Austin Chronicle

A $1,000 expenditure by a state agency might not sound like much particularly when you consider that the state of Texas will spend about $58 billion this year. But in the case of the Texas Funeral Service Commission, and their decision to spend $1,000 in an effort to join the wrong side of a proconsumer lawsuit, well, then $1,000 begins to look like a whole lot of money.

The TFSC’s declared mission is “to protect the public from deceptive practices.” But given the agency’s current efforts to involve itself in an El Paso lawsuit known as David Hijar v. SCI Texas Funeral Services Inc., it appears the agency’s actual purpose may be to protect the funeral industry from tort lawyers and to allow it to continue hiding its profit margins.

For obvious reasons, few people like the funeral industry. Funeral directors have a less-than-glamorous job, although like everybody else, they want to get paid for their work. How much? Indeed, the central question in the long-running battle between the funeral industry and consumers concerns disclosure. More specifically, how much information are consumers entitled to when it comes to funeral contracts?

For two decades, the funeral industry has relied on a federal regulation known simply as “the funeral rule.” (The state of Texas has a nearly identical regulation.) That rule says that funeral homes must provide consumers with a price list, but they do not have to tell consumers how much profit they are making on big-ticket items like caskets. Nor do they have to disclose their profit margins on smaller items like clothing or embalming. They are, however, required to tell consumers if they are using third parties for some goods and services. The items that they buy “on behalf of the consumer” – and that’s the key phrase here – are known in the trade as “cash advance items,” and funeral directors are required to reveal exactly how much those third parties are charging the funeral home for those items. For years, the funeral industry has narrowly construed the cash-advance-item definition, and applied it to only a handful of things, such as flowers and newspaper obituaries.

But on May 21, El Paso County Judge Javier Alvarez issued a partial summary judgment in the Hijar case, and his three-page ruling has sent shock waves through the American funeral business. Alvarez sided with the plaintiffs and ruled that Service Corporation International, the world’s largest funeral company, had not properly disclosed the prices it had paid for certain items that were supplied to the plaintiffs. Most importantly, Alvarez ruled that cash advance items include a panoply of things, including: direct cremation, embalming, refrigeration, transportation, caskets, shipping containers, and even prayer cards and memorial booklets.

Alvarez’s ruling – if it survives what are certain to be many appeals – will be good for consumers, says Lamar Hankins, a San Marcos resident who has served as president of the Funeral Consumers Alliance and is a longtime consumer advocate on funeral issues. If the ruling stands, it will “give the average consumer more information about pricing,” says Hankins.

Diminishing Returns
The Hijar case is a class action lawsuit. It was filed by lawyers from the Dallas tort firm Baron & Budd and seeks damages for “all persons, entities and organizations who purchased funeral services from Service Corporation International” at any time since March 18, 1998. So if Alvarez’s ruling survives, SCI could face enormous payouts. SCI’s revenues since 1998 total more than $14 billion, so the payout to the class action attorneys and plaintiffs in the class could – at least in theory – bury the company in bankruptcy.

SCI is no stranger to litigation. According to the Dec. 2, 2002, issue of Funeral Monitor, an industry newsletter, at the time SCI was fighting some 350 lawsuits and employing more than 100 outside law firms to handle its litigation. James Shelger, SCI’s general counsel, refused to confirm a current number when contacted by the Chronicle. He did say that SCI is “generally facing an array of litigation,” but that he is “not at liberty to disclose” the number of lawsuits pending against it.

While the Hijar case affects SCI in a very specific way, it could also affect the entire American funeral business, a $25 billion-per-year industry. There are about 1,200 funeral homes in Texas, and some 23,000 in the U.S. And every one of them is scrambling to secure a share of a shrinking market. Full-service funerals, along with a cemetery plot and marker, can easily cost $10,000. Consumers are finding that cremation costs a fraction of that sum. In 1980, only 10% of Americans were choosing cremation. Today, about 30% of all deaths are followed by cremation. By 2025, that figure is expected to be 43%. That trend poses a big challenge for the funeral business because cremation services are far less profitable than burial services.

The big funeral consolidators are in particular trouble. After several years of too-rapid expansion, SCI and its brethren are choking on their acquisitions. Revenues are flat or falling. Nearly all of them are heavily leveraged and cannot afford to see their profit margins erode. For instance, in 2003, Alderwoods Group Inc., the second-largest funeral chain, spent about 90% of its operating profit just paying off its debt. In short, the funeral industry has far too much capacity. There are too many funeral homes chasing too few funerals. And more consumers don’t want to pay big money for what the industry calls “death care.”

Now comes the Hijar case, which could force the funeral homes to disclose far more information than it wants to. Janis Carter, a lobbyist for the Texas Funeral Directors Association (SCI is a member), says the Hijar lawsuit “is a threat to the whole industry,” and that independent funeral home owners and SCI are in complete agreement about the need to prevent Alvarez’s ruling from becoming standard regulatory practice.

The Undertakers Panic
An indication of the industry’s concern can be seen by the voluminous amicus briefs that have been filed in the case. The TFDA filed one. So did the National Funeral Directors Association. So did the big funeral consolidators – including Stewart Enterprises Inc., Carriage Services, and Alderwoods Group. Carriage Services’ brief is indicative of the industry’s worry. It says that if Alvarez’s ruling is allowed to stand, “perhaps every funeral home in the nation, would thereby become exposed to protracted litigation with its purchasers. … The extreme burden on funeral homes would be manifold.” Lawyers for Stewart and Alderwoods make similar arguments. They also say that the industry has long relied on its own interpretation of the regulation and that Alvarez’s reading of the rule differs from that of the industry.

Carter and other industry representatives argue that consumers are not entitled to know how much profit Wal-Mart makes on a T-shirt or how much a steak house pays for its meat. True enough. But then, consumers don’t spend $6,500 ever time they visit Wal-Mart or Outback Steakhouse. That $6,500 is the average cost of a funeral this year, according to the National Funeral Directors Association. And those funeral costs have been increasing at double the rate of inflation since 1994.

In addition to fighting the lawsuit in court, Carter said that the funeral directors group is planning to put together a bill for the next legislative session that would clarify the state’s funeral regulations – and prevent other lawyers from suing on the same grounds.

The undertakers may have a better chance of getting their bill through the Texas House next year thanks, in part, to the fact that Rep. Steve Wolens, D-Dallas, will no longer be in office. Wolens chose not to run for re-election, and his term expires in January. But the retiring rep will remain a legal thorn in the industry’s side – Wolens, a partner at Barton & Budd, is the lead lawyer in the Hijar case.

Value Added?
Although the funeral directors argue that consumers don’t need more information about the items on a funeral contract, a look at the Texas Funeral Commission’s recent history shows just the opposite. In 1998 and 1999, under then director Eliza May, the TFSC began investigating SCI’s embalming practices and found that it was using third parties to do embalming at some of its funeral homes. Neither the TFSC nor the Federal Trade Commission is allowed to regulate pricing for funerals. But the TFSC investigation helped reveal the fact that SCI was making enormous profits by outsourcing some of its embalming services.

In 1999, Doyle Ooten, the owner of Professional Morticians of Fort Worth, told the Chronicle that he was doing contract embalming work for SCI funeral homes. He charged SCI $145 for each body that he transported and embalmed. All of the work was done at Ooten’s embalming facility. But Ooten said that SCI was charging consumers “as much as $950” for the work he had performed – a markup of 550% that was never revealed to consumers.

The TFSC’s investigation into SCI resulted in a panel of the commission recommending that the company be fined $445,000. The agency settled that case earlier this year for just $21,000. But it has passed a regulation requiring funeral homes in the state to inform consumers if it will be embalming bodies in another location. There is no corollary requirement for the funeral home to disclose if it is marking up the cost of the embalming.

The TFSC Amicus
According to TFSC executive director O.C. “Chet” Robbins, the commission decided to get involved in the Hijar case at its Aug. 17 meeting. Two members of the commission, both of whom just happen to be funeral directors, convinced the other commissioners that the agency should intervene, and they voted to do so.

Robbins agreed with the commissioners. He told the Chronicle that he believes the judge in the Hijar case “had misinterpreted” the funeral rule. On Sept. 28, Robbins asked the attorney general’s office for permission to hire an outside law firm to write an amicus brief in the Hijar case. The AG’s office granted that permission the next day. That very day, Sept. 29, Tim Herman of the Austin law firm Herman Howry & Breen, submitted an eight-page amicus brief in the Hijar case. The brief contains a lovely example of circular logic. It says that the TFSC “believes that a good or service is a ‘cash advance item’ only when the funeral establishment represents that is has provided the good or service as a ‘cash advance item’ or that it has paid for the item on behalf of the consumer.” In other words, the funeral home gets to decide what is – or is not – a cash advance item. If it says an item is “cash advance,” it is. If not, not.

The TFSC paid Herman about $1,000 to write the eight-page brief. On Oct. 12, Alvarez ruled in favor of Wolens’ motion to strike the TFSC’s amicus brief from the court record. Thus, the TFSC’s effort to be on the record in support of the funeral industry failed.

Given that the agency’s brief was struck from the record, was the $1,000 spent by the TFSC to get involved in the case wasted? “This agency is very cost conscious,” replied Robbins. “I think the money was well spent.”

Asked for the plaintiffs’ perspective on the agency’s intervention, attorney Wolens was blunt. “The Texas Funeral Service Commission has long been criticized, and even sued, for being influenced by the very industry it regulates,” he said. “It is unusual and improper that this state agency would voluntarily inject itself in a private lawsuit where it is not a party. It is even more suspicious that their involvement came 21/2 years after the lawsuit was filed. … The state of Texas should not succumb to political influence and permit itself to be used to advance a private interest.”

When asked how the agency’s position in the case helps consumers, Robbins responded, “The issue here is accommodation. Rather than the consumer having to write several checks for cash advance items, the funeral director assists them to obtain the things that they are requesting.” And what about transparency of pricing? Wouldn’t consumers be helped if they could see exactly how much profit the funeral home was making on particular items, like caskets or embalming? Robbins did not answer. He did allow that if the plaintiffs in the Hijar case prevail, it would “create work” for the TFSC.

That line of thinking doesn’t convince Marc Allen Connelly, who served as general counsel at the TFSC during Eliza May’s tenure. Connelly, who now works as an assistant general counsel at another state agency, said it was “inappropriate” for the TFSC to try to get involved in the SCI lawsuit. During his tenure at the TFSC, Connelly said, his interpretation of the funeral rule agreed with the ruling that Alvarez made in the Hijar case. And the fact that the agency has sided with industry leads Connelly to believe that the TFSC has departed from its mission statement. “The purpose of the commission is to regulate the industry and to protect consumers,” he said. “It is not to protect the industry.”

A final ruling in the Hijar case is expected in the next few weeks. The appeals are certain to begin shortly afterward. n
Robert Bryce, a former Chronicle staff writer, can be reached at robert@robertbryce.com.