United States: Landmark Illinois Supreme Court Decision Redefines State Law Governing Class Actions and Consumer Fraud Claims

In a long-awaited decision with far-reaching implications, the Illinois Supreme Court overturned a $1.1 billion judgment against State Farm Mutual Auto Insurance Company.

Avery v. State Farm Mut. Auto Ins. Co., Ill. Sup. Ct. No. 91494, was issued August 18, 2005. The decision rejected a putative class action challenging State Farm’s practice of specifying that non-Original Equipment Manufacturer (non-OEM) parts be used in repairs of damaged vehicles. Chief Justice Mary Ann G. McMorrow wrote for a unanimous court in holding that the case should not have been certified as a class action and that none of the named plaintiffs established violations of the Illinois Consumer Fraud Act (ICFA).

The court also held, with two justices dissenting in part, the plaintiffs failed to prove State Farm breached its obligations under its insurance policies by using non-OEM parts or that the plaintiffs were damaged by the use of those parts.

Filed in Williamson County in rural, southern Illinois in 1997, the lawsuit alleged that State Farm promised policyholders their vehicles would be repaired with parts equal in quality to those manufactured by or for the automobile’s original manufacturer, but that State Farm knew the non-OEM parts it specified for repairs were inferior in terms of fit, durability or appearance. The case was ultimately certified as a class action comprising nearly five million State Farm policyholders from 48 states. A jury found that the use of non-OEM parts breached State Farm’s obligations under the insurance policies and awarded the class more than $455 million. The trial judge held State Farm violated the ICFA and added an additional $130 million in compensatory damages and $600 million in punitive damages on top of the jury award.

The Fifth District Appellate Court set aside as duplicative the additional compensatory damages awarded by the trial judge, reducing the judgment to $1,056,180,000, but otherwise affirmed. The case was then appealed to the Illinois Supreme Court, where it was argued in May 2003.

Chief Justice McMorrow wrote a sweeping opinion destined to herald a sea change in the conduct of Illinois class actions and ICFA claims.

The opinion includes the following highlights:

• Class certification procedure. Factual issues pertaining to whether the prerequisites for a class action have been satisfied must be decided before trial. The circuit court erred by certifying a class without first deciding whether the operative language in the various versions of State Farm policies issued to members of the putative class was susceptible to uniform interpretation.

• Class certification: whether common questions predominate. Differences in the operative language in the various State Farm policies in many states precluded class certification on the breach of contract claim because those differences meant issues common to the U.S-wide class did not predominate.

• Breach of contract: whether the policies were breached. The plaintiffs failed to prove the use of non-OEM parts breached State Farm’s insurance policies. If one or more versions of State Farm policies could have been breached by specifying the use of non-OEM parts, a new trial might have been necessary with respect to subclasses based on each of those versions of the policy. The court’s ruling that none of the policies was breached obviated a new trial.

• Damages issues. Plaintiffs’ counsel had offered two creative theories to support their damage claims; the court rejected both, and this was an additional reason why no subclass of policyholders could be entitled to recover. First, the court emphasized that only the use of non-OEM parts, not their specification in repair estimates, could support a damage claim. Because OEM parts were sometimes used in repairs even though the repair estimates had specified non-OEM parts, the court set aside $243,740,000 in damages based on the mere specification of non-OEM parts. Second, the plaintiffs also failed to establish a right to recover "installation damages" relating to the cost of replacing non-OEM parts with OEM parts. Uncertainty about the facts underlying the calculation of those damages led the plaintiffs’ expert to testify that those damages ranged between $658,450,000 and $1.2 billion. On cross examination, the expert admitted that his damages estimate could be off by as much as $1 billion. The court held the speculative nature and potential inaccuracy in the installation damages estimates were too great to support a damages award and constituted "an arbitrary deprivation of property in violation of State Farm’s due process rights."

• Relationship between ICFA claims and breach of contract. ICFA claims cannot be based simply on a defendant’s breach of contract. Accordingly, the plaintiffs could not base an ICFA claim on State Farm’s alleged breach of its contractual duty to restore plaintiffs’ vehicles to their "pre-loss condition" or to repair plaintiffs’ vehicles using parts of "like kind and quality."

• Puffing is not actionable under the ICFA. Subjective statements of quality are simply puffing and, hence, not actionable under the ICFA. The plaintiffs could not base an ICFA claim on State Farm’s description of its non-OEM parts as "quality replacement parts."

• Extraterritorial application of ICFA. The ICFA does not apply to fraudulent transactions which take place outside Illinois. A plaintiff may pursue a private right of action under ICFA if the circumstances that relate to the disputed transaction occur "primarily and substantially in Illinois." Here, the overwhelming majority of circumstances relating to the disputed transactions—State Farm’s claims practices—occurred outside of Illinois for the out-of-state plaintiffs.

• Burden of proof under ICFA. The preponderance of the evidence standard applies to private causes of action under ICFA. Appellate court cases applying a clear and convincing evidence standard were overruled.

• Actual damage. The lone Illinois putative class representative failed to prove a violation of ICFA because he did not suffer actual damages. As previously noted, damages cannot be based on the mere specification of non-OEM parts in a repair estimate. In addition, the Illinois plaintiff cannot recover damages relating to the cost of replacing the non-OEM part because he sold his vehicle for fair market value, i.e., without any adjustment in price despite the presence of non-OEM parts.

• Proximate cause—actual deception. Proximate cause is an element of all private causes of action under ICFA, not just those involving advertising. To establish proximate cause, a plaintiff must prove that he or she was actually deceived. The Illinois plaintiff was not deceived because he admitted that he was aware non-OEM parts were to be used on his truck, and he complained to his agent because he believed such parts were not as good as OEM parts. Absent deception, the court held, there was no case under ICFA.

• ICFA class certification issues. The circuit court erred in certifying a nationwide class on the ICFA claims because, as previously noted, ICFA does not apply to transactions that took place outside Illinois. Nor could a class be established limited to Illinois policyholders because the only Illinois plaintiff did not prove his ICFA claim.

The court could have decided Avery without addressing many of the issues discussed in the majority’s 51-page decision. The expansive scope of the decision, as well as the substance of the legal principles articulated by the court, appear intended to counteract the reputation that some Illinois courts (and, in particular, those in certain downstate counties and the Fifth Appellate District) are unduly favorable to ICFA plaintiffs and putative nationwide class actions. Since the court was unanimous on most issues, Avery is likely to rein in perceived excesses in ICFA claims and Illinois class actions. It also may be a harbinger of the court’s forthcoming decision in the downstate class action that resulted in a $10.1 billion judgment against Philip Morris in Price v. Philip Morris (USA), Inc., No. 96236.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.