In the
United States Court of Appeals
For the Seventh Circuit

No. 00-2016

LaVerne Beyer, et al.,

Plaintiffs,

v.

Heritage Realty, Incorporated, et al.,

Defendants-Appellants.

Real Party in Interest:

     St. Paul Fire and Marine Insurance Company,

Intervenor-Appellee.

Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 98-C-488--Aaron E. Goodstein, Magistrate Judge.

Argued April 2, 2001--Decided June 8, 2001


  Before Bauer, Cudahy, and Easterbrook,
Circuit Judges.

  Easterbrook, Circuit Judge. Heritage
Realty purchased a "Real Estate Agents
and Brokers Program Professional
Liability" policy from St. Paul Fire &
Marine Insurance Company. The policy
covers loss that "results from the
conduct of real estate agent or broker
duties". A class of customers sued
Heritage (plus its officers and an
affiliated firm, which we ignore to
simplify matters), contending that
Heritage had failed to comply with the
Real Estate Settlement Procedures Act of
1974, 12 U.S.C. sec.sec. 2601-17 (RESPA).
In particular, according to the
complaint, Heritage failed to disclose
its affiliation with Lighthouse Title
Services, Inc., which sometimes provided
title insurance in transactions that
Heritage initiated. RESPA does not
prohibit the purchase of services from
corporate affiliates but does require
disclosure and consent by a client in
possession of the facts. See 12 U.S.C.
sec.2607(c). By neglecting to make the
necessary disclosure, Heritage exposed
itself to damages up to treble its fees
for settlement services. 12 U.S.C.
sec.2607(d)(2).

  St. Paul intervened in the class action,
seeking a declaration that its policy
does not cover any noncompliance with
RESPA. Conceding that the claims are
presumptively covered by the policy, St.
Paul relied on this exclusion:

Price fixing. We won’t cover loss
that results from any violation of
any state or federal antitrust,
price fixing, restraint of trade or
deceptive trade practice law, rule
or regulation . . . .

RESPA has nothing to do with antitrust or
"restraint of trade" in general, or price
fixing in particular. Nonetheless, St.
Paul contends, RESPA is a "deceptive
trade practice law" because it requires
disclosure, and the lack of disclosure
equals "deception" in the "trade
practice" of obtaining title insurance. A
magistrate judge, presiding by consent
under 28 U.S.C. sec.636(c), agreed and
entered a judgment providing that St.
Paul need not defend or indemnify
Heritage. The class action later was
settled for $325,000, and Heritage
contends on this appeal that St. Paul
must reimburse this sum, plus its legal
expenses.

  Section 5 of the Federal Trade
Commission Act, 15 U.S.C. sec.45, is the
model "deceptive trade practice law." The
FTC may ban "unfair methods of
competition in or affecting commerce and
unfair or deceptive acts or practices in
or affecting commerce." Heritage argued
in the district court that the RESPA
could not be a "deceptive trade practice
law" because it is enforced by the
Department of Housing and Urban
Development rather than the FTC. The
district court correctly rejected that
position; why should it matter which
agency enforced a particular statute?
Many states have deceptive trade practice
laws, which are enforced in many
different ways. Perhaps the RESPA is a
statutory application of sec.5’s approach
to the real estate settlement business.
What sense could it make to exclude
coverage for violation of RESPA-like
rules from coverage, if made by the FTC,
and not to exclude coverage for violation
of similar requirements articulated by
the legislature? Failure to disclose a
conflict of interest (which Heritage had
but concealed) is a form of deception,
and it does not stretch language unduly
to call it a "deceptive trade practice"
addressed by a law (RESPA) that covers
other kinds of deception as well.

  One response might be that a mention of
"deceptive trade practices" in a clause
headed "Price fixing" and referring to
"antitrust" and "restraint of trade" may
comprehend only a subset of all laws and
regulations that carry the label
"deceptive." The FTC is divided
internally into a Bureau of Competition
and a Bureau of Consumer Protection; both
rely on powers granted by sec.5, but for
different ends. Often the FTC uses sec.5
to supplement other antitrust laws, tying
up loose ends. When it does this--usually
though not always relying on the ban of
"unfair methods of competition" that was
enacted in 1914, rather than the power to
proscribe "deceptive acts and practices"
added in 1938--reviewing courts ask the
questions normal in antitrust cases, such
as whether the challenged practice
reduced output and raised prices, and not
simply whether it was "deceptive." See,
e.g., California Dental Association v.
FTC, 526 U.S. 756, 769-81 (1999). Perhaps
the reference to "deceptive trade
practices" in the policy’s exclusion
means in context the sort of "deceptive
trade practices" that the FTC analyzes
under antitrust standards. Cf. Curtis-
Universal, Inc. v. Sheboygan Emergency
Medical Services, Inc., 43 F.3d 1119 (7th
Cir. 1994) (an insurance policy covering
"unfair competition" requires the insurer
to defend a claim of false advertising
and related fraud, but not an antitrust
claim). This approach lays emphasis on
the word "trade" as designating how
businesses interact with their rivals,
rather than with their customers. And if
this is a potentially sensible reading of
the exclusion, then the rule of insurance
law resolving ambiguities in favor of
policyholders, see Monfils v. Charles,
216 Wis. 2d 323, 329, 575 N.W.2d 728, 731
(Wis. App. 1998), becomes important. A
normal policyholder--the benchmark in
Wisconsin, see Kremers-Urban Co. v.
American Employers Insurance Co., 119
Wis. 2d 722, 735, 351 N.W.2d 156, 164
(1984), whose law supplies the rule of
decision--would not necessarily indulge
the broader reading of a "deceptive trade
practices" exclusion embedded in a clause
dealing with antitrust issues.

  At oral argument we asked St. Paul’s
lawyer how she understood the phrase
"deceptive trade practices." Eventually
counsel defined the phrase as excluding
from coverage all acts that entail
nondisclosure of any sort, even if the
nondisclosure has no effect on price (or
on any other aspect of the transaction).
This absurdly broad definition comprises
the food and drug laws (omission of a dye
from the list of ingredients on a box of
oatmeal then would violate a "deceptive
trade practice law") and most of the tort
system--for medical malpractice and
product-liability torts, among many
others, can be characterized as liability
for failure to disclose and obtain
consumers’ consent to one or another
risk. If a real estate broker failed to
disclose that the house was 50 miles from
a fault line, or that it might be below
the high water mark of a 1,000-year
flood, this would violate a "deceptive
trade practices law" on counsel’s view.
Yet the policy is designed in large
measure to cover these risks of
liability, as well as more immediate
risks such as an employee’s absconding
with client funds (which could be
characterized as failure to disclose that
the employee was a thief). The policy
explicitly excludes liability for
violation of the securities laws, yet on
counsel’s view this is unnecessary: the
securities laws address actual or
constructive deception, so their full
scope already would be excluded by the
"deceptive trade practices" proviso.

  RESPA is the principal federal statute
regulating the activities of real estate
brokers. The insurance policy at issue is
limited to participants in the real
estate business and directly addresses
potential sources of liability for
brokers. Would it not be weird--would it
not be deceptive?--to exclude all
coverage of RESPA in such a policy
without mentioning RESPA by name or
direct reference? The policy mentions and
explicitly excludes coverage for
violations of the antitrust laws, the
securities laws, and ERISA, but it does
not mention RESPA. Hiding a RESPA
exclusion, surely an important element
for any real estate dealer purchasing
insurance to cover the risks of its
business, in a clause captioned "Price
fixing" and sounding distinctly like an
antitrust exclusion, would hoodwink all
but the most suspicious customers.
Wisconsin requires exclusions from
coverage to be more straightforward, so
that careful readers will know what they
are buying. St. Paul’s policy therefore
must be read to cover unintentional
violations of RESPA.

Reversed and Remanded
