$1Billion Reversal Likely to Curtail Some Class Action Abuses

8/22/2005
Client Alert

In what amounts to a significant blow to the plaintiffs’ bar in the notorious Fifth District of Illinois, the Illinois Supreme Court on Thursday reversed a $1.05 billion dollar verdict against State Farm. Avery et al. v. State Farm Mutual Automobile Insurance Co., No. 91494, 2005 WL 1981444 (Ill. Aug. 18, 2005). In an opinion authored by Chief Justice McMorrow with significance far beyond State Farm, the court held that neither the nationwide breach of contract class nor the nationwide statutory fraud class had been properly certified.

At issue was State Farm’s use of non-OEM (original equipment manufacturer) parts for vehicle repairs. Plaintiffs claimed that the use of such parts breached a promise by State Farm to restore vehicles to their pre-loss condition with parts of "like kind and quality," and that State Farm acted deceptively because it failed to tell its policyholders of a "supposed categorical inferiority of non-OEM parts" during the claims process.

As to the breach of contract claim, the court found that material differences between State Farm contracts in use in different parts of the country rendered nationwide class certification improper. The court also rejected the alternative of certifying subclasses of policyholders with the same policy language. Some of those policies, the court found, required a highly individualized examination of the vehicle’s pre-loss condition which would preclude certification. The court also rejected subclassification after finding that none of the policies had been breached, and that plaintiffs had not established damages under any of them.

The court also reversed the trial court’s verdict under the Illinois’s UDAP law, the Consumer Fraud and Deceptive Business Practices Act ("CFA"). The court began by noting that the fraud claim could not be based on (1) the same theories plaintiffs advanced in their breach of contract claim, (2) the mere act of specifying the use of non-OEM parts, or (3) even puffing about the quality of replacement parts. As to the only viable theory for plaintiffs’ fraud claim — that State Farm deceived policyholders by failing to inform them that specified replacement parts were supposedly inferior — the court found nationwide class certification improper. Significantly, it did so after finding that the CFA does not apply to transactions outside of Illinois. The court did not address State Farm’s constitutional or choice-of-law arguments against nationwide certification of state law claims. It did, however, clarify that the CFA would only apply to class members who were subjected to the offending practice within Illinois, or actually injured there (i.e., those whose vehicles were assessed or repaired in Illinois). Although the court declined to adopt a test that would allow only consumers deceived or injured within the state to sue under the CFA, it did find that merely alleging that the defendant’s scheme of deception emanated from within the state (State Farm is headquartered there) would not be enough.

This case has been closely watched by companies saddled with litigation in infamous Madison County and surrounding courts, where a number of plaintiffs firms have sough nationwide classes against a wide variety of consumer and financial service companies, often on theories long rejected elsewhere.

The full opinion can be found at: http://www.state.il.us/court/Opinions/SupremeCourt/2005/August/Opinions/Html/91494.htm

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