Since 2013, Zenefits, one of Silicon Valley’s “unicorns,” has been offering its software for a remarkably low price: free. Zenefits is a cloud-based human resources software-as-a-service (SaaS) company; or, in English, it is an insurance broker. That’s how Zenefits can afford to offer its software for free to its user—it makes yearly commissions of about $450 per employee for whom it serves as insurance broker. Unfortunately for Zenefits, there may be a pretty big problem with this unique business model. It might be illegal.

Almost every state (Florida and California being the exceptions) has “anti-rebating” statutes. These statutes, most of which are almost a century old and based on a Model Act, prohibit insurance brokers from rebating any portion of their commission back to the insured. When states began enacting these statutes, the insurance brokerage business was dogged by unethical practitioners and a soiled reputation. These statutes were passed as one of several regulations aimed at curbing abuses in the insurance marketplace, including discrimination and anti-competitive behavior. Today, insurance is one of the most heavily regulated industries in the United States, and several scholars and practitioners have questioned whether anti-rebating laws still serve (or indeed ever did serve) a valuable function.

So, is Zenefits’ business model illegal? Can a broker provide presumably valuable software at no cost, expecting to make that money back via commissions? Of the 48 states (and the District of Columbia) with anti-rebating laws, only one doesn’t think so.

In November 2016, after a lengthy investigation, Washington became the first state to ban Zenefits’ business model as an unlawful rebate. Utah took similar steps the year before but ultimately passed amending legislation to carve out exceptions for the San Francisco-based company. No such amendments came from Washington’s legislature, however, and Zenefits was force to raise its price for its Washington-based clientele.

Lest we lose the forest for the trees, a state government just forced an innovative technology company to charge its citizens more money for its product. Why? Because a century-old statute with shaky philosophical underpinnings forbids insurance brokers from competitively pricing their services. One can only speculate about potential lobbying efforts that helped spur Washington toward its final determination, but that Washington’s traditional brokers are the only clear winners is undeniable. Only time will tell if Washington remains an anomaly or if it is the first domino to fall (or if broker alternatives like Zenefits fade away entirely). But as long as most states retain their anti-rebating statutes in their current form, consumers are likely the real losers.

Christian Kerr

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