dep’t of Treasury v. Fabe, 508 U.S.
491, 499 (1993) (quoting Paul v. Virginia, 75 U.S. (8 Wall.)
168, 183 (1869)). That changed when South-Eastern
Underwriters held that “insurance transactions were subject to
federal regulation under the Commerce Clause, and that the
antitrust laws in particular[] were applicable to them.” SEC v.
Nat’l Sec., Inc., 393 U.S. 453, 458 (1969).
Fearing that South-Eastern Underwriters would
“undermine state efforts to regulate insurance,” Congress
enacted the MFA. Humana Inc. v. Forsyth, 525 U.S. 299, 306
(1999). Relevant to our inquiry today are the provisions of the
statute codified at §§ 1011 and 1012 of Title 15 of the United
States Code.2 The first, denominated “Declaration of policy,”
states:
Congress hereby declares that the continued
regulation and taxation by the several States of
the business of insurance is in the public interest,
and that silence on the part of the Congress shall
not be construed to impose any barrier to the
regulation or taxation of such business by the
several States.
15 U.S.C. § 1011. Then, § 1012 provides:
2
All references herein to the MFA are to its provisions
as codified.
5
(a) State regulation
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.
(b) Federal regulation
No Act of Congress shall be construed to
invalidate, impair, or supersede any law enacted
by any State for the purpose of regulating the
business of insurance, or which imposes a fee or
tax upon such business, unless such Act
specifically relates to the business of insurance:
Provided, That after June 30, 1948, the Act of
July 2, 1890, as amended, known as the Sherman
Act, and the Act of October 15, 1914, as
amended, known as the Clayton Act, and the Act
of September 26, 1914, known as the Federal
Trade Commission Act, as amended, shall be
applicable to the business of insurance to the
extent that such business is not regulated by State
law.
15 U.S.C. § 1012.
The Supreme Court later, in Prudential Insurance Co.
v. Benjamin, 328 U.S. 408 (1946), “explained the legislative
intent behind the statute’s preclusionary approach to federal
intrusion on state insurance laws.” Sabo v. Metro. Life Ins. Co.,
137 F.3d 185, 189 (3d Cir. 1998). It said, among other things,
that Congress’s “purpose was broadly to give support to the
existing and future state systems for regulating and taxing the
business of insurance.” Prudential Ins. Co., 328 U.S. at 429.
6
Those closing words ‒ “the business of insurance” ‒ have high
salience in this dispute over captive insurance companies.
B. Overview of Captive Insurance
A “captive” insurance company is one that is wholly
owned and controlled by its insureds. Avrahami v. Comm’r of
Internal Revenue, 149 T.C. 144, 176 (T.C. 2017). This type of
entity protects the owner-insured while simultaneously
allowing the benefit of reaping the captive company’s
underwriting revenues. Businesses that are experienced in
establishing and managing captive insurance companies are
called “captive managers.” (J.A. at 241 at ¶ 14.) Captive
managers facilitate the creation and management of captive
insurers in jurisdictions that have passed captive insurance
enabling legislation, as has Delaware.
Captive insurance is effectively a kind of self-insurance,
but one with an added tax benefit: “Amounts paid for insurance
are deductible under [26 U.S.C. § 162(a)] as ordinary and
necessary expenses paid or incurred in connection with a trade
or business[,]” as opposed to “amounts set aside in a loss
reserve as a form of self-insurance,” which are not deductible.
Avrahami, 149 T.C. at 174. The upshot is that a company that
wishes to hold money aside in case of loss can reduce its
taxable income by paying such money as premiums to its
captive insurer and then deducting the premiums.
Title 18 of the Delaware Code (the “Delaware Insurance
Code”) governs insurers and insurance professionals licensed
under Delaware law. Chapter 69 of the Delaware Insurance
Code is the part of the state’s statutory scheme governing the
formation, licensing, and regulation of captive insurers. Under
7
Chapter 69, corporations and various alternative entities can
apply for certificates of authority from the Insurance
Commissioner of the State of Delaware to operate as captive
insurance companies. 3 If a certificate is granted, the resulting
Delaware captive insurance company is generally subject to
triennial examinations in which the Department “thoroughly
inspect[s] and examine[s] [the company’s] affairs to ascertain
its financial condition, its ability to fulfill its obligations and its
compliance with the provisions of [Chapter 69].” 18 Del. Code
Ann. § 6908.
Section 6920 of the Delaware Insurance Code, which is
central to the present controversy, relates to the confidential
treatment of materials and information that captive insurers are
required to submit to the Department. It provides, in pertinent
part:
All portions of license applications reasonably
designated confidential by … an applicant
captive insurance company, … and all
examination reports, … recorded information,
[and] other documents, … produced or obtained
3
A would-be captive insurance company may apply for
a “certificate of authority” from the Commissioner, as provided
in 18 Del. Code Ann. § 6903 (“License application; certificate
of authority”). Once issued a “certificate of authority,” a
captive insurance company is “authoriz[ed] … to do insurance
business in th[e] State.” Id. § 6903(f). The terms
“Commissioner” and “the Department” will be used herein
interchangeably, as there is no issue in this case relating to
delegation of the Commissioner’s authority.
8
by or submitted or disclosed to the
Commissioner that are related to an examination
pursuant to this chapter must, unless the prior
written consent … of the captive insurance
company … has been obtained, be given
confidential treatment …, and may not be …
disclosed to any other person at any time except:
….
To a law-enforcement official or agency
of … the United States of America so long
as such official or agency agrees in
writing to hold it confidential and in a
manner consistent with this section.
§ 6920.
In short, § 6920 prohibits the Department from
disclosing covered information to anyone, including the
federal government, unless the captive insurance company
consents, or, as relevant here, the federal government agrees in
writing to treat the information as confidential.
C. Overview of “Micro-Captive” Insurance and
Tax Concerns
As mentioned above, captive insurance can be used to
obtain a tax benefit for the insureds by permitting them to claim
deductions for the premiums they pay. But that does not
prevent the IRS from taxing the captive insurers. “While the
[Internal Revenue] Code permits the deduction of insurance
premiums paid, it also taxes insurance premiums received.”
Avrahami, 149 T.C. at 174 (emphasis in original); see also id.9
at 175 (“Insurance companies – other than life-insurance
companies … – are generally taxed on their income in the same
manner as other corporations.”).
There is, however, an exception of particular relevance
here: insurance companies whose annual net written premiums
do not exceed a specified maximum and meet certain other
requirements may elect tax treatment under 26 U.S.C.
§ 831(b).4 See id. at 176, 178-79 & n.46. That election allows
a captive insurance company to pay no taxes on the premiums
it receives. IRS Notice of Transaction of Interest – Section
831(b) Micro-Captive Transactions (“2016 IRS Notice”),
2016-47 I.R.B. 745 (2016). Instead, it only pays tax on any
eligible investment income it may have. Id.; see also
Avrahami, 149 T.C. at 176 (explaining that such an entity is
“subject to tax only on its taxable investment income”). In that
4
That section generally provides that instead of paying
taxes computed using their taxable income, insurance
companies that have elected this treatment have their “tax
computed by multiplying” their “taxable investment income”
“by the rates provided in [26 U.S.C.] section 11(b).” 26 U.S.C.
§ 831(b)(1) (setting the general tax consequence for certain
small insurance companies). The 2015 amendments to 26
U.S.C. § 831(b) set the threshold at $2.2 million and provided
that this will periodically be “increased for inflation.”
Avrahami, 149 T.C. at 176 n.46. The federal government
represents that as of the time it filed its Answering Brief, the
maximum still stands at $2.2 million. The 2015 amendments
to 26 U.S.C. § 831(b) “added new diversification requirements
that an insurance company must meet in order to receive the
favorable tax treatment of subsection (b).” Id.10
circumstance, then, the insured can deduct premiums from its
taxable income without its captive insurer being taxed on those
same premiums.
Insurance companies that are both “captive insurers”
and taxed under 26 U.S.C. § 831(b) are known as “micro-
captives.” The term “micro-captive” does not appear
anywhere in the Delaware Captive Law or the Internal
Revenue Code. It is simply an apt description used by the IRS
and the Tax Court, among others, to designate a captive
insurance company whose annual net written premiums do not
exceed the maximum allowed for it to elect the special tax
treatment available under § 831(b). See Avrahami, 149 T.C. at
176, 178-79 (discussing such companies and transactions, their
tax consequences, and their potential for abuse).
While the IRS has explicitly “recognize[d] that related
parties may use captive insurance companies that make
elections under § 831(b) for risk management purposes that do
not involve tax avoidance,” it has identified “micro-captive”
transactions as having “a potential for tax avoidance or
evasion.” 2016 IRS Notice, 2016-47 I.R.B. 745. For example,
“[u]nscrupulous promoters” may “persuade closely held
entities to … create captive insurance companies onshore or
offshore, drafting organizational documents and preparing
initial filings to state insurance authorities and the IRS.” IRS
News Release IR-2015-19 (Feb. 3, 2015),
https://www.irs.gov/pub/irs-news/IR-15-019.pdf. Too often,
these micro-captives are not providing bona fide insurance.
“Underwriting and actuarial substantiation for the insurance
premiums paid are either missing or insufficient.” Id. Instead,
their purpose is to serve as a conduit for inflated premiums that
their insureds can deduct as business expenses, while the faux
11
insurer, by keeping the premiums below the threshold for
§ 831(b), is taxed only on the investment income it may have.
Id. The promoters help paper over the charade and may
“assist[] with creating and ‘selling’ to the entities often times
poorly drafted ‘insurance’ binders and policies to cover
ordinary business risks or esoteric, implausible risks for
exorbitant ‘premiums[.]’” Id. All the while, the insured may
retain actual commercial insurance coverage from traditional
insurers. Id.
Accordingly, “the IRS has applied increased scrutiny to
these transactions, adding them to [its] ‘dirty dozen’ list of tax
scams in 2015 and declaring them ‘transactions of interest’ in
2016.” Avrahami, 149 T.C. at 173. A 2016 IRS Notice
declared micro-captive transactions satisfying certain criteria
as “transactions of interest” that must be reported to the IRS.
IRS Notice, 2016-47 I.R.B. 745.
D. Factual Background
The summons enforcement action now on appeal arises
from the IRS’s investigation of Artex Risk Solutions, Inc.
(“Artex”), and Tribeca Strategic Advisors, LLC (“Tribeca”),
the latter entity being wholly owned by Artex. The
investigation seeks to determine whether Artex and Tribeca are
liable for penalties under 26 U.S.C. § 6700 for promoting
abusive tax shelters.5 The federal government successfully
enforced two summonses issued to Artex, leading to a
production of documents in 2014. Those documents included
5
The origins of that investigation are immaterial to the
issues before us now.
12
two email chains between Artex and the Delaware Department
of Insurance that piqued the interest of the IRS and led to the
summons at issue here. The first email chain related to the
issuance by the Department of certificates of authority in
December 2012 to an Artex client. The second involved the
Department’s Director of Captive and Financial Insurance
Products, who declined a dinner invitation from Artex but
scheduled a breakfast meeting the following day with six
Department employees and Artex.
On October 30, 2017, the IRS issued an administrative
summons to the Department for testimony and certain records
relating to filings by and communications with Artex, Tribeca,
or others working with those companies. Of main concern is
what the parties and District Court refer to as “Request 1” of
the summons. Request 1 seeks “all electronic mail between
[the Department] and Artex and/or Tribeca related to the
Captive Insurance Program.” (J.A. at 065.) The “Captive
Insurance Program” is broadly defined in the summons as “any
arrangement managed by Artex or Tribeca wherein captive
insurance companies, defined by [Chapter 69 of the Delaware
Insurance Code], provide either insurance and/or reinsurance.”
(J.A. at 063.) At the time of the summons, it seems the IRS
believed that the Department had issued 191 certificates of
authority to insurance companies created by Artex and
Tribeca.6 It directed the Department to appear before a revenue
agent to give testimony and produce requested documents by
November 29, 2017.
6
The Department has represented that it actually issued
225 certificates of authority to companies created by Artex and
Tribeca.
13
The Department responded with objections to the
summons, including confidentiality objections pursuant to
§ 6920 of the Delaware Insurance Code. The IRS declined the
Department’s request to agree in writing to abide by the
confidentiality requirements of § 6920. The Department has
thus continued to refuse to produce any emails or other
documents responsive to Request 1 that relate to specific
captive insurers created by Artex and Tribeca, absent the
affirmative consent of the relevant captive insurers, and no
representative of the Department has ever appeared to provide
testimony. Any limited compliance with the summons was
tailored to avoid violating § 6920 and does not bear on the
issues before us.
E. Procedural Background
Given the Department’s refusal to comply with the
summons, the federal government filed in the District Court a
petition to enforce it, supported by a declaration from IRS
Revenue Agent Bradley Keltner. Specifically, the government
sought an order directing the Department to comply with
Request 1 of the summons and the demand for testimony. A
Magistrate Judge, the Honorable Christopher J. Burke, issued
an order to show cause why the Department should not be
compelled to comply with the summons. The Department
opposed the petition for enforcement and moved to quash the
summons. Of importance here, the Department argued that,
under the MFA, § 6920 reverse-preempts the IRS’s summons
authority.7
7
To make out a prima facie case for the validity of a
summons, the federal government must show each of the
following: (1) “that the investigation will be conducted
14
The Magistrate Judge issued a thorough Report and
Recommendation concluding that the petition to enforce the
summons should be granted. He recommended against any
holding of reverse-preemption under the MFA, after analyzing
the question at length. First, he explained how MFA reverse-
preemption is “an exception to the general rule” that a “state
statute yields under the doctrine of preemption” in the face of
a conflicting federal statute. (J.A. at 025.) Specifically, he
explained that, unlike the normal situation, the MFA “permits
state laws to trump federal laws in certain circumstances (or to
‘reverse preempt’ those laws).” (J.A. at 025.) Further, he
described how the MFA’s reverse-preemption provision,
codified in § 1012(b), contains two clauses, with the first
pursuant to a legitimate purpose”; (2) “that the inquiry may be
relevant to the purpose”; (3) “that the information sought is not
already within the [IRS’s] possession”; and (4) “that the
administrative steps required by the [United States Tax] Code
have been followed.” United States v. Rockwell Int’l, 897 F.2d
1255, 1262 (3d Cir. 1990) (quoting United States v. Powell,
379 U.S. 48, 57-58 (1964)) (internal quotation marks omitted).
Before Judge Burke, the Department argued the third
prerequisite had not been shown. He decided that the federal
government had met its burden on the challenged Powell factor
and that the Department had not rebutted it. The Department
did not object to that finding, which also underpins the District
Court’s decision based on the Report and Recommendation of
Judge Burke. Likewise, the Department has not raised that
point on appeal and thus it is forfeited. See Geness v. Cox, 902
F.3d 344, 355 (3d Cir. 2018) (explaining that an appellant
forfeits an argument in support of reversal if it is not raised in
the opening brief).
15
addressing “federal laws in general,” and the second
addressing “application of federal antitrust laws.” (J.A. at 025
(quoting Highmark, Inc. v. UPMC Health Plan, Inc., 276 F.3d
160, 167 n.1 (3d Cir. 2001)).)
The Magistrate Judge then said that in a non-antitrust
matter, such as this case, the first clause of § 1012(b) asks three
questions (the “first clause requirements”) that must be
answered in the affirmative before reverse-preemption is
appropriate under the MFA. Those questions are: “(1) whether
the state law is enacted ‘for the purpose of regulating the
business of insurance’; (2) whether the federal law does not
‘specifically relat[e] to the business of insurance’; and (3)
whether the federal law would ‘invalidate, impair, or
supersede’ the State’s law.” (J.A. at 026 (citing Humana, 525
U.S. at 307).)
Argued by the federal government, the Magistrate
Judge went on to say “that before the Court applies the above-
referenced three-factor test drawn from [§ 1012(b)], it must
first assess whether an additional, threshold element … has
been met: ‘whether the activity complained of constitutes the
“business of insurance.”’” (J.A. at 026 (emphasis removed)
(quoting Highmark, 276 F.3d at 166 (quoting Sabo, 137 F.3d
at 191)).) He observed that our precedent has “clearly and
repeatedly instructed that … [courts] must first assess whether
the movant has satisfied the threshold element, before applying
[§ 1012(b)]’s three-part test.” (J.A. at 028.) Further, he
rejected the argument that, based on the Supreme Court’s
decisions in U.S. Department of Treasury v. Fabe, 508 U.S.
491 (1993), and Humana Inc. v. Forsyth, 525 U.S. 299 (1999),
our threshold “business of insurance” inquiry is no longer good
law.
16
With that said, the Magistrate Judge recommended the
conclusion that, under our threshold inquiry, the challenged
conduct did not constitute the “business of insurance” and so
was not subject to the reverse-preemption provision of the
MFA. He suggested that, in determining whether the reverse-
preemption provision in § 1012(b) applies, courts should look
at the discrete conduct in question (here, resisting an IRS
summons, as dictated by § 6920), rather than examining how
the ostensibly reverse-preempting provision of state law fits
into the State’s overarching regulatory scheme. He agreed
with the federal government that the conduct at issue in this
case is “fairly characterized as ‘[r]ecord maintenance’ or ‘the
dissemination and maintenance of information, documents,
and communications [maintained by the state.]’” (J.A. at 029
(quoting D.I. 23 at 12-23).) Parsing the language of § 6920, he
determined that the “entire focus is on the type of access that
[the Department] may or may not provide to third parties
(including federal law enforcement officers) regarding a
captive insurer’s confidential information.” (J.A. at 029.) He
thus recommended concluding such conduct does not
constitute the “business of insurance.”
In sum, the recommended holding was that the MFA
does not apply to the particular conduct of the Department now
at issue and, accordingly, that the petition to enforce the IRS
summons should be granted and the motion to quash should be
denied. The Department filed timely objections to the
Magistrate Judge’s Report and Recommendation, and the
District Court overruled them, adopting the Report and
Recommendation, granting the petition to enforce the
summons, and denying the motion to quash. This timely
appeal followed.
17
II. DISCUSSION8
The Department argues, first, that our threshold inquiry
is no longer good law and, second, that even if it remains good
law, the District Court erred in saying it was not satisfied here.
Both of those arguments proceed from a fundamental
misreading of our precedent. Accordingly, before turning to
either argument, we review our holding in Sabo v.
Metropolitan Life Insurance Co., 137 F.3d 185 (3d Cir. 1998),
and our reaffirmance of Sabo in Highmark, Inc. v. UPMC
Health Plan, Inc., 276 F.3d 160 (3d Cir. 2001).
A. Our Threshold Inquiry Precedent
1. Origin and General Principles
In Sabo, we interpreted subsections 1012(a) and
1012(b), as well as the import of the Supreme Court’s
discussion of the MFA in SEC v. Nat’l Sec., Inc. (“National
Securities”), 393 U.S. 453 (1969). We concluded that there is
a “threshold question in determining whether the
antipreemption mandate of . . . § 1012(b) applies,” and that the
8
The District Court had jurisdiction under 26 U.S.C.
§§ 7604(a), 7402(b), and 28 U.S.C. §§ 1340, 1345. We have
jurisdiction pursuant to 28 U.S.C. § 1291. We review for clear
error whether the factual prerequisites for enforcement of an
IRS summons have been met, and we review questions of law
de novo. United States v. Ins. Consultants of Knox, Inc., 187
F.3d 755, 759 (7th Cir. 1999). The issue of reverse-preemption
under the MFA is one of law. Weiss v. First Unum Life Ins.
Co., 482 F.3d 254, 263 (3d Cir. 2007).
18
inquiry is “whether the challenged conduct broadly constitutes
the ‘business of insurance’ in the first place.” Sabo, 137 F.3d
at 189-91. Only when that question is answered in the
affirmative do the “three distinct requirements” from the first
clause of § 1012(b) come into play. Id. at 189. For reverse-
preemption to be appropriate, all three of those “first clause”
requirements must be met: “(1) the federal law at issue does
not specifically relate to the business of insurance; (2) the state
law regulating the activity was enacted for the purpose of
regulating the business of insurance; and (3) applying federal
law would invalidate, impair, or supersede the state law.”9 Id.
In Sabo, we were at pains to demonstrate that the
threshold inquiry – again, whether the challenged conduct
constitutes the “business of insurance” – had a firm foundation
in § 1012(a). The issue presented in Sabo was whether reverse-
preemption under the MFA barred an insurance salesman from
suing his former employer under the Racketeer Influenced and
Corrupt Organization Act, 18 U.S.C. §§ 1961-68, when the
“challenged predicate acts ar[o]se [out] of the defendant’s
9
This is the test applicable in all but antitrust cases. In
antitrust cases, the second clause, or “antitrust clause,” of
§ 1012(b) provides a statutory exemption from antitrust
liability “for activities that (1) constitute the ‘business of
insurance,’ [and] (2) are regulated pursuant to state law,” so
long as they “(3) do not constitute acts of ‘boycott, coercion or
intimidation,’” under § 1013(b). Ticor Title Ins. Co. v. FTC,
998 F.2d 1129, 1133 (3d Cir. 1993). Antitrust issues are not in
play here, but the distinction between antitrust and non-
antitrust cases under the MFA is noteworthy because of the
different treatment the two categories receive under § 1012(b).
19
insurance business.” Sabo, 137 F.3d at 187. The parties’
disagreement focused on “the scope of the ‘insurance business’
covered by [the MFA], and whether it applied to” the conduct
at issue in the dispute. Id. at 187-88. That conduct was a
churning scheme involving the fraudulent trading of insurance
policies, the fraudulent advertising of insurance policies as a
retirement savings plan, and the coercing of employees to
engage in those acts. Id.We decided that those activities constituted the
“business of insurance,” after analyzing the proper role and
basis for the threshold inquiry. Id. at 188-92. We stated that
“Section [1012(a)] by its terms, affirmatively subjects the
business of insurance to state regulation.” Id. at 189. We then
explained that the MFA took the “further step of proscribing
unintended federal interference of state insurance laws by a
general mandate,” quoting the requirements of the first clause
of § 1012(b). Id. We noted that our preemption analysis would
focus on “the first clause of section 1012(b),” rather than the
second clause because the complaint was not “grounded in
federal antitrust law.” Id. at 189 n.1.
We then analyzed the interplay between § 1012(a) and
§ 1012(b), saying, “[i]f it is determined that the alleged conduct
at issue broadly constitutes the ‘business of insurance,’ and is
therefore subject to state regulation under section 1012(a), the
next issue is whether the anti-preemption mandate of section
1012(b) precludes a federal cause of action.” Id. at 189. We
did not engraft an atextual limitation onto the requirements of
the first clause of § 1012(b). Rather, citing National Securities,
we made it clear that we were relying on the text of § 1012(a)
for the threshold inquiry:
20
The threshold question in determining whether
the antipreemption mandate of 15 U.S.C.
§ 1012(b) applies is whether the challenged
conduct broadly constitutes the “business of
insurance” in the first place. 15 U.S.C.
§ 1012(a). If the contested activities are wholly
unrelated to the insurance business, then the
[MFA] has no place in analyzing federal
regulation because only when “[insurance
companies] are engaged in the ‘business of
insurance’ does the act apply.”
Id. at 190 (quoting National Securities, 393 U.S. at 459–60). We
concluded by observing again that, “[i]f the defendant’s
conduct does not constitute ‘the business of insurance,’ then
the Act simply does not apply and there is no need to confront
preclusion issues under § 1012(b).” Id.
Re-emphasizing the point, and, relying on another
Supreme Court opinion, U.S. Department of Treasury v. Fabe,
we noted that reverse-preemption applies when “the activity in
question constitutes the business of insurance and … the
specific state law was enacted with the ‘end, intention, or aim’
of adjusting, managing, or controlling the business of
insurance.” Sabo, 137 F.3d at 191 (quoting Fabe, 508 U.S. at
505).10
10
The phrase “the specific state law was enacted with
the ‘end, intention, or aim’ of adjusting, managing, or
controlling the business of insurance” derives from the
Supreme Court’s construction of the phrase: “for the purpose
of regulating the business of insurance.” See Fabe, 508 U.S.
at 505 (“The broad category of laws enacted ‘for the purpose
21
After Sabo, we reaffirmed the threshold inquiry in
Highmark. “If the activity does not constitute the ‘business of
insurance,’ then the [MFA] does not apply,” we said.11 276
F.3d at 166 (citing Sabo, 137 F.3d at 190-91). If, however, the
threshold inquiry is satisfied, “we then look to whether
§ 1012(b)” reverse-preempts the federal law in question. Id.
2. The Breadth of the Phrase “Business of
Insurance”
The Supreme Court has provided further guidance on
the meaning of the phrase “business of insurance,” as used in
the MFA. The phrase is undefined in the statute, so the Court
has looked to “the ordinary understanding of that phrase,
illumined by any light to be found in the structure of the Act
of regulating the business of insurance’ consists of laws that
possess the ‘end, intention, or aim’ of adjusting, managing, or
controlling the business of insurance.”) (citing Black’s Law
Dictionary 1236, 1286 (6th ed. 1990)).
11
In Highmark an insurance company sued a rival
seeking injunctive relief and damages for advertisements that
allegedly included misleading statements about the plaintiff’s
insurance, in violation of the Lanham Act, 15 U.S.C.
§ 1125(a)(1)(B). 276 F.3d at 163-64. The defendant moved to
dismiss on two bases: first, that the advertisement did not
substantially affect interstate commerce and, therefore, the
Lanham Act did not apply, and, second, that the Lanham Act
claims were reverse-preempted by the Pennsylvania Unfair
Insurance Practices Act. Id. at 164. The district court denied
the motion to dismiss and entered a preliminary injunction. Id.We affirmed. Id.22
and its legislative history.” Grp. Life & Health Ins. Co. v.
Royal Drug Co., 440 U.S. 205, 211 (1979). We do likewise,
looking to how the Supreme Court employed that phrase in
National Securities.
In its opinion there, the Court noted that Congressional
debates surrounding the MFA were “mainly concerned with
the relationship between insurance ratemaking and the antitrust
laws, and with the power of the States to tax insurance
companies,” none of which was then at issue in the case before
it. National Securities, 393 U.S. at 458-59. Accordingly, the
Court analyzed the phrase “business of insurance” in the
broader context of Congress’s reaction to South-Eastern
Underwriters, and, in so doing, found “it [was] relatively clear
what problems Congress was dealing with.” Id. at 459.
“Congress was concerned” with preserving for state regulation
that which had been understood as beyond the Commerce
Clause before South-Eastern Underwriters, specifically, “the
type of state regulation that centers around the contract of
insurance.” Id. at 460.
Having thus set the stage, the Supreme Court identified
the “core of the ‘business of insurance’” as “[t]he relationship
between insurer and insured, the type of policy which could be
issued, its reliability, interpretation, and enforcement[.]” Id. In
addition, National Securities provided several examples of that
“core”: “the fixing of [insurance] rates”; “the selling and
advertising of [insurance] policies”; and the “licensing of
companies and their agents.” Id. National Securities,
however, made clear that the sweep of the “business of
insurance” goes beyond the core to reach “other activities of
insurance companies [that] relate so closely to their status as
reliable insurers that they too must be placed in the same class.”
23
Id. “[W]hatever the exact scope of the statutory term,” the
touchstone remains the impact on the “relationship between the
insurance company and the policyholder.” Id.The Court later admonished that not everything that
“indirect[ly] [a]ffects” policyholders or “redounds to the[ir]
benefit” in some way falls within the “business of insurance.”
Fabe, 508 U.S. at 508-09 (citing Royal Drug, 440 U.S. at 216-
17). After all, the “statute d[oes] not purport to make the States
supreme in regulating all the activities of insurance
companies[.]” National Securities, 393 U.S. at 459. Thus,
“terms such as ‘reliability’ and ‘status as a reliable insurer’”
cannot “be interpreted” so “broad[ly]” that “almost every
business decision of an insurance company could be included
in the ‘business of insurance.’” Royal Drug, 440 U.S. at 217.
B. Sabo and Highmark Remain Good Law
In this appeal, the Delaware Department of Insurance
argues that our decisions in Sabo and Highmark are no longer
good law, citing three reasons. First, the Department argues
that Sabo conflicts with the Supreme Court’s earlier decision
in Fabe, 508 U.S. 491. Second, it argues that Sabo was
implicitly overruled by a later Supreme Court decision,
Humana Inc. v. Forsyth, 525 U.S. 299. And third, it argues
that our own decisions after Sabo and Highmark conflict with
those two cases. More specifically, the Department says that
the lack of any mention of the threshold inquiry in Suter v.
Munich Reinsurance Co., 223 F.3d 150 (3d Cir. 2000),
represents the true post-Humana precedent of our Court,
replacing Sabo and Highmark. None of those arguments holds
water, and, contrary to each of them, the threshold inquiry
24
prescribed in Sabo and reiterated in Highmark remains the law
of this Circuit.
The Department’s arguments contain two foundational
flaws. First, they misread the origins of the threshold inquiry.
The contention that the threshold inquiry does not derive from
§ 1012(a) is plainly wrong, as demonstrated by the description
we have just given of Sabo. See supra Section II.A.1.12 As
already noted, Sabo expressly cites § 1012(a) when stating that
“[t]he threshold question in determining whether the
antipreemption mandate of 15 U.S.C. § 1012(b) applies is
whether the challenged conduct broadly constitutes the
‘business of insurance’ in the first place.” Sabo, 137 F.3d at
190; see also id. at 189 (“If it is determined that the alleged
12
The Department misunderstands footnote two of
Sabo. We said there “that federal courts have seemingly
disagreed as to the proper analytic inquiry into [MFA]
preclusion[,]” and, therefore, we thought it important “to
discuss our analysis in detail.” Id. at 189 n.2. That footnote
observed that some courts had adopted a three-part test “that
does not require a specific conclusion that the defendant’s
conduct constitutes the business of insurance,” but others had
adopted a four-part test that did require such a specific
conclusion. Id. Our holding that there is a threshold inquiry
deriving from § 1012(a) relied on none of those cases. Indeed,
it would have been difficult to do otherwise, as none of them
relies on § 1012(a) for a threshold inquiry, and no one here
suggests they do. In that context, our statement that “it is
important to discuss our analysis in detail” is more naturally
read as divergence from ‒ not a subscription to ‒ the position
stated in those other cases.
25
conduct at issue broadly constitutes the ‘business of insurance,’
and is therefore subject to state regulation under section
1012(a), the next issue is whether the anti-preemption mandate
of section 1012(b) precludes a federal cause of action.”
(emphasis added)). The quoted language from Sabo speaks for
itself.
Second, as we proceed to discuss now, the Department
perceives jurisprudential conflict where there is none. Those
supposed conflicts are instances where we or the Supreme
Court analyzed MFA reverse-preemption under the first clause
of § 1012(b), focusing on what was at issue in those cases.
Whether reverse-preemption is warranted under the first clause
of § 1012(b) when it is implicated is a separate question from
whether reverse-preemption is implicated in the first place
under § 1012(a).
1. Sabo does not conflict with Fabe
By way of example, the Department wrongly asserts
that Fabe conflicts with Sabo. Fabe stands for the
unremarkable proposition that the first clause of § 1012(b) has
three requirements, but it does not foreclose a threshold inquiry
derived from § 1012(a). In Fabe, the liquidator of an insurance
company brought a declaratory judgment action in federal
court “seeking to establish that [a] federal priority statute [did]
not preempt [an] Ohio law designating the priority of creditors’
claims in insurance-liquidation proceedings.” 508 U.S. at 495.
The federal statute “accord[ed] first priority to the United
States with respect to a bankrupt debtor’s obligations[,]” while
the Ohio statute “confer[red] only fifth priority upon claims of
the United States in proceedings to liquidate an insolvent
insurance company[.]” Id. at 493.
26
Fabe quoted the first clause of § 1012(b) and gave
passing acknowledgment to uncontested points. Fabe, 508
U.S. at 500-01. After that, “[a]ll that [was] left” for analysis,
under the first clause, was “whether the Ohio priority statute
[was] a law enacted ‘for the purpose of regulating the business
of insurance.’” Id.The Supreme Court’s treatment of that contested point
included analysis akin to our threshold inquiry. The Court first
clearly stated that “the Ohio statute” was “a law ‘enacted for
the purpose of regulating the business of insurance,’ within the
meaning of the first clause of § [1012(b)].” Id. at 505. It then
backtracked, refusing to fully reverse-preempt the federal law
with respect to creditors who were not policyholders, holding
that the state law was “not a law enacted for the purpose of
regulating the business of insurance” to the extent it benefited
such creditors. Id. at 508 & n.8. Additionally, it refused to
hold that the portion of the state law providing for
administrative costs for creditors other than policyholders
reverse-preempted federal law. Id. at 509. It reasoned that the
provision’s “connection to the ultimate aim of insurance [wa]s
too tenuous.” Id. Although pressed by the dissent to justify
such a “compromise holding,” id. at 518 (Kennedy, J.,
dissenting), the majority provided no textual hook for its
holding. See id. at 508-09 & n.8 (arguing that the dissent had
conceded that the statute need not “stand or fall in its entirety”
and observing that the dissent had cited nothing preventing the
majority from finding certain parts of the statute had effected a
reverse-preemption and others had not). Of more importance
for present purposes, it never foreclosed § 1012(a) from
playing the role we have concluded it plays.
27
Simply put, while Fabe focuses on § 1012(b), it is not
irreconcilable with our threshold inquiry or the conclusion that
§ 1012(a) is the source of it.
2. Sabo does not conflict with Humana
Nor does Humana conflict with Sabo or overrule it. In
Humana, insurance policy beneficiaries alleged that an
insurance company engaged in a scheme to hide discounts that
the company had received from a hospital, and that it did so to
prevent the beneficiaries from sharing in the savings. 525 U.S.
at 303-04. The plaintiffs contended that this violated both the
Nevada law regulating insurance fraud and RICO. Id. at 302.
Although the state and federal laws represented “differ[ing]”
“remedial regimes,” the Supreme Court concluded that “RICO
can be applied in this case in harmony with the State’s
regulation,” and, therefore, “the [MFA] does not bar the federal
action.” Id. at 303.
Humana touched only on the first clause of § 1012(b),
without suggesting a rejection of a threshold inquiry under
§ 1012(a). The first sentence of the opinion introduced the case
as one “concern[ing] the regulation of insurance by the states,
as secured by the [MFA], 59 Stat. 33, as amended, 15 U.S.C.
§ 1011 et seq.” Id. at 302. But that same paragraph made it
apparent that the Court was going to limit its discussion solely
to the one requirement of the first clause of § 1012(b) then in
dispute13 ‒ whether RICO “‘invalidate[d], impair[ed], or
13
Recall that the three requirements for application of
MFA reverse-preemption, as set forth in the first clause of
§ 1012(b), are as follows: “(1) the federal law at issue does not
specifically relate to the business of insurance; (2) the state law
28
supersede[d]’ the State’s regulation.” Id. at 302-03. Although
Humana states that § 1012(b) is “the centerpiece of this case,”
id. at 306, it discusses only two of the three “first clause”
requirements, and one of those only in passing, with the
remaining one being assumed to be satisfied. Id. at 307
(“RICO is not a law that ‘specifically relates to the business of
insurance.’ This case therefore turns on the question: Would
RICO’s application to the employee beneficiaries’ claims at
issue ‘invalidate, impair, or supersede’ Nevada’s laws
regulating insurance?”).
That Humana proceeded to examine whether RICO
conflicted with state law without tarrying along the way does
not mean that Humana addressed the existence of a threshold
inquiry derived from § 1012(a). It did not, and thus does not
foreclose it. The Department’s suggestion that Humana sets
out the first clause of § 1012(b) as the exclusive “test for the
[MFA]” preemption ignores what Humana makes plain in
context – that the Court was quickly getting to the heart of the
issue without purporting to write a treatise on every aspect of
the MFA.14 Cf. United States v. Sineneng-Smith, 140 S. Ct.
regulating the activity was enacted for the purpose of
regulating the business of insurance; and (3) applying federal
law would invalidate, impair, or supersede the state law.”
Highmark, 276 F.3d at 166.
14
While we refer to the inquiry derived from Section
1012(a) as a “threshold” one, it need not be addressed in every
case. Sound advocacy may well lead parties to concede or
assume the threshold inquiry has been met, thus allowing them
to address other requirements for MFA reverse-preemption
that may be more readily dispositive. Judicial economy may
29
1575, 1579 (2020) (“[Courts] wait for cases to come to them,
and when [cases arise, courts] normally decide only questions
presented by the parties.”) (discussing the “principle of party
presentation”); In re Permian Basin Area Rate Cases, 390 U.S.
747, 775 (1968) (“[T]his Court does not decide important
questions of law by cursory dicta inserted in unrelated cases.”);
Roebuck v. Drexel Univ., 852 F.2d 715, 738 n.41 (3d Cir. 1988)
(declining appellee’s “invitation to transform what is in
essence stray language and at best no more than dicta into a
binding holding”).
likewise prompt a court to resolve an MFA reverse preemption
question in a similar way. Courts often assume satisfaction of
some analytical steps, where appropriate, to get to the heart of
a matter. See, e.g., Pearson v. Callahan, 555 U.S. 223, 234-43
(2009) (loosening the rigidly ordered two-step analysis of the
qualified immunity inquiry and allowing courts to begin with
either step to prevent the misuse of “substantial expenditure[s]
of scarce judicial resources … [on matters that] have no effect
on the outcome of the case”); United States v. Leon, 468 U.S.
897, 924 (1984) (“There is no need for courts to adopt the
inflexible practice of always deciding whether the officers’
conduct manifested objective good faith before turning to the
question whether the Fourth Amendment has been violated.”);
Strickland v. Washington, 466 U.S. 668, 697 (1984) (“[T]here
is no reason for a court deciding an ineffective assistance claim
to approach the inquiry in the same order or even to address
both components of the inquiry if the defendant makes an
insufficient showing on one.”).
30
3. Sabo does not conflict with Suter
Also contrary to the Department’s assertion, our own
decision in Suter v. Munich Reinsurance Co. does not suggest
there is a conflict between Humana and Sabo, or that Humana
implicitly overrules Sabo. Indeed, Suter mentions neither case.
Suter involved a suit brought in state court by the liquidator of
an insurance company against a German reinsurance company
over an alleged breach of “certain reinsurance treaties.” 223
F.3d at 152. The reinsurance treaties “include[d] arbitration
clauses governed by the United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards.”
Id. Congress enacted a removal provision, 9 U.S.C. § 205, as
a part of an act to enforce that convention (the “Convention
Act”). Id. at 154-55. Relying on those procedural tools, the
defendant first removed the case to district court under 9
U.S.C. § 205, and then tried to both compel arbitration and stay
the district court proceedings pending arbitration. Id. at 152.
The plaintiffs argued for remand on three grounds, two of
which are relevant here: first, that a provision in the
reinsurance treaty waived the defendant’s right to remove and,
second, that the Convention Act and Federal Arbitration Act
(the “FAA”) were reverse-preempted by the MFA. Id. The
district court remanded the case to state court on the first
ground without reaching the plaintiffs’ other arguments or
ruling on the defendant’s motion. Id. After reversing the
district court on the only ground that it examined, we declined
to affirm on the basis of MFA reverse-preemption. We
examined only one of the three requirements of the first clause
of § 1012(b) and found it was not satisfied. Id. at 162. To
begin, we noted that “there is no contention that either the
Convention Act or the FAA ‘specifically relate to the business
of insurance.’” Id. at 160. We briefly identified the remaining
31
requirements of the first clause of § 1012(b) and assumed one
of them away without discussion. See id. at 160-61 (“Thus the
only issues are whether these statutes as applied in the instant
case invalidate, impair or super[s]ede a New Jersey statute that
was enacted for the purpose of regulating the business of
insurance.”); id. at 161 (“For purposes of this decision, we will
assume that [the statutory] provisions were enacted for the
purpose of regulating the business of insurance[.]”). We then
briefly explained why “application of the Convention Act to
th[e] suit does not impair the New Jersey Liquidation Act.” Id.
at 162. Nothing in that analysis overrides Sabo, even if the
approach looked at § 1012(b) without pausing at § 1012(a).
Given Sabo’s status as pre-existing precedent, Suter could not
have overruled Sabo, see Third Circuit I.O.P. 9.1, and there is
no indication that it intended to.
4. The Department’s remaining
arguments
The Department makes two additional points that
warrant brief mention. First, it notes that we are alone in
holding that there is a threshold inquiry derived from
§ 1012(a). Second, it contends that each of the other circuits
that previously used a four-factor test have abandoned it.
Neither point would, of course, overrule Sabo or Highmark,
but they might provide a basis for en banc review if they were
persuasive. Cf. In re Krebs, 527 F.3d 82, 86 (3d Cir. 2008) (a
panel may neither overrule a prior precedential opinion
“because we are no longer persuaded by its reasoning” nor
because “[s]everal of our sister courts of appeals have decided
the … issue” contrary to that precedent). They are not. The
Department identifies no post-Humana precedential opinion of
our sister circuits that engages in legal analysis grappling with
32
(let alone dispensing with) something akin to Sabo’s threshold
inquiry under § 1012(a).
The one pre-Humana case that explicitly parts ways
with Sabo is Autry v. Nw. Premium Servs., Inc., 144 F.3d 1037(7th Cir. 1998), and it misreads Sabo. Without explanation or
analysis, Autry lumps Sabo in with opinions applying a four-
factor test derived from § 1012(b). Autry, 144 F.3d at 1041.
Hence, the reasons articulated in Autry for rejecting a four-
factor test derived from § 1012(b) are errantly applied to Sabo
because, as we have explained, Sabo’s threshold inquiry
derives from § 1012(a).15
15
Autry declined to find that its own four-part precedent
was no longer good law. In a footnote, the opinion
acknowledges the three-factor test that it recited does not
square with American Deposit Corp. v. Schacht, 84 F.3d 834,
838 (7th Cir. 1996). But Autry suggests that it might be
appropriate to apply the fourth factor later in the MFA analysis:
In Schacht we first addressed whether the state
statute was “enacted ... for the purpose of
regulating the business of insurance.” After
answering that question in the affirmative, we
asked whether the particular activity at issue in
the case was part of the “business of insurance.”
No doubt we took this second step because Fabe
counsels that a statute “need not be treated as a
package which stands or falls in its entirety,”
Fabe, 508 U.S. at 509 n.8, and instead that a state
statute should only displace federal law “to the
extent that it regulates policyholders,” id. at 508.
Because we find that the Illinois statute
33
C. The Threshold Inquiry is Not Satisfied
We now turn to the task of applying the threshold
inquiry. That involves identifying the conduct being
challenged by the party asserting federal supremacy and then
asking if that conduct constitutes the “business of insurance.”
1. The Challenged Conduct is Non-
Disclosure of Records Maintained by
the State Absent a Confidentiality
Agreement
To recap, the federal government brought this summons
enforcement action to force the Department to provide
information related to certain micro-captives. The Department
has steadfastly refused to provide that information without the
federal government first signing a confidentiality agreement.
The Department’s refusal, and that alone, is the challenged
conduct. More specifically, the challenged conduct is the
Department’s insistence that it need not provide documents
and related testimony that are responsive to Request 1 of the
summons. The Magistrate Judge’s Report and
Recommendation, adopted by the District Court, characterized
the conduct in fundamentally the same way, while noting that
the conduct tracks the pertinent exception to the general
regulating premium financing agreements is not
one “enacted ... for the purpose of regulating the
business of insurance,” we need go no further.
Autry, 144 F.3d at 1042 n.3.
34
disclosure proscription in § 6920 of the Delaware Insurance
Code.
The Department proposes that, to define the challenged
conduct for purposes of the threshold inquiry, we should
examine the purpose of § 6920 and how it fits into the State’s
overall regulatory scheme. But that proposal is tantamount to
asking us to skip the threshold inquiry. The Department wants
us to characterize the challenged conduct by asking,
effectively, whether § 6920 was “enacted … for the purpose of
regulating the business of insurance.” Transforming the
threshold inquiry into that post-threshold requirement from the
first clause of § 1012(b) cannot be reconciled with Sabo’s
admonition that those are separate questions. Sabo, 137 F.3d
at 191.
Furthermore, the Department’s proposal is not faithful
to how we went about characterizing the conduct at issue in
Sabo and Highmark for purposes of the threshold inquiry. In
Sabo, we defined the challenged conduct as a “churning
scheme” involving fraudulently trading insurance policies,
fraudulently advertising an insurance policy as a retirement
savings plan, and coercing employees to engage in those
activities. Sabo, 137 F.3d at 187, 191. Although such conduct,
if it occurred, would violate state law, no reference was made
to state law in characterizing that conduct. Id. at 191-92. In
Highmark, the plaintiff alleged that a rival’s advertisements
included misleading statements about the plaintiff’s insurance,
ostensibly running afoul of the Pennsylvania Unfair Insurance
Practices Act. Highmark, 276 F.3d at 163-64. We
characterized “the action complained of” as “the advertising”
or the “advertising practices of the parties,” with no mention of
the state law. Id. at 166. Thus, in keeping with Sabo and
35
Highmark, we reject the contention that defining the
challenged conduct for purposes of the threshold inquiry
entails examining the purpose of § 6920 and how it fits into
Delaware’s overall regulatory scheme.
2. The Challenged Conduct Does Not
Constitute the Business of Insurance
The Department’s refusal to provide documents and
testimony responsive to Request 1 of the summons is not the
“business of insurance.”16 As an initial matter, it is plainly not
the “core of the ‘business of insurance.’” See National
Securities, 393 U.S. at 460 (“The relationship between insurer
and insured, the type of policy which could be issued, its
reliability, interpretation, and enforcement – these [are] the
core of the ‘business of insurance.’”). It also cannot reasonably
be understood as “[an]other activit[y] of insurance companies
[that] relate[s] so closely to [their] status as reliable insurers
that [it] must be placed in the same class.” Id. It stands, rather,
16
The Report and Recommendation indicated the
parties were generally in agreement that, if the petition were
granted, the IRS would get both the documents and the
testimony. The Magistrate Judge noted that the Department
made a passing argument that the federal government forfeited
its ability to get testimony. But he rejected that argument as
being without legal support and that rejection was adopted by
the District Court in its overall endorsement of the Report and
Recommendation. The Department does not mention the
forfeiture argument before us and, thus, we do not address it.
See Geness, 902 F.3d at 355 (supra at note 10).
36
somewhat removed from the “relationship between the
insurance company and the policyholder.” Id.
The Department nevertheless presses the argument that,
even if the challenged conduct is its adherence to the strictures
of § 6920 in the face of an action to enforce Request 1 of the
summons, such conduct constitutes the “business of
insurance.” That conclusion follows, the Department says,
because the confidentiality provision at issue deals with
materials submitted in connection with the licensure of would-
be captive insurers and examinations of already-approved
captive insurers “for the purpose of determining the solvency
and safety of insurers, and for the protection of its
policyholders.” (Answering Br. at 38.) If § 6920 does not
reverse-preempt the IRS’s summons authority, the Department
claims, then applicants and already-approved captive insurers
will be less forthcoming with the Department. The Department
therefore contends that affirming the District Court will
indirectly endanger those who are insured. By that route, the
Department reasons that its adherence to § 6920 should be
placed in the category of the “business of insurance.”
For that argument to hold water, however, we must
accept that affirming the District Court would lead to a change
in behavior by captive insurers (or their managers) that would
reduce the reliability of captive insurers. That is a contention
that cannot survive scrutiny. As an initial matter, the
substantive requirements for licensure and continued
permission to operate under certificates of authority issued by
the Department is not altered by our affirmance of the District
Court’s ruling. The Department has the authority to obtain
documents it requires for licensure and subsequent
examinations and can impose consequences on companies that
37
will not provide them. See, e.g., 18 Del. Code Ann. §§ 6903,
6908, 6909.17 Simply put, the Department will be no less
17
Although no case has been cited to us construing any
of these provisions of the Delaware Insurance Code, it seems
clear on their face that they endow the Department with such
powers. For example, one provision provides in part: “Before
receiving a certificate of authority, an applicant captive
insurance company shall file with the Commissioner a certified
copy of its organizational documents, a statement under oath
of its president or other authorized person showing its financial
condition, and any other statements or documents required by
the Commissioner.” 18 Del. Code Ann. § 6903(c)(1). It,
further, indicates that the Department has the authority not to
approve the certificate in the first instance if its filings do not
comply with Delaware Captive Law. See id. § 6903(f) (“If the
Commissioner is satisfied that the documents and statements
that such captive insurance company has filed comply with the
provisions of this chapter, the Commissioner may grant a
certificate of authority authorizing it to do insurance business
in this State….”). As previously mentioned, captive insurance
companies are generally examined triennially to determine,
among other things, their “ability to fulfill [their] obligations
and [their] compliance with the provisions of this chapter.” 18
Del. Code Ann. § 6908. The Department may “suspend or
revoke” a captive insurance company’s certificate of authority,
if, “upon examination, hearing or other evidence,” the
Department finds that the company has “refus[ed] or fail[ed]
to submit … any … report or statement required by law or by
lawful order of the Commissioner” or “fail[ed] otherwise to
comply with the laws of” Delaware. 18 Del. Code Ann.
§ 6909.
38
entitled to the information it currently receives to license
captive insurance companies than it has previously been. The
same is true of the Department’s entitlement to information to
determine whether already-licensed captive insurance
companies should be allowed to continue to operate.
Moreover, according to the Department and Amici, the
information sought here is as legally obtainable by a direct
summons or subpoena to the captive insurance companies (or,
perhaps, to their managers) as a summons directed to the
Department. Accepting those arguments on their own terms,
insurance companies will have no plausible reason to withhold
information from the Department that turns on the outcome of
this case. That is, we are being asked to accept that, but for the
potential availability of the novel argument that § 6920
reverse-preempts the IRS’s summons authority, a prospective
or existing captive insurer will intentionally withhold required
information from the Department.
But if a captive insurer is so well informed about the
IRS’s enforcement powers and defenses against them that it
thinks of MFA reverse-preemption in this context, such a
company is almost certainly aware of the obvious threat of a
direct IRS summons or subpoena. And it must also be aware
that being less than forthcoming with the Department risks
foregoing or losing a certificate of authority to operate as an
insurer. In short, it is hard to see the causal connection the
Department is trying to draw. If enforcement of the summons
is not the but-for cause of a company’s changing its
transparency (or lack thereof) with the Department, then the
Department is in the same position regardless of how we
decide the present dispute. And if that is so, then affirming the
District Court will neither undermine the insurer-insured
39
relationship nor the insurer’s reliability as an insurer.
Accordingly, we reject the Department’s argument that its
adherence to § 6920 constitutes the “business of insurance.”
III. CONCLUSION
For the forgoing reasons, the District Court’s order will
be affirmed.
40