Consumer Class Certification Becomes More Difficult

By Thomas M. Goutman and Edward M. Koch

A recent state supreme court decision may have far-ranging implications for nationwide consumer class actions. In Avery v. State Farm Auto. Mut. Ins. Company, the Illinois Supreme Court reversed a $1 billion judgment against State Farm in a suit that arose out of the insurer’s alleged practice of requiring the use of after-market parts for automobile repairs. The court reversed the judgment principally because the record reflected that there were far more differences than similarities between members of the nationwide class and, thus the class should have never been certified in the first place.

General Requirements for Class Actions

The class action mechanism permits a lawsuit to be brought by or against a large number of persons or entities whose interests and claims are sufficiently related. At an early stage in the proceedings, the court determines
whether the class may be certified. While there are differences in the rules that govern class actions in state and federal courts, class certification generally requires a showing that the class is sufficiently large, the claims are common, the claims of the class representative are typical of those of the class, the class is adequately
represented, and questions of law or fact predominate over the class. Historically, commonality and predominance are the most difficult elements to establish for the plaintiff because of the inevitable differences between class members and their claims.

The Lower Court Decisions in Avery

In Avery, the plaintiffs sought to bring a nationwide class action on behalf of all State Farm policyholders. The plaintiffs alleged that State Farm had a policy or practice of using after-market parts in automobile repairs when those parts were available and less expensive than the original parts. These parts, which are commonly known as “non-OEM” (i.e., non-original equipment manufacturer), were specified by State Farm as a cost-savings measure. The plaintiffs alleged that, because non-OEM parts were inferior to OEM parts, State Farm breached its promise
to its policyholders to use parts of “like kind or quality” or restore the automobile to its “pre-loss condition.” From this, the plaintiffs asserted class claims for breach of the insurance policy, violation of the Illinois Consumer Fraud Act, and violation of the Illinois Deceptive Business Practice Act.

The trial court found that each of the requirements for class certification were met, and certified a nationwide class. The case then proceeded to trial. At trial, the jury awarded the plaintiffs $456 million in damages. The trial court added $130 million in disgorgement damages and $600 million in punitive damages. State Farm appealed, arguing that the class should never have been certified in the first instance. The Illinois intermediate appellate court disagreed and affirmed the judgment — with one small exception. It reversed a portion of the damages award, and lowered it to $1.06 billion.

The Illinois Supreme Court Decision

In an exhaustive opinion, the Illinois Supreme Court reversed. It agreed with State Farm that the class should have never been certified on any claim. With regard to the contract claim, the court focused on the factual differences between the class members that were developed during pretrial discovery, and found that there were material differences in the insurance policies among the class. It noted that some policies promised to use parts “of like kind and quality,” while others promised to restore the vehicle to it “pre-loss condition.” These differences led the court to conclude that the commonality and predominance requirements could not be met. The court further concluded that the verdict could not be sustained even if it was possible to divide the plaintiffs into sub-classes to correspond to the different policy language because the plaintiffs never established that State Farm breached the policy by using non-OEM parts. Addressing next the plaintiffs’ claim for specification damages (i.e., representing State Farm’s savings for specifying after-market parts) and installation damages (i.e., representing the additional costs to the plaintiffs for replacing the after-market parts with original parts), the court held that the plaintiffs’ theories were legally insufficient. It reasoned that the mere “specification” of non-OEM parts resulted in no legal damage, while “installation” damages were speculative.

Turning to the remaining fraud-based statutory claims, the court held that the plaintiffs could not assert cognizable claims because most of the circumstances surrounding the use of non-OEM parts were simply not
fraudulent. The only colorable fraud claim (i.e., the supposed failure to disclose the categorical inferiority of non-OEM parts) could not form the basis for a nationwide class action because the Illinois statutes could not cover out-of-state conduct. As to the one named Illinois plaintiff, the court found that, because that plaintiff already believed that non-OEM parts were inferior, he could not have been deceived by State Farm’s representations.

Conclusion

The impact of the Avery decision will likely be felt nationwide. In the near term, the decision will undoubtedly curb the spate of non-OEM part class actions. In the long term, the decision may also discourage nationwide consumer class actions based on insurance claims handling practices.