Wednesday, 31 August 2005 17:00

Illinois Supreme Court overturns verdict against State Farm

In an anticlimax second only to the Y2K debacle (remember - the hysteria over the new century), the Illinois Supreme Court overturned on a technicality the lower court decision in Avery vs. State Farm, the class-action lawsuit in which jurors found that aftermarket crash parts were not of like kind and quality to OEM parts and awarded over $1 billion against State Farm in October 1999. 

After over two years of deliberation, the court zeroed in on whether the plaintiffs in the case merited being considered a class. The court decided that the class action had been improperly certified and ruled in favor of State Farm, vacating all financial awards to the plaintiffs. The Supreme Court had little to say about the core issue - the quality of OEM versus aftermarket parts.

Chief Justice Mary Ann G. McMorrow delivered the opinion of the court.

The Avery case was filed in the First Judicial Circuit Court of Williamson County, Illinois. The plaintiffs asserted breach of contract claims and claims under the Illinois Consumer Fraud Act (ICFA), based upon State Farm's specification of non-OEM parts in car repair estimates for its insureds' vehicles. The Circuit Court certified a class action consisting of some 4.75 million State Farm policyholders from 48 states and the District of Columbia.

The seven-week trial resulted in a jury verdict on the contract claims against State Farm of more than $456 million. In addition, the Circuit Court awarded the class $130 million on the ICFA claim and punitive damages of $600 million. The Appellate Court, Fifth District, vacated the $130 million compensatory damages awarded on the ICFA claim but affirmed the remainder of the judgment, more than $1 billion, against State Farm.

In May 2003, the case was argued before the Illinois Supreme Court with Robert Clifford, Clifford Law Offices, Chicago for the plaintiffs. Sheila Birn-baum, Skadden Arps, Slate, Meagher & Flom, presented the winning argument to the court for State Farm.

Dissent among the justices

Although reluctantly agreeing with the decision to reject that validity of the class, Justice Charles E. Freeman wrote in his dissenting opinion:

"The court avoids discussing the evidence presented by plaintiffs by holding that State Farm never promised any policyholders that repairs would utilize parts of equal quality to OEM parts. Thus, according to my colleagues, it does not matter whether State Farm was knowingly repairing its policyholders' vehicles with inferior parts, because State Farm never promised to use non-inferior parts.

"I suggest that the court has perhaps insufficiently considered the policy implications of overturning a billion dollar verdict on the basis that an insurer's knowing usage of inferior parts is "good enough." I am not stating that non-OEM parts are by definition inferior; my point is that plaintiffs alleged, and by its verdict the jury found, that as of now non-OEM parts are not up to the standards of OEM parts - a factual conclusion the court avoids addressing. The quality of non-OEM parts could change in the future, but the court does not dispute that the crash parts State Farm was actually specifying for repairs were inferior to their OEM counterparts.

Freeman continued: "Although I am in agreement with my colleagues on a number of legal points, I disagree with many conclusions reached by them today. I find the tone taken by the court with respect to plaintiffs' trial counsel and the lower courts to be particularly unwarranted given that their actions were not especially egregious. They did not flout any of the rules of this court nor did they break with precedent in such a way as to deserve condemnation.

Judge Freeman suggested that political agendas had an improper effect on the judgment, saying: "Thus, the question becomes, from whence does this hostility come? What is not said anywhere in today's opinion is the fact that this case has been the focus of a great deal of national attention with respect to class actions in general and our Fifth District in particular. In my view, today's opinion appears to be my colleagues' point of entry into the ongoing national debate concerning class action litigation. It is my considered opinion, however, that while this debate is being conducted in the legislative arena amongst our elected officials in Congress and the Illinois General Assembly, we in the judiciary ought to tread carefully."

No gloating

State Farm offered a statement saying the company is very pleased that the Illinois Supreme Court concluded that the company's actions were correct. "This decision is good for consumers. In reversing all awards made by the lower court, the Illinois Supreme Court found that the plaintiffs' case was without merit and that it failed to demonstrate that any plaintiff suffered harm."

"As with all types of consumer products, the public benefits from open competition in the replacement parts business," said Kim Brunner, general counsel for State Farm.

Citing Congress's recent passage of class action reform legislation, he said, "The Court's decision recognizes the problems inherent with national or multi-state class actions. The Avery case was frequently referenced during congressional testimony as an example of class action abuse."


Plaintiffs disappointed

In a comment to the Los Angeles Times, Michael B. Hyman, partner with the Chicago law firm of Much Shelist Freed Denenberg Ament & Rubenstein, who also argued for the plaintiffs, said he was "very disappointed." He said the ruling was going to open the door for insurance companies to indiscriminately use generic parts, which were found by the jury "to be of inferior quality to original equipment."

Hyman said the plaintiffs' lawyers were pondering their next move. Options include appealing to the U.S. Supreme Court or refiling the case on behalf of policyholders who live in Illinois, he said.

Effect on collision industry

Industry leaders have been surprisingly quiet regarding the verdict, stating fear of repercussions by the insurance company as the reason for their reticence.

Karen Fierst, of KerenOr Consultants, a spokesperson for Taiwanese manufacturers of crash parts, offered the following comment: "The Avery verdict is complex. While great news for proponents of aftermarket parts, it is not a solution to the emotional, and equally complex, debate which has plagued our industry for over two decades. It does, however, create an environment where solutions to the debate can be pursued in an intelligent, cooperative fashion."

Aftermarket parts industry rejoices

Keystone Automotive Industries stated that the overturning of Avery vs. State Farm represents a significant victory for consumers because aftermarket collision replacement parts are a high-quality cost- savings alternative to original equipment.

"The collision repair (parts) market is a $16 billion industry that is 76 percent controlled by automobile manufacturers. With an estimated 20 to 40 percent savings over those parts supplied by the automobile manufacturers, the utilization of aftermarket generic collision replacement parts by the collision repair industry represents an important alternative for consumers - analogous to benefits to the healthcare industry from generic brands," said Richard L. Keister, president and chief executive officer of Keystone Automotive Industries.

Keystone believes that substantially all of the aftermarket crash parts that it distributes are of like kind and quality to OEM crash parts as defined by the Illinois Supreme Court because, when installed in a competent manner by collision repair shops, vehicles are restored to their pre-loss condition.

MQVP, Inc., a certifier of aftermarket parts, foresees growth opportunities as a result of the verdict. The company expects many insurance carriers will be reviewing their policies, procedures, and strategy for re-engaging the use of non-OEM collision replacement parts. "We believe that insurers will recognize our systems' quality and technical advantages, as well as the legal defensibility, and therefore will have confidence to endorse the Manufacturer's Qualification and Validation Program," states Neil Stolman, Operations Manager, MQVP Inc.

"MQVP has long held that its international standards based (ISO) requirements and OEM like processes, methods and best practices make it the premier supply chain quality assurance program for the independently produced parts industry," says John Arvay, Esq., the company's director of Insurance Client Services.

Jack Gillis, the outspoken executive director of the non-profit Certified Automotive Parts Association (CAPA), opined that with its decision "the Illinois Supreme Court has stood up for the interests of American consumers who are faced with the horrendous impact of the monopoly held by the car companies in the crash parts used in collision repair. We welcome this landmark decision by the Court to endorse competition instead of the car company monopoly that has kept the cost of collision repair artificially high and contributed to high numbers of vehicles totaled because of those high costs."

Gillis had further strong words. "Hopefully, this decision will reverse a trend in the crash repair industry since the [original] decision by the lower court in 1999. Unfortunately, consumers needing crash repairs since 1999 have found themselves victims of this monopoly by paying too much for the parts they need or, worse, having a perfectly repairable car totaled because the parts are so expensive.

"Ironically, car companies can charge what ever they want for their parts until they get to a price point that forces us to buy another one of their cars. Until now it has been a lose-lose situation for consumers and a win-win for the car companies.

"This decision is a victory for consumers across the country who will benefit from the presence of high quality, competitively-priced crash repair parts. The lower court decision had threatened the very existence of the competitive crash parts. This ruling rectifies that mistake, and it is now up to insurers to step up to the plate and do the right thing by insisting on the use of high quality certified aftermarket crash parts," stated Gillis.

The full opinion of the court can be found at www.takingthehill.com.


Read 1560 times