Wednesday, September 28, 2016

No. 181: State Farm Insurance—Class Certification in a Lawsuit in Federal Court Alleging that the Company Subverted the Illinois Court System

On September 16, 2016, U.S. District Court Judge David R. Herndon issued a "Memorandum and Order" (Order) in an extraordinary case. He ruled that "the Court finds the class certification is proper and grants the motion for class certification."

Judge Herndon, a 1998 Clinton nominee, is in the Southern District of Illinois and is a former chief judge there. His Order grew out of a complaint filed in May 2012 and an amended complaint filed in November 2014 that describe, in significant detail, an allegation that State Farm Mutual Automobile Insurance Company (Bloomington, Illinois) subverted the Illinois state court system for the benefit of the company. (See Hale v. State Farm, U.S. District Court, Southern District of Illinois, Case No. 12-cv-660.)

The Avery Case
The underlying case—Avery v. State Farm—was a class action lawsuit filed in an Illinois state court in 1997. The plaintiffs were State Farm policyholders whose automobiles were repaired with parts that were not factory authorized or were not original-equipment-manufacturer parts, or who received compensation based on the cost of those parts. After a trial, the jury awarded the plaintiffs $456 million in breach-of-contract damages. The state court judge who presided over the trial added $130 million of disgorgement damages and $600 million of punitive damages, for a total award of $1.186 billion.

State Farm appealed the trial court ruling. In April 2001 the Illinois Appellate Court threw out the $130 million of disgorgement damages as duplicative, but affirmed the remaining $1.056 billion of the award.

In October 2002 the Illinois Supreme Court agreed to hear State Farm's appeal of the Illinois Appellate Court ruling. The case was fully briefed and argued by May 2003, but the decision was delayed more than two years. In August 2005 the Illinois Supreme Court, in a split decision, overturned the $1.056 billion judgment of the Illinois Appellate Court.

The Hale Case
Judges who serve on the Illinois Supreme Court are elected to their positions. In January 2005 the Avery plaintiffs allegedly received reliable information that State Farm had used financial and political influence to accomplish the election of Lloyd Karmeier, an Illinois trial court judge, to a vacant seat on the Illinois Supreme Court. Judge Karmeier won the election in November 2004 over Gordon Maag, an Illinois Appellate Court judge.

The Avery plaintiffs filed a motion to disqualify Judge Karmeier from participating in State Farm's appeal of the Avery ruling in the Illinois Appellate Court. State Farm's response to the motion allegedly misrepresented and concealed the magnitude of the company's involvement in the election of Judge Karmeier. The Illinois Supreme Court denied a motion by the Avery plaintiffs to disqualify Judge Karmeier. In August 2005 Judge Karmeier cast an important vote in favor of State Farm in the previously mentioned split decision that overturned the $1.056 billion judgment.

In December 2010 attorneys for the Avery plaintiffs began an investigation into State Farm's involvement in the election of Judge Karmeier. The investigation followed a U.S. Supreme Court decision overturning a West Virginia Supreme Court ruling in a case involving a party's financial and political influence to elect a judge whose vote it sought for an appeal. A retired special agent of the Federal Bureau of Investigation led the probe. It allegedly found evidence that State Farm had recruited Judge Karmeier, directed his election campaign, funneled as much as $4 million to the campaign ($4 million was the bulk of the campaign's funds), and concealed this information from the Illinois Supreme Court while the appeal was pending. The investigation also allegedly found evidence that State Farm had worked through Edward Murnane, president of the Illinois Civil Justice League, and William G. Shepherd, a State Farm employee who headed Citizens for Karmeier.

In May 2012 the plaintiffs filed the initial complaint in the Hale case alleging two counts of violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. In November 2014 the plaintiffs filed an amended complaint that alleged the same two RICO counts. The defendants are State Farm, Murnane, and Shepherd. The thrust of the allegations is that State Farm used financial and political influence to accomplish Judge Karmeier's election to the Illinois Supreme Court.

State Farm's Comment
I asked State Farm for comment on Judge Herndon's Order. A spokesman for the company provided this statement:
We are disappointed in the Court's decision on the class certification question, and respectfully disagree with it. We intend to ask the appellate court to review this ruling in the very near future. Plaintiffs have unsuccessfully asserted and reasserted these allegations for many years and should not be permitted to do so any longer.
General Observations
Readers of The Insurance Forum, my 2015 book entitled The Insurance Forum: A Memoir, and this blog are aware that I have reported over the years on many troubling cases. The Hale case, however, is one of the most troubling I have ever seen. Judge Herndon included, near the beginning of his Order and before his discussion of the class certification issues, a verbatim excerpt from the first six pages of the amended complaint in the Hale case.

The Hale case and its predecessor, the Avery case, have been around for almost two decades. Whether the end is near remains to be seen. If State Farm files an appeal of Judge Herndon's Order, presumably the company would do so in the U.S. Court of Appeals for the Seventh Circuit. However, Hale has the feel of a case that eventually may reach the U.S. Supreme Court. I plan to follow further developments in the Hale case and report on them.

Available Material
I am offering a complimentary 29-page PDF containing Judge Herndon's Order, which includes a lengthy verbatim excerpt from the amended complaint in the Hale case. Send an email to jmbelth@gmail.com and ask for the Herndon/State Farm Order dated September 16, 2016.

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