The Illinois Supreme Court on August 18, 2005, reversed a $1.2 billion verdict entered against State Farm Mutual Automobile Insurance Company in the national aftermarket parts class action entitled Avery v. State Farm. In this long-awaited decision, the Supreme Court went far beyond the expectations of the insurance community and issued a lengthy, well-reasoned analysis that rejects every element of the class action. The importance of this decision to the insurance industry cannot be underestimated. The Avery decision is likely to substantially curb (and perhaps entirely eliminate) efforts by the plaintiff's bar to attack the specification of non-OEM parts through the class action process. In addition, the decision may further discourage the plaintiff's bar from pursuing national class action litigation based upon insurance claims handling practices.
Avery concerns State Farm's longstanding nationwide claims practice of specifying non-OEM parts in repair estimates issued to its policyholders. Plaintiffs alleged that State Farm specified such parts while knowing that such parts were inferior in quality and condition to original equipment manufacturer parts, and could not restore vehicles to pre-loss condition. Plaintiffs contended that State Farm deceived its policyholders by failing to notify them of the purportedly inferior quality of the non-OEM parts. Plaintiffs alleged that in furtherance of this deception, State Farm falsely represented that the non-OEM parts satisfied a high performance criteria, and also offered a "bogus" guarantee regarding the quality of the parts. Plaintiffs alleged that State Farm's conduct breached the contracts of the policyholders, and violated the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq. As noted above, Plaintiffs sought to represent a national class. The trial court granted class certification, and the matter proceeded to a $1.2 billion verdict. An intermediate appellate court largely upheld the decision, although damages were reduced to $1.05 billion.
The matter was appealed to the Illinois Supreme Court, which was widely expected to limit certification to an Illinois-only class but otherwise uphold the verdict. However, the Court elected to reverse the verdict in its entirety.
The Court held that certification of a single breach of contract class was improper, given material differences among the various policies applicable to the class members' claims. The Court also held that the certification of breach of contract subclasses (grouped according to the specific policy language applicable to each class member) was improper, as Plaintiffs failed to establish that the specification of non-OEM parts violated any of the policies at issue. Notably, the Court held that the specification of a non-OEM part was not a per se violation of policy language requiring the insurer to specify parts of "like kind and quality" or return the vehicle to "pre-loss condition." Rather, the Court concluded that these issues required an individualized inquiry with regard to each class member's claim, making class certification improper.
The Court also rejected the theories of damages presented by the breach of contract class. The Court rejected the theory of "specification" damages (in which damages could be awarded based upon the mere specification of a non-OEM part on a repair estimate, even if an OEM part was ultimately installed) as fundamentally inconsistent with contract law. The Court also rejected the theory of "installation" damages (in which all class members who actually received an non-OEM part were entitled to damages), holding that the expert testimony presented in support of this theory was far too speculative and did not establish that damages could be calculated to a reasonable certainty.
In addition, the Court rejected Plaintiffs' claim for violation of the Illinois Consumer Fraud Act on its merits. First, the Court emphasized that a mere breach of contract, without more, cannot support a fraud claim. The Court also held that there was no evidence that State Farm made any representations to the named Plaintiffs that non-OEM parts were of equivalent quality to OEM parts. In this regard, the Court noted that the description of the parts as "quality replacement parts" was merely "puffing" and did not constitute an actionable misrepresentation. The Court also held that State Farm's guarantee of the non-OEM parts used in a repair could not support the consumer fraud claim, as there was no evidence that the named Plaintiffs had any difficulty in using the guarantee.
The Court then turned to the crux of Plaintiffs' statutory fraud claim: State Farm's alleged failure to disclose the "categorical inferiority" of the non-OEM parts. Initially, the Court held that the Illinois Consumer Fraud Act concerns only conduct which occurred "primarily and substantially" in the state of Illinois. Therefore, the Court held that as the claims of four of the five named plaintiffs concerned insurance claims outside of the state of Illinois, these plaintiffs could not bring statutory fraud claims.
With regard to the remaining Illinois plaintiff, the Court expressed suspicion as to whether the plaintiff asserted a cognizable fraud claim, noting that State Farm had complied with state regulations regarding the disclosure of non-OEM parts and the absence of any general requirement for a company to disclose that its products may be inferior to competing brands. However, the Court focused its analysis upon the Illinois plaintiff's absence of actual damages. The Court observed that the plaintiff sold the vehicle soon after it was repaired with non-OEM parts, and there was no evidence that the use of non-OEM parts played a role in the repair. Furthermore, there was no evidence that the Illinois plaintiff was actually "deceived" by State Farm as to the quality of non-OEM parts. Rather, the evidence demonstrated that the plaintiff believed at all times that such parts were inferior, and objected to their installation on his vehicle.
Having held that the Plaintiffs could not therefore assert a cognizable statutory fraud claim, the Court did not examine whether the certification of such a claim was improper, or whether the punitive damages award was appropriate.
The Avery decision will certainly have an effect on the future of aftermarket parts class actions currently pending across the country.
Michael R. Nelson and Craig A. Cohen are Partners and Mark H. Rosenberg is an Associate in Nelson Levine de Luca & Horst, LLC with offices in Philadelphia, Cherry Hill and Columbus. The firm focuses on the business of insurance and specializes in the defense of class action and other types of complex litigation. Copyright © 2005 Nelson Levine de Luca & Horst, LLC. All rights reserved.