State Farm Car Parts Reversal Gives Boost to Class Action Critics

Critics of national class action suits were among those cheering the loudest after the Illinois Supreme Court dismissed a $1.06 billion judgment against State Farm Insurance involving the use of generic auto repair parts.

The decision overturning the lower court ruling in (Avery, et.al. v. State Farm) held that the national class was improperly certified in 48 states. It threw out all of the monetary damages awarded by lower courts and ruled that the use of “aftermarket” or “non-OEM” (original equipment manufacturer) crash parts did not breach the insurance company’s contract with its policyholders.

In the 1998 class action suit, a Williamson County, Illinois, judge awarded a total of $1.18 billion in damages: $456 million for breach of contract, $600 million for punitive damages under the consumer fraud law and $130 million for disgorgement damages. An intermediate appellate court later reversed the award of disgorgement damages and upheld the rest, for a total judgment of $1.06 billion.

The class claims were based on the allegation that the insurer specified non-OEM parts in preparing estimates for repairs-even though other states (including Hawaii and Massachusetts) permitted or even required the use of non-OEM parts.

Critical of certification

Lawsuit reform advocates believe that because the decision is highly critical of the lower court’s certification of the class action against State Farm, it could slow down the rush to class actions in other cases.

“This is a victory for businesses and it sends a strong signal that class action abuse won’t be tolerated,” said Robin Conrad, senior vice president of the U.S. Chamber of Commerce’s National Litigation Center, which filed an amicus brief supporting class decertification. “The aggregation of 4.7 million claims in one lawsuit defied common sense and violated State Farm’s due process rights. Had this case gone forward as a class action, it would have been a travesty of justice.”

According to Conrad, the lower court decision represented “an extreme departure from the permissible use of the class action device” and the certification in this case contributed to turning Southern Illinois into a class action haven for trial lawyers.

The National Association of Mutual Insurance Companies used the occasion to call upon lawmakers to establish safeguards for preventing further instances of class action abuse.

NAMIC Public Policy Director Robert Detlefsen said that while the decision should invite savings that will benefit consumers, “what is equally significant, from a legal and public policy standpoint, is the supreme court’s core ruling that the case should never have been tried as a class action in the first place.”

The court pointed to glaring differences among the members of the plaintiff class with regard to such fundamental matters as the language in their policy agreements and whether they had actually had non-OEM parts installed in their vehicles. “Accordingly,” the Illinois high court said, “it was an abuse of discretion for the circuit court to certify plaintiffs’ breach of contract claim as a class action.”

Detlefsen noted that the now overturned decision had effectively imposed a nationwide moratorium on the use of non-OEM parts, even in the 47 states that permit and require their use.

“All of this could have been avoided,” Detlefsen maintained, “if Illinois had a law allowing either party to immediately appeal an adverse class action certification ruling to the state supreme court, with a requirement that the supreme court issue a definitive ruling on the appeal before the case could go to trial. Texas passed such a law three years ago, and the Avery debacle should serve notice to other states that they ought to follow Texas’s lead.”

Underlying controversy

The class action ruling is unlikely to end the underlying controversy over the use of aftermarket parts that has been dragging on for decades among insurers, manufacturers, repair shops, consumer groups and state policymakers.

While most states permit the use of aftermarket parts in insured repairs, the laws vary and various interest groups have continued to slug it out over whether they should be used.

The controversy revolves around whether less expensive non-OEM parts are safe and good enough in their fit and quality to allow them to be used in repairing insured vehicles. Insurers, a an industry-backed parts certification group, and generic parts makers have advocated for their use while original manufacturers, car leasing firms and repair shops have opposed them.

In July, after hearing testimony from more than a dozen witnesses, the property casualty committee of the National Conference of Insurance Legislators again postponed a final up or down vote on the issue. The panel instead voted 22-7 to form a special subcommittee to further consider an draft model law that would support the use of certified aftermarket automobile crash parts. The vote came during NCOIL’s summer meeting in Newport, R.I.

The controversial model act, sponsored by committee chairman, Rep. George Keiser, North Dakota, would endorse certification of aftermarket crash parts by third-party organizations such as the Certified Automotive Parts Association.

Jack Gillis, who heads CAPA, an organization that is supported by the insurance industry, advocated for the model act. He told state lawmakers to “follow the money” to understand what interests oppose aftermarket parts. He said that opposition comes from big companies, as was the case with pharmaceuticals.

“They said generic drugs were not and couldn’t be done but we are talking about stamped sheet metal and molded plastic. This model is a critically important step forward,” Gillis maintained.

Jim Kiley of the Alliance of Auto Manufacturers opposed the model act, claiming that it creates the false expectation that non-OEM parts are as safe as OEM parts.

Bill Walters of the Texas Auto Dealers Association, representing 112 car dealers, said dealers choose to sell OEM parts in most situations because they have found that non-OEM parts do not compare in weight, strength or fit and they need to be re-engineered frequently. “Customers are angry when they need retrofitting,” Walters told state lawmakers in Newport, adding that his group feels the NCOIL model undermines a consumer’s right to choose. Collision repair representatives from Maine, Massachusetts and Pennsylvania seconded the views of the Texas dealers.

The NCOIL subcommittee has been asked to submit changes to the draft law in time for the group’s November meeting in San Diego.

Topics Lawsuits Texas Auto Legislation Illinois Manufacturing