| A SOLUTION IN SEARCH OF A PROBLEM: THERE'S NO NEED TO FEDERALIZE CLASS ACTIONS |
The Recorder, June 14, 2000 |
| America's unique civil justice system results from a carefully crafted constitutional compromise in 1787, which contemplates that federal and state systems will work side by side. Proponents of the "Class Action Fairness Act of 1999" -- S.353, up for a vote in the Senate Judiciary Committee in the next several weeks -- now seek to usurp state power, in a way that the Founders could not have contemplated, by stripping state courts of jurisdiction over class actions. Given our history of cooperative federalism, the arguments advanced in these pages by professor Ronald D. Rotunda ("Stating the Case for Federal Class Actions," May 17) -- that state courts must now cede jurisdiction to protect major corporations from unfairness -- deserve careful scrutiny. |
| Although removal has been recognized since at least Martin v. Hunter's Lessee (1816), respect for state sovereignty has led Congress to require complete diversity and limit removal to out-of-state defendants. Similarly well-established principles expressed in cases such as Sun Oil v. Wortman (1988) and Matsushita Electrical Industrial Co. v. Epstein (1996), allow state courts to adjudicate national class actions. |
| Now, despite their earlier claims that federal courts undermine state sovereignty, numerous conservative judicial appointments and several favorable courts of appeal decisions have convinced corporate interests that some federal courts are more friendly to their interests than state tribunals. Transitory and possibly illusory self-interest thus spawns the legislative initiative to remove all class actions to federal court. This runs directly counter to the current federalism trend in the U.S. Supreme Court, and is an insult to federal and state courts alike. |
| At present federal and state courts share the task of adjudicating class actions. While an enabling statute promoting coordination between federal and state courts, when related actions are pending in multiple forums, would be useful to our system of cooperative federalism, the current proposed legislation offers no such practical solutions. Indeed, this act signifies no newfound fondness for the federal courts; tellingly, S.353 includes no funding for additional judges or staff to cope with the expanded jurisdiction. |
| In support of "reform," proponents cite several cases of so-called "class action abuse," seeking to generalize a problem for Congress to remedy. One "example" is Avery v. State Farm Mutual Insurance Co. That this $1.2 billion verdict for breach of contract and consumer fraud has become a poster child for class action "reform" says more about State Farm’s substantial lobbying clout and extensive efforts to seek amnesty through the political process, than about Avery itself, which actually demonstrates that class action litigation can be tried fairly in state courts. |
| The story of Avery begins with plaintiff Michael Avery insuring his Jeep Cherokee with State Farm and faithfully paying his premiums for six years. Then, Mr. Avery’s wife had an accident, and he made a claim. The standard form policy obligated State Farm to pay for parts of "like kind and quality." Instead, State Farm specified repair with lower quality "imitation" crash parts made in Taiwan. |
| By refusing to provide genuine Jeep parts State Farm saved about $155. Mr. Avery paid out-of-pocket to get real Jeep parts because he was concerned about his family’s safety if his Cherokee was repaired with parts that did not meet the manufacturer’s specifications, and he did not want to install shoddy-looking repair parts that could reduce its value. |
| The evidence at trial showed that the imitation parts, specified on over 4.2 million repair jobs by State Farm, were not of "like kind and quality" because they failed to fit and lacked the durability, quality, and finish of genuine parts. Many of these crash parts were bumper parts that demonstrations showed crumbled easily on impact. |
| The inferior quality of these knock-off parts was the natural result of manufacturing and design processes designed to make cheaper, not better, parts. As one State Farm vice president candidly admitted in a confidential 1997 memorandum: "we may well say it is like kind, and quality, but the bottom line is that it is not the same." The proponents of class action "reform," not surprisingly, avoid all this, instead arguing Avery was "unfair" and interferes with state regulation. |
| State Farm is headquartered and chartered in Illinois, and several plaintiffs were Illinois residents. Avery was thus filed in Illinois state court, where our jurisdictional system required it be filed. The evidence at trial also showed that State Farm’s policy and practice of using substandard parts when settling claims had been conceived of, systematized, and applied from Illinois. Established U.S. Supreme Court doctrine allows a state court to exercise jurisdiction over a nationwide class, and to apply its own law, under the facts found in Avery. (See 1985's Phillips Petroleum Co. v. Shutts). |
| Corporations (and mutual insurance companies like State Farm) may have grown in power far beyond what could have been contemplated in the mid-1800s, when the modern corporate form arose, but they remain creatures of state, not federal law, and each state has a sovereign interest in controlling corporate misconduct that emanates from that state. |
| Nor was State Farm disadvantaged by the forum. The judge who certified and held the three-month trial in Avery had been an attorney for State Farm before his elevation to the bench and was a State Farm policyholder, and both parties consented to his assignment. Procedurally, State Farm was also afforded every opportunity to make its arguments and protect its rights. Class certification involved a four-day evidentiary hearing, and the court’s comprehensive certification opinion was challenged, not once, but twice, in the Illinois Supreme Court, and then by writ of certiorari to the U.S. Supreme Court. |
| After a full year and a half of discovery, the trial court again considered State Farm's arguments when deciding State Farm's decertification and summary judgment motions. At trial, State Farm presented over 14 full days of testimony and dispensed with surrebuttal. The jury deliberated for three days, followed by the court's judgment on the consumer fraud claim. After trial, State Farm petitioned for direct review in the Illinois Supreme Court, which was denied. The case is now on appeal in the Illinois Court of Appeals. |
| Although the argument is frequently made that class actions cannot be tried, the Avery case demonstrated that common issues arising from a standard form contract and a common practice can be fairly and efficiently tried on a class basis. Nor did the Avery court ignore State Farm's contentions. They were simply disproved at trial. |
| Prior to trial, State Farm listed over 35 witnesses from state insurance departments, claiming they supported State Farm’s use of imitation parts. But, only five appeared at trial, and none supported State Farm’s claims. Rather, they testified that no state insurance regulations allowed the use of inferior imitation parts; only parts which were of "like kind and quality" could be used; and that class action enforcement of policyholders’ contract rights was entirely appropriate. |
| Nor is the Avery decision likely to raise insurance premiums. The consumer fraud bench trial afforded State Farm a full opportunity to justify its practice; however (no doubt to the amazement of the court), State Farm’s internal documents showed that the use of imitation parts did not save State Farm policyholders money. |
| Rather, one key 1997 memorandum to State Farm management recommended that it stop specifying imitation crash parts because any savings were being "dwarfed" by the extra costs of claims administration and customer dissatisfaction. Nor has the Avery verdict created a "moratorium"on imitation parts. Major insurers have continued to use certain types of imitation parts under contracts different from State Farm's. Other insurers have never used imitation parts, and have no intention of doing so. All, of necessity, have competitive premium rates. |
| Nor would uprooting such suits to federal court eliminate the need to apply the same choice of law principles and substantive laws applied in Avery to complement and support state regulation of insurance. We doubt that the proponents of S.353 would enjoy the intrusive bureaucracy and regulation that businesses must accept if we were to forgo the private enforcement role of class action litigation. |
| Corporations may dislike nationwide accountability, and prefer piecemeal and ineffective litigation, but if they are to profit from nationwide commerce then our social contract requires that they be accountable to all the citizens with whom they deal. The ultimate irony of citing Avery as a case of class action abuse is that nothing in the push for federalization would have helped State Farm to overcome the evidence arrayed against it. If it were true that State Farm would have gained amnesty under S.353, then it is federal, not state, class action practice that would be in need of reform. |
| Our current system of dual federal/state courts strikes a careful balance between sovereignty and fairness to out-of-state litigants. Senate bill 353 seeks to destroy this balance to introduce bias at the expense of consumers damaged by the nationwide conduct of large, powerful corporations. To upset our current constitutional balance to address a nonexistent problem would be a dangerous mistake. |