Federal Class Action Reform

Evidently, legislators are telling the industry that class action reform is a done deal. (IJ)  However, Evan Schaeffer at NFTLU has a nice summary of some of the costs of enacting this particular reform.  His focus is on how the proposed law affects the practice of law and, to some extent, the practice of business.  He believes that the practice of class action law (and who practices it) will change and he believes that the legislations coupon restriction will make it harder for business to settle cases.  Further he believes that business will likely be able to "get away" (my words not his) with relatively small ($5 million or less) trespasses because the incentives to bring these cases are reduced.

Bill Childs of MassTort also has an interesting set of questions.  The ones of interest (to me) are the relative strength of the federal judiciary versus the states' judiciaries. His conclusion is that the debate is caused by the parties who think they are better off in state court (plaintiff lawyers) versus federal court (defense lawyers).

Being a small letter federalist, states should have power to decide local matters unless they are not local.  The case (Avery v. State Farm) which comes to mind is the State Farm OEM parts case that was decided in Williamson County, Illinois.  In this case the trial court certified a nationwide class action even for policyholders who lived in states with official state policies to encourage the use of OEM parts.  It may be true that the ruling was correct under Illinois law for Illinois policyholders, but it is not universally true for other states who regulate the use of OEM parts differently (see e.g. Insurance Information Institute scroll down to bottom).  In Avery the jury chose a remedy for customers who may not have been injured under their home state's law and interfered with the legislative prerogatives of other states' lawmakers.  This seems wrong on so many levels. I'd like to think that a federal court would not do this (call me Pollyanna) as it should be interested in the federalism aspects of its class certifications.  Even so, the choice of law problems are going to be huge.

I agree with Evan and Prof. Childs that there are significant questions that have not really been addressed.  This is good for people like me as every time Congress passes a new law an angel gets its wings a professor gets tenured.

Comments

[Evan]

You say that "[i]n Avery the jury chose a remedy for customers who may not have been injured under their home state's law"--true, but the law that was applied was that of State Farm's home state, i.e., Illinois. Avery, by the way, is still on appeal. But I don't think it is unfair that Illinois law was applied to all class members--even non-Illinois class members--because State Farm is a citizen of Illinois.

In fact, I think that this will continue to be the model even under the new federal legislation; the only difference will be that a federal court will be applying the state law to out-of-state residents. I mentioned this in my post.

The application to a multistate class of state law originating from the defendant's home state is not limited to Avery or to Illinois. It's not a new concept. The fact is that corporations must be cognizant of the laws that apply in the state in which they are citizens. If they don't like those laws, they should avoid citizenship in those states. (Under the federal banking laws, by the way, a bank is responsible only for following the laws of the state in which it is incorporated, and can violate the state laws of all other state laws in which it does business with immunity--the Avery decision, in some respects, reaches an analogous result.)

[Martin]

Evan,

I am not sure but I think this case is really different because of the nature of the underlying contract. When I buy insurance from State Farm for my house in Georgia, the policy contract is approved by the insurance department and it is interpreted under Georgia law. The insurance company prices it based on Georgia law. Why would it be proper for an Illinois court to have the power to interpret and ignore a Georgia contract to impose an Illinois interpretation on people who have no connection to Illinois except that their insurer is located there? This is the type of weird interstate trumping of state law that should be prohibited. It could lead to a bad type of forum shopping where one state can invalidate other state's contract interpretations. I don't know how Illinois treats these outside of class action but I suspect that they would use the Restatement of Contract which suggests using the law of the principal location of the insured. The McCarran Ferguson Act which gave the power to regulate insurance to the state is really different than the federal laws allowing banks to ignore the laws of other states if they conflict with their home state laws. it makes each state supreme over the business of insurance in the state. One of the major insurer complaints is that they are subject to 51 different state (+DC) laws on insurance and they often conflict.

[E L Eversman]

Avery might not have been the best case example to choose in your argument that the Illinois court certified a nationwide class and then imposed Illinois law on everyone.

The contract issues were straightforward and I don't think there is a single jurisidiction that would have applied its contract law differently than the Avery court: State Farm claimed in its (nationwide) insurance contracts that it was electing to have damaged cars repaired with non-OEM parts and that the aftermarket (non-OEM) parts were of "like kind and quality" (also known in the industry as LKQ). Ostensibly, State Farm initiated this contract provision because the use of these aftermarket parts would save the insurer big money and the insureds would have exactly what they had before, except the brand name.

The testimony in the case -- particularly from collision repairers who actually fix these cars -- demonstrated that the LKQ parts WERE NOT equivalent, were sub-standard, and, in many instances, dangerous. Most tellingly, State Farm appears to have been well aware of the sub-standard quality of the replacement parts as State Farm employees, executives, and "special friends" were always provided OEM parts in repairs, not the "LKQ" parts the insurer insisted its insureds accept.

Additionally, State Farm's insurance contract said that it would replace any LKQ part at its expense with which an insured had a problem. When called upon to do so, however, it refused, claiming that the insured had to obtain a remedy under the manufacturer's warranty -- and the manufacturers were located in Taiwan, Korea, China, etc.

Now, is there a state's law that says its OK to lie to your insured about how great LKQ parts are and force them to use them when you won't use them yourself? Also, is there any state's law that wouldn't find the promise to replace the LKQ part breached, or at least, illusory if the insurer refuses to perform as promised in the insurance contract?

Frankly, I think one of the biggest flaws of Avery was that the lawyers never argued that State Farm's promise to replace/warranty the LKQ parts (which is not typically governed by insurance departments as the business of insurance) exposed SF to liability under the Magnuson-Moss Act. I keep telling the insurers they are out of their minds to keep offering their own "guarantees" and "warranties" on the LKQ parts to get insureds to use them because someone will get smart and tag them under Magnuson-Moss and its multiple damages and attorney fee provisions.

[Martin]

I still don't see how Illinois can make a determination of what other state's law is... Other states have made determinations about aftermarket parts differently than in Avery.

In June 2004, the California Court of Appeals in Lebrilla v. Farmers Group, Inc., No.G031069, reversed the lower court ruling, denying certification of plaintiffs’ class action against their insurer for use of allegedly inferior non-OEM parts. In its decision, the Court defined the term “like kind and quality” as applying to the replacement part’s quality and suitability rather than the age or condition of the part replaced.

In February 2003, three separate class action suits in Ohio, Washington and Florida dealing with aftermarket parts were overturned or dismissed, giving insurers hope that they might finally be getting control over the long-running parts nightmare. In these cases, the plaintiffs sought damages and relief for alleged breaches of contract based on insurance companies’ use of vehicle replacement crash parts from sources other than the OEM. The courts deemed that the plaintiffs had not met requirements for class action status under the state laws, and that the class action lawsuits were not superior to other available methods for fair and efficient settlement of the matters.

After Market Parts and Diminished Value: In 2003, in a Massachusetts case, the Supreme Judicial Court of Massachusetts ruled that the use of a non-OEM part did not lead to diminished value. The plaintiff had argued that only a fender from the OEM would satisfy the insurer’s obligation to repair the vehicle under the language of the policy and state regulations. During the past several years, insurers have been targeted as defendants in class action lawsuits involving diminished market value. Georgia is the only state that supports the notion that auto insurers should compensate for any loss of value a car suffers after it has been involved in a crash.
These cases are from http://www.iii.org/media/hottopics/insurance/genericauto/

[E L Eversman]

Whoa. Hold on a minute about the diminished value issue. III is not correct about the statement that Georgia is the only State that requires compensation for loss of value of cars suffer after a crash. Let's make sure we're talking about the same things because insurers only ever discuss the diminished value topic from the point of the first party relationship. Until recently, consideration and payment of diminished value was automatically required by Iowa insurance regs. Other states have said that if the repairs have a significant impact on the value of the vehicle, an insured may be entitled to additional compensation for the decrease.

Now, don't misunderstand me. As per the direct realtionship with the insured and insurance contract, I'm not certain that there is or should be a requirement to pay for the diminution in value caused by the insured's at fault activities. But let's not forget the key point with DV. The reason class action lawyers bring the suits on behalf of insureds is because there is no effective way to certify a class of third parties who absolutely are entitled to DV as part of the total measure of damages caused by the negligence of the insured.

I know about the OEM/aftermarket decisions. One of the big issues, however, is the impact that damage (and repair, if applicable) has on the vehicle manufacturer's warranty, and there are a whole variety of other issues affecting a vehicle's value apart from whether it was repaired with OEM parts or not. The key, however, is that some aftermarket parts are simply not functionally equivalent to OEMs, they don't always fit properly, and there are other issues with them as well. See Collision Industry Conference Cycle Time Task Force Oct. 2003 analysis: http://www.ciclink.com/cyctime112801/2003-10-Cycletime.pdf

My issue with your take on Avery is that State Farm's insurance contract promised insureds that it would repair their cars with products of Like Kind and Quality and these parts would restore the vehicle to its "pre-loss condition". SF promised all of its insureds that the products were LKQ. The evidence in the case established the parts were sub-standard and not of the same quality as the OEMs. Clearly a violation of the contract any way you slice it. The poor quality parts prevented the vehicle from being restored to its "pre-loss condition" (which I frankly think is one of those ludicrous industry buzz phrases as there is no way to turn a vehicle with an adverse history into one that has a clean predigree, except by fraud -- but that's another issue.) Failure to return the car to pre-loss condition: Clearly a breach of the contract unless we want to say it wasn't really a promise and is just shameless puffing.

Then there was the promise that SF would replace the problem aftermarket parts, at no cost to the insured, which SF ignored and told its customers to get the parts maker to handle the problem. Yet another breach.

Avery was a case about basic factual issues. Where the parts of equivalent quality or not? The evidence said NO, the parts were not equivalent, and sometimes their use was dangerous to the insured and everyone else on the road. State Farm promised insureds it would use equivalent parts. It did not use equivalent parts. Even a state that promotes the use of aftermarket parts in its laws and regulations will not let an insurer misrepresent to its insureds the quality or safety of the parts being used. I contend that the jury's decision on the contract issue would not have done injury to any state's insurance law.

[Martin]

I think you are partially right--Avery from a factual basis may not be the poster child for class action reform. It still is from a legal basis as the question comes down to whether we want to let state courts (who do not have "interpretative" jurisdiction over insurance contracts outside their state to make binding legal determinations potentially conflicting with an insured's home state's public policy. It seems the Avery court did not think this was important.

My previous post was not meant to bring up diminished value, but to suggest that states had made law in this area which may or may not be consistent with Illinois' law.

[lazerlou]

That is the whole point. State Farm's practices violated the contract in any state Just because some state specifically allow aftermarket LKQ parts (probably in Republican states beholden to insurance interests), it does not mean those parts did not violate the contract. All that says is that the regulations in those states were flawed, so flawed they ran up against common law contract principles. When the insurance industry writes regulations that ultimately violate basice common law principles of fraud and contract, you shouldn't be so quick to defend that state's rights to regulate. Further each and every class member could have sued state farm in Illinois. State Farm was well aware it could be hailed into Illinois court by any of its customers, and therefore to claim it was unfair to be held up to Illinois law is just disingenuous.