MI Conference Series
No. 9 October 24, 2002
Unfair Competition and Consumer Fraud Statutes:
Recipe for Consumer Fraud Prevention or Fraud on the Consumer, continued
Panel One: Striking a More Balanced Public Policy
MR. DEWEY: We’re going to have two very interesting panel discussions, and we have two very distinguished moderators whom I’d like to introduce.
The first panel will be “Striking a More Balanced Public Policy,” and Walter Olson will moderate it.
Wally is a senior fellow at the Manhattan Institute’s Center for Legal Policy, where he writes on a variety of economic, political, and legal topics. He also founded what is now the Institute’s Center for Legal Policy in 1985. Previously, he spent five years with the American Enterprise Institute in Washington, D.C., and before that he worked on Capitol Hill.
Wally has been referred to as an intellectual guru of tort reform and as America’s leading authority on over-litigation. His books include The Excuse Factory and Litigation Explosion: What Happened When America Unleashed the Lawsuit, and he has another book coming out at the end of the year, published by St. Martin’s Press, entitled The Rule of Lawyers: How the New Litigation Elite Threatens the Rule of Law.
He continues to write for publications such as the New York Times and the Wall Street Journal. His current professional activities include acting as an advisor to the Federalist Society. He still maintains his website, Overlawyered.com, and regularly speaks before professional, business, and student audiences.
Wally is a graduate of Yale University.
The second panel is entitled “Successful Defense Litigation Strategies.” Our moderator for that panel will be John H. Turner, Jr. John is vice president at the Environmental Law Institute, or ELI, in Washington, D.C., where he is responsible for the Institute’s treaties, textbook, and environmental reporting offerings. Those include ELR, the Environmental Law Reporter, and the National Wetlands Newsletter.
He also serves as editor in chief of the Environmental Law Reporter.
Previously, John served as divisional vice president of Browning-Ferris Industries, as counsel to a trade association, and as an attorney in private practice, where much of his work involved product liability, toxic tort, and related individual and class action claims. In other words, John has been in the trenches as well as in academia.
He has authored over 40 articles in law reviews and other legal publications on environmental, constitutional, tort, and land-use issues and is a frequent speaker at legal conferences.
John graduated from the University of Alabama and from Vanderbilt University’s law school.
MR. WALTER OLSON: Our first panel this afternoon can be thought of as reporting from a war zone. In particular, all three of our panelists were involved in one of the most fascinating class actions of our time, Avery v. State Farm. See 321 Ill. App. 3d 269. This is the lawsuit over the insurer’s use of replacement parts not from original manufacturers after auto crashes.
It’s a fascinating case; first, as Sheila Birnbaum pointed out, because, even though it was a very high stakes national class action it was tried to a verdict rather than settling before that point. I could scarcely believe my eyes at the news that a case of this sort had actually gone all the way through trial. I thought such cases were required to settle as a matter of procedure. But it went to trial and would be fascinating if only for that.
But there is much more of interest to the Avery case than that. It illuminates the kind of consumer protection statutes that are the theme of today’s conference. It raises questions of how state courts handle nationwide class actions. It illuminates the conflict or interplay between regulation by agencies and regulation by legal action in an industry whose operations came under heavy state regulation.
It would be easy for us to spend the next hour and a half getting into Avery’s intricacies. But you will notice that the title of our panel is somewhat different: “Striking a More Balanced Public Policy.” Since Avery v. State Farm is still in progress, some of our panelists may not be able to say everything they know or think about it; but I’ll bet all of them can shed light on its implications for other cases, other defendants who might get sued, and other uses of these state consumer protection statutes, which is sure to be of interest to almost everyone in the room.
Our panel will begin with Robert Shultz, who certainly has earned his war stripes. He is a class action specialist defense lawyer in Madison County, Illinois. You can’t get more warlike than that. He has been, I believe, for his entire career with the law firm of Heyl, Royster—first in its Peoria office and then opening its Edwardsville, Illinois, office, which he runs today. He is active in such professional associations as the Illinois Association of Defense Trial Counsel, the Defense Research Institute, and the Illinois Institute for Continuing Legal Education.
He also practices in St. Clair County—which, I understand, is a close runner-up to Madison County in terms of class action lawsuits—and in Cook County, which seems almost like an easy place to practice, by comparison.
He will be followed by one of the nation’s premier plaintiffs’ lawyers, Elizabeth Cabraser, whom we’re honored to have with us. She is with the San Francisco–based law firm of Lieff, Cabraser, one of the leading class action law firms in the nation. She has participated in many of the best-known class action and mass torts of recent years.
Her honors include 100 Most Influential Lawyers in America, named by the National Law Journal in both 1997 and 2000. She has been influential in procedural debates as a participant in panels considering changes in procedure, and is the author of articles on the appropriate uses of aggregation published in law reviews and elsewhere.
Our final panelist will be Jeffrey Jackson, of the State Farm Mutual Automobile Insurance Company, the defendant in Avery, who will give you an inside look at how it has affected the company and the way it has to plan for its future. He has overall responsibility for the corporate counseling and litigation division for corporate law at State Farm. He joined the company in 1988, after nine years in private practice. He is also active in professional organizations, including Lawyers for Civil Justice, of which he is on the board of directors, and the Illinois Equal Justice Foundation.
We will start with Bob, otherwise known as Barney Schultz.
MR. BARNEY SHULTZ: I keep looking at the program title “Unfair Competition and Consumer Fraud Statutes,” and it strikes me that if that were really the only topic that were to be discussed today, none of us would be here and we wouldn’t have a program.
If we look a little deeper, the reason we have this program is because we’re talking about consumer fraud statutes in the context of class actions. If you look even further, what you’re going to find as the reason we’re gathered here is that we’re talking about consumer fraud statutes prosecuted as class actions in the state courts of our country rather than in the federal courts. That, I think, is the real reason that we’re here. And it’s probably the only thing that I’m qualified to speak about.
But if the question that’s being posed is, “Does a better balance need to be struck as far as the matter of public policy?” I can strongly state that a better balance needs to be struck in those instances where consumer fraud actions are prosecuted as class actions, and especially when those are prosecuted in the state courts of the country.
That has particular application for those businesses that are regulated. I’m talking about insurance carriers, pharmaceutical companies, and telecommunications companies. Those industries that have traditionally done business in a regulated environment are the ones that are particularly at risk here and in need of a better-balanced approach from the nation’s civil justice system.
If these cases are tried in the state courts and if they are tried as class actions and if they are tried on consumer fraud allegations, you will be facing the prospect of a single judge or a single jury in a county court of one of the states of this country imposing or superimposing, and in turn regulating, these businesses that have traditionally operated within a well-known and well-established regulatory environment, be it legislative or administrative.
That’s the real peril. There are many arguments that can be made that the consumer fraud statutes and litigation can complement each other and that they’re not exclusive. But they are also contradictory. I hesitate to go through the details of the Avery case. We’ll get into it somewhat, I imagine; but it is on appeal, so I really don’t want to talk a lot about it.
The Avery case concerned State Farm’s practice of sometimes specifying non-original equipment parts in the repair estimates for its own policyholders. That is a practice that by regulation was allowed in 40 states, regulations that in many instances had come about following hearings. In none of the states were there any regulations that prohibited the practice of specifying non-OAM parts. Yet by virtue of the loss, the adverse result of the trial in Avery, there was a sea change in the way that State Farm did business. They declared a moratorium when the verdict was returned on the use of the specification of non-OAM parts. If you’re looking for examples of contradictions, a contradiction between the state court litigation and the regulatory process, that act of declaring a moratorium in specification of the parts is, in fact, directly at odds with what the Massachusetts Department of Insurance says you should do.
Instead, you have situation where there are contradictory regulatory environments, one being the circuit courts of different states and the other being the traditional legislative and administrative bodies of those states.
As Sheila said earlier, the consumer fraud acts of many of these states vary in their elements and in their requirements. But I think it’s a safe and fair statement to say that none of them encompasses all the traditional elements of fraud.
In that sense, I always tend to think of these statutes as being “lite” fraud, sort of like the old “lite beer” commercials. It only has half the elements, but it has all the penalties. That’s what we’re really talking about.
If we’re talking about traditional cases, using a single plaintiff and a single defendant, the consumer fraud statute certainly will not require intent and may or may not require reliance and deception. The standards of proximate causation vary from state to state. Under some states’ laws, you don’t even need cause in fact. Then you can talk about the burdens of proof varying from state to state.
But if you take these “lite” fraud statutes and combine them with the class action device, you are putting together a situation in which you need to strike a better public policy. Because once you combine the consumer fraud statutes and the limited elements that are required of them with the class action device, you’re upsetting what was the traditional public policy behind the consumer fraud statutes in the first place.
The consumer fraud statute is a reaction to the doctrine of caveat emptor. One commentator—fairly, I think—characterized the combination of the consumer fraud statutes and the class action device as the ultimate reaction to caveat emptor.
Have we taken this so far now that we’re being counterproductive? I think a very good case can be made around that.
If you think in terms of the class action device, at the core all you need is a common question of law or fact. Bright, imaginative lawyers like Elizabeth Cabraser will always be able to come up with a common question of law or fact; that’s not hard. It’s actually pretty easy if you look at suing a regulated industry. Because the very nature of regulation means that there is some uniformity to your business practice, and that uniformity lends itself to the creation, or at least the statement of, a common question of law or fact.
I don’t want to suggest that the common question of law or fact is the only criterion in order to certify a class. It is not. We’ll talk about that in a moment. But it certainly is, in my experience, the driving force; that is, it is the ability to frame that common question of law or fact in the end drives the decision making of state court judges in deciding whether the class should be certified.
There are other elements that have to be met. There has to be proof that the common question predominates over individual questions that apply, over questions that apply to the individual class members. That is a point of hesitancy and a point of concern for many trial judges who have to hear these cases. But it certainly is also my experience that those judges who are presented with these questions and who have that concern as to whether we really have predominance of this common question are comforted more often than not with the argument of, “Judge, if it works out that we really don’t have predominance here, you can always decertify the class at a later time. Right now, we’re just asking you to certify the class. If you get it wrong, you can undo it before the case goes to trial; you can modify a class certification order. If you get it wrong in defining or identifying the class members, you can always modify it.”
So the result is that once you identify this common question, and if you can address the concern that the trial court has over predominance, from the plaintiffs’ perspective, you’re almost all the way there.
Having then certified the class, the defendant has to face the prospect in state courts, or at least the state courts where these actions are filed, that you have no right to appeal. Because unlike the federal rules—and I can speak more about Illinois than any other state—there is no automatic or immediate right to appeal an order that either grants or denies class certification, such as we have with Federal Rule 23F. It’s just not there.
You can try to take your appeals or your interlocutory appeals. But they’re discretionary. They may or may not be successful. But the only sure way that you’re going to get appellate review of that order certifying the class is if you take the case to trial and a judgment. That’s a daunting prospect indeed for defendants.
If you want to combine the class device and the common question and the predominance issue, there also has to be recognition that many states don’t have the superiority requirement that the federal rules have. By that, I mean that under the federal rules, you at least have to demonstrate that the class action device is a superior method of adjudicating the controversy in question. In many of the state courts, or at least the state courts where these lawsuits are being filed, there is no superiority requirement. Usually, there is a requirement that there has to be a fair and efficient method of adjudicating the controversy. But it doesn’t have to be the best; it simply has to be fair and efficient. Unfortunately, far too often the fairness is sacrificed for the sake of the efficiency once that class certification order is entered.
If you make the decision that you’re going to go to trial, this is a class action that has been brought by representative plaintiffs. Representative, the theory being that if the representative plaintiff proves his claim, the claims of all the class members are established. Conversely, if the claims of the representative plaintiff are defeated, the claims of the entire class are defeated.
But you don’t end up trying the representative plaintiff’s claims. That’s particularly true in the context of a consumer fraud action because what really happens is that the case is presented by way of global proof or aggregate damage theories or statistical damage models. I’m not here to say that there isn’t a basis in the law for those; clearly, there is. But I am saying that when those devices of aggregate or global proof or damage models are used in prosecuting the consumer fraud action, they’re particularly ill suited. I’ll get to that in a few minutes.
The transformation—I think that Professor McGovern used the word “morphed”—is that you really see a morphing of the plaintiff from being an individual into the aggregate plaintiff. Or, in our case, the Avery case, when the case was presented to the jury, the instruction was simply, “Is it probably more true than not true that State Farm breached its contract with the class?” So you end up trying it against this mythical entity, to some extent, this aggregation of the composite plaintiff, and you end up defending the case against a plaintiff that has all the best attributes of the plaintiff’s claims and none of its weaknesses. That’s a dramatic transformation.
It’s a transformation that, as I said earlier, is ill suited for consumer fraud actions. Because if you look at the consumer fraud statutes, they require in some form or another a representation. It may or may not require reliance, and may or may not require proof of actual deception that the plaintiff was deceived. If causation is an element, that’s an element.
From the plaintiff’s perspective, it’s a wise tactic to transform representative plaintiff into the aggregate plaintiff. Because in consumer fraud actions, proof of the representative plaintiffs’ claims doesn’t prove the rest of the class members’ claims.
If the representative plaintiff says, “I was deceived,” what does that tell you about the other class members? It doesn’t tell you anything as far as whether the other class members were deceived. If the representative plaintiff says, “I was harmed,” what does that say about the other class members? It doesn’t say anything.
As I said, if you disprove that, it doesn’t give you the defense verdict for the rest of the class.
So from that perspective, it’s a wise move, and Elizabeth and her colleagues are very smart in undertaking this transformation of the representative plaintiff into the aggregate plaintiff.
But in the end, if you look at the consumer fraud statutes of the states, in order to establish liability you need precision in the fact-finding. You need to establish: Was it a misrepresentation or mere puffery? Was the element of reliance or deception met? What was the element of causation?
When you combine the prosecution of these consumer fraud actions in the context of a class action, you don’t get the precise fact-finding that’s required. At the very basis of what we do as lawyers, we go into the courtroom with the belief that each side is going to go at the other as hard and as well as they can, and that, having presented each side, the fact finder will have that ability to render a precise finding of fact. From that, you can end up with a just result.
But when you take this kind of consumer fraud action, which has specific elements, and you morph it into an aggregate plaintiff with classwide damage theories and statistical damage models, you cannot get that precise finding. So if you take it to trial, you run the risk of an unjust result—or worse, I would say, is that as you approach trial you have to weigh the consideration as to whether you really can get a fair trial, recognizing that you’re trying a consumer fraud action in the context of a class action and the representative plaintiff’s claims are really not the ones at issue.
MS. ELIZABETH CABRASER: We could talk all day about specific cases, such as Avery v. State Farm, 321 Ill. App. 3d 269. I may mention that a bit, but I’m going to try not to delve too much into that because, as Barney mentioned, it is on appeal. I think that so much of that case, in terms of how it was litigated and tried and what the issues will now be before the Illinois Supreme Court, has to do with the particular facts of that case. It is an unusual case for class actions, in that it was tried.
By the way, that doesn’t make it unique. One thing that most people forget is that class actions need to be designed in such a way so that they can be fairly tried. That’s where many class actions are defeated, in terms of a judicial attempt to translate common concepts into something that can be fairly tried.
There have been a number of class actions that have gone to trial—for some reason, mine tend to go to trial more than most people’s, perhaps because I don’t put enough chips on the table and don’t create enough irresistible pressure to settle them. But cases like the Exxon Valdez, for example, a class action that went to trial, went on appeal, and will now be re-determined at the district court level or be retried to get just the right amount of punitive damages. See In re Exxon Valdez, 270 F.3d 1215 (9th Cir. 2001).
In terms of the public policy issues that are raised by the convergence of the class action procedure and statutory consumer protection statutes or deceptive practices statutes, and how federal and state courts react to these, it’s good to remember a few complicating factors. These aren’t clarifying factors; they’re complicating factors.
For example, in California, where I do at least some of my practice, where the conventional wisdom is that 17200 is a Goliath of a consumer statute, the truth is that that statute, though it dispenses with standing requirements, doesn’t provide for damages. You can get injunctive relief, and you can get declaratory relief if you’re a private plaintiff. Conceptually, you can get restitution disgorgement. In practice, it’s very difficult to get any of those remedies without being certified as a class action. In fact, the California Supreme Court said a year or so ago that if you don’t have a certified class action in the 17200 cases, you cannot get an injunctive remedy or complete disgorgement.
There was an appellate case this year, Corbett v. Superior Court, 101 Cal. App. 4th 649 (2002); it’s a fascinating case for anyone who cares to become enmeshed in the esoterica of 17200. The issue, which a very clever defense counsel posited to the California Court of Appeal, was: Are the class action procedure and 17200 incompatible? Can you even have both in one action?
Interestingly, the appellate panel split two to one on that issue, and both the majority opinion and the dissent are tours de force on the history and policy of 17200. So for anyone who is a 17200 fan from any perspective, I would highly recommend that decision, Corbett v. Superior Court. I believe that it’s on petition for review by the California Supreme Court. I don’t know if it will be accepted. But there is an attempt to unbundle the notion of combining a class action and a consumer statute. The question is, can you even have both in the same case?
I would say yes; I don’t think they’re incompatible. I think they’re complementary. But it’s a very interesting argument on the other side.
One thing that defense counsel fear about these statutes, and somewhat unnecessarily, is that while the statute and the jurisprudence interpreting them point out that they differ from common law fraud and that in some circumstances elements such as causation or damages need not be proven, the truth is that in order to implement any remedies under these statutes, in order to get damages, whether it’s actual damages or penalties or punitive damages in those states that allow them, the courts have held that you need to prove causation. You typically need to prove intent on the part of the defendants, so it can’t be an innocent act if you’re going to generate penalties or damages. While the courts in most states that don’t have an express reliance provision in the statute have indeed held that reliance is not required, they nonetheless require a determination of causation or proximate cause, as the court did in Avery.
So on the plaintiff side, we still have a case to prove if we want to translate a consumer statute that might be very powerful in the hands of an attorney general seeking injunctive relief to a weapon on our arsenal to actually obtain damages for plaintiffs.
One thing that frustrates us on the plaintiff side as well is that notwithstanding what we think is the clear statutory language in most states with respect to what is and is not an element of a consumer claim, judges, who have been schooled in the common law, repeatedly—and intuitively, to some extent—reimport requirements of reliance, for example, into the consumer statutes.
This happened to us just the other day in southern California in a court that in other contexts is called “the Bank”. We had a judge basically say that you can’t have a UCL or a 17200 class action because you haven’t shown reliance.
That makes us want to knock our heads against the wall because there’s plenty of jurisprudence that says otherwise. But it is a reflection of the fact that we all are trained in common law, and, whether it’s expressed in an error-free way or not, what you’ve got is a judicial reaction to a claim that might be easy to bring but not all that easy to prove. Judges want to see something that actually was a bad practice, something that actually caused damages to real people, and something that the law ought to be involved in redressing.
A few years ago, in reaction to a 17200 case that was brought as a class action in the California courts, the appellate court was moved to talk about junk litigation. The court could see no social utility in the claim at all.
I think that’s a good bottom line. If we step back from our own cases and controversies, that ought to be a touchstone for both plaintiffs and defendants.
The damages on a per-consumer level might be small; that doesn’t mean that they’re non-meritorious, insignificant, or not worth the bother of the courts. But there is an inherent concept that something ought to be worthwhile or the courts ought not to trouble themselves with it. That’s what good plaintiffs’ lawyers struggle with when they decide whether to bring a case. It’s not just about, “Let’s see if we can remember the names of the founding fathers and find a county that matches and file it there because the judge will be good.” But a judge and perhaps a jury are going to have to pass on the worthwhileness of a claim. Judges who don’t think a case is worthwhile, even if it’s brought under a consumer statute, are going to find ways not to certify it and throw it out of court.
So there is a policy that inheres in these statutes that can’t be unbundled.
We have to remember that these statutes, which arose during the Thirties and again during the Sixties, not only arose as creatures of their economic and sociological times, but also resonate in these times. Basically, what happens on a policy level in terms of bringing all the factors together that make a compelling consumer claim that will survive summary judgment, that may win at trial, that may justify a substantial settlement, and so on, is that it involves conduct that departs from respect for the individual.
My reaction to Barney’s remark about morphing from an individual into a class is, that’s simply what we do in response to what a defendant has done to us. If consumers have not been treated as individuals, if they haven’t been respected, if they’ve been subjected to misleading advertising campaigns, if they’ve been treated as an undifferentiated mass, then there is some sense and some justice to returning the favor.
Can wholesale conduct only be redressed through retail justice? I would say that it’s procedurally unjust to consign consumers to the sole option of individualized suits, particularly when the individual claims are small and expensive to bring, and we have limits on the number of courtrooms and judges in our country.
The federal/state controversy is fascinating, and I feel very strongly both ways. If I were ever to write a book about my own practice, I probably wouldn’t call it anything like “overlawyering.” But I might call it “A Bleeding-Heart Liberal in the Confederate Army.”
Plaintiffs’ lawyers find themselves on interesting sides of the federalism debate. We find ourselves agreeing for practical purposes with recent Supreme Court decisions much more frequently than we would like. We labor under a system in which most consumer claims, much as we would love to do so, cannot be brought in the federal courts because we simply cannot meet the amount in controversy requirements under diversity jurisdiction, and the Supreme Court seems almost intentionally disinclined to help anyone out on this.
So it’s a messy situation, and it’s going to continue to be messy. Every time that I try to file a claim in federal court and make a good argument for aggregation of the jurisdictional minimum, it’s shot down by brilliant defense lawyers. Every time that I file a case in state court, recognizing that I can’t make that argument, I hear complaints such as “There they go off in some state court again when they should be in a real court, in the federal court.”
Another aspect of that is that these are creatures of state law. The question as to whether a state court has any business adjudicating claims under its state consumer law for claimants from out of state is fascinating. In many instances, it is fully appropriate, if the proper choice of law doctrine is applied.
In the Avery case, for example, our position is that it was fully appropriate for the court to do so on the breach of contract claim, because no true conflict was found. That’s what the Supreme Court said in Phillips v. Shutz. On the consumer claim, there are many cases in which it would not be appropriate for one court to adjudicate consumer claims under its own state law against or with respect to a nationwide class.
But in some cases, where the defendant is not only incorporated in the state, but the conduct—or a substantial or significant part of it—at issue occurred there, so that if any one state’s law had to be determined and selected, which under interest analysis is the case, that would be the most appropriate law to apply. It simplifies the proceedings. The alternative is simply to subclass to address variations among state laws.
On the consumer fraud level, there are variations among state laws. But they tend to be at the remedy stage. In other words, you’ve got two types of consumer statutes: a broad prohibition against unfair or deceptive conduct; and laundry-list statutes that specify examples of particular activity that will violate the statute.
In a typical case, if a particular course of conduct or act would violate any of those statutes, it would probably violate all those statutes. So you don’t have a conflict at the liability level.
In the remedies level, there are variations among the states. Many states do not allow punitive damages or multiple damages. Some do. California doesn’t allow any damages under 17200. The state has another statute, a much narrower statute called the Consumer Legal Remedies Act, which provides actual and punitive damages. But not every 17200 claim meets those criteria.
At the remedy stage, though, a court could, through subclassing, apportion the appropriate remedy to the citizens of a particular state.
While some state statutes seem scary in terms of the per-violation penalty—and if you total up the number of class members in that state or even nationwide, you come up with a huge number as a penalty award—I don’t know of any courts that have actually gone so far as to impose those per-violation penalties on a classwide basis by aggregating. Courts, probably understandably in a situation like that, shy away from the inexorable logic of the calculator.
So courts are doing what courts can do to moderate the unreasonable impact or reach of these statutes. But it’s unreasonable to expect state by state aggregating and unreasonable to expect jurisprudentially that courts will evolve or devolve to a point where every court everywhere says that if you have conduct that affected people in multiple states or nationwide, you cannot under any circumstances bring a nationwide class, but instead you have to go into every state and do it individually.
I would say never say “never,” and I would be right. I think that the Bridgestone/Firestone decision by Judge Easterbrook comes very close to doing that. If you look at the two extremes of the spectrum—and I don’t mean that disparagingly, with respect to the response of judicial ideology, philosophy, and interpretation of procedures to the same problem—you can compare and contrast Judge Easterbrook’s decision in Bridgestone/Firestone with Judge Weinstein’s recent decision in the Simon 2 tobacco legislation, which just came out on Lexis, a 200-page memorandum explaining why it is appropriate to select New York law to apply to nationwide common law fraud claims of a very specifically defined smokers’ class against tobacco companies for purposes of reaching a classwide punitive damages determination. That’s on Lexis at 202 U.S. District Lexis 19773.
So there you have two federal judges, two brilliant minds, two divergent judicial philosophies, two divergent views of how law and economics do and ought to interact. The promise and the frustration that all of us face in advocating for our respective clients’ positions in this environment is that we have a wide divergence of judicial thought and response by independent jurists. There is a wide array of jurisdictions available. There is a limited ability on both sides and only a limited ability to select those forums. In more cases than not, the attempt to predict or control the outcome by selecting the forum will be frustrated. Because laws change, judges are independent, and these cases do get decided, when they get decided, on the facts.
The other phenomenon that I hear every time I listen to defense counsel talk about policy is the magnet jurisdiction. I think that this year, it’s—well, probably last year, it was Madison County. Maybe this year, it’s Jefferson County. That’s a phenomenon that’s short-lived and transitory. If you try to make permanent policy based on predictions of where you think cases are going to go and on reactions to where cases have been, we’re all going to founder and end up with laws that are short-lived and cases that don’t fit.
Avery, for example, was not brought in Madison County. It’s perceived as a poster child for the phenomenon, but it was a different county entirely and was presided over by a judge who was selected, at least in part, by defense counsel. This was a judge who was not perceived by either side as being particularly favorable to anyone, and who made a series of very thoughtful rulings.
The ability to know where to go and when, in order to maximize recovery, has eluded me. I forgot to file any cases in Jefferson County, Alabama, and it’s probably too late. I probably am counsel of record on a couple of cases in Madison or perhaps St. Clair. Good cases despite the fact that they were filed there. That’s the reaction that I have to this whole debate. There are appropriate jurisdictions for cases. There may be a choice among appropriate jurisdictions. What is appropriate when one is trying to apply a single state’s law nationwide is either to bring the case in the forum of the state where the defendant resides, does business, conducted the allegedly illegal activity, has a reason to be and a reason to expect and predict that that state’s law will be applied, or where the choice of law doctrine that the forum court is bound to apply will result in the choice of a law that lends itself to multistate adjudication.
Alabama, for example, is not one of those states. It has a lex locus choice of law.
So there are principled, as well as unprincipled, ways of attempting to design predictability and uniformity into cases through forum selection and choice of law. I think there will be a lot of disagreement as to whether that’s appropriate in a given case. But that’s something that defendants do as well, and that they should do.
The debate over state versus federal courts, for example: my life would be a lot easier if there were a statute on the books that gave federal courts minimal diversity jurisdiction and enabled me to know with certainty whether I had to file a case in federal court, could file a case in federal court, or could not file a case in federal court. I wouldn’t have to get up at 4 a.m. and wonder what was happening in all the other state courts where I wasn’t on file.
But that debate involves these fundamental issues of federalism, which cut both ways, and involves a fundamental messiness in the system that we have. Because we rely on the courts, many courts, for private enforcement, as well as relying on the government for regulation.
I run a small law firm. We have about 250 employees in several offices. I don’t like government regulation very much. If I had to be a bleeding-heart anything, it probably would be a bleeding-heart libertarian. I don’t like to be told what to do. So I am a big fan of private enforcement after the fact, if I’ve actually done something that someone doesn’t like or done something that someone thinks is wrong. I don’t want to be told beforehand what I can do and can’t do, and I don’t want to be told that by a bunch of federal or state governments.
If we want to have the liberty to do business and conduct our lives, we’re going to have to recognize that the tradeoff for freedom from prior restraint through government regulation is going to be a certain amount of private enforcement. Even private enforcement when we may have done something that no government agency seems particularly upset about. If our clients are upset about it and have a claim and think there was something wrong about it, they have the right to go directly to court and seek redress. That is risky, unpredictable, and messy. But it’s the price that we all ought to be willing to pay, and we ought to concentrate not on relying on government or statutory reform to immunize us from that, but recognize that we have choices, responsibilities, the liberty to make them, and, yes, accountability for the consequences.
MR. JEFFREY JACKSON: I’m glad that Elizabeth’s here because she has some good comments and I have some things I would like to visit with her about later. I have followed her on other occasions. She won’t remember it, but one was in front of the Federal Advisory Board Committee when they were talking about changes in the federal rules.
I’m not here to bash consumer fraud acts. I’m not even here to bash class actions. I’m not a regulatory lawyer. What I want to do today is to leave some questions with the defense lawyers in the room, any plaintiffs’ lawyers who are here, and ask where we are going.
We are talking today about businesses being regulated by regulators, by lawyers, through fraud acts and class actions together. It would be one thing if all we had to deal with was Elizabeth. We could probably make peace and work out something. But we have thousands of Elizabeths, each with her own interpretation of what the rules and the practices of my fine company should be.
We’ll play by any rules. Just tell us what they are. That’s my message this afternoon.
I have a few comments about State Farm and a few on our Illinois Consumer Fraud Act. Then I’ll leave you with a few examples of what we’re facing today.
In 1922, there was another resident of the soybean and cornfields of central Illinois. He was employed by an insurance company and was always wondering why the farmers in central Illinois were paying the same insurance rates as the people did who lived in Chicago. He couldn’t understand it. They didn’t drive much; they weren’t in many accidents. But they paid the same premiums.
The story has it that his supervisor told him, “If you don’t like the way we run our insurance company, go start your own.” So G. J. Mecherle walked across the street, opened up a little shop, and started his own company. He started it as a mutual company for a reason: he wanted farmers collectively to be a part of his company. That was in 1922.
Today, State Farm is the largest writer of auto and homeowners’ insurance in the United States. We are in 27 million households. We have about 72 million policyholders. I mentioned that we’re organized as a mutual company. We conduct millions of transactions a year. I’m told by our claims’ department that it’s 14 to 15 million a year. We have about 78,000 employees and 16,000 independent-contractor agents. We’re in all states of the union and three provinces of Canada. And, as Barney alluded to earlier, we are operating in a sphere of heavy, heavy regulation. Each state has its own department of insurance. In some states, we can’t file a policy form without state approval. Our rates in many instances have to be approved, as well.
We can’t discuss consumer fraud, class actions, or any of these other things without recognizing the environment that we are in. It’s very difficult when you have bonding requirements in some of these states for judgments and defendants can’t even look to try a class action to judgment with the idea that if there is mistake on certification it can be resolved on appeal, particularly in those states where you don’t have an interlocutory right of appeal. You can’t lose sight of that. It’s a bigger piece of the puzzle we’re dealing with.
One thing that I want to spend a few minutes on is the Illinois Consumer Fraud Act. I know that Mr. Trigg and Mr. Howard, following our panel, are going to spend a little more time talking about California and the other states.
State Farm today has nine purported national class actions pending in Illinois—even though our statute says it’s to apply, or is limited in scope, to Illinois residents.
The statute defines trade or commerce as any trade or commerce directly affecting the people of this state, a limitation that was added in 1973 when our little FTC act was amended to allow for a private cause of action. Legislatively, there was discussion by a sponsoring senator, who was quoted at the time as saying, “We’re talking about trade or commerce that is not included within the interstate concept.” That would suggest that this is to apply to Illinois only.
Fortunately, our Avery case was taken by our Illinois Supreme Court. We are very hopeful that the court will take the opportunity to set the record straight on the scope of the Illinois Consumer Fraud Act. I say, “set the record straight” because there is an interesting case out of our Illinois Supreme Court from 1987. It was a class action, and there was a contract involved. It was a national class action, if I recall correctly. But the terms of the contract said that all those involved would be governed by the state of Illinois. So when the case percolated up, it was decided that because of that language, the court would rule that it had application beyond the borders of Illinois. So we’re hopeful that we’ll get some direction there.
I’m also encouraged by our Illinois Supreme Court. It has always been known as—I don’t want to say “middle of the road,” because that suggests I know where that middle is—fairly reasonable. It has recently taken another case involving State Farm on the question of forum non-conveniens. The case is going to involve both interstate and intrastate forum non-conveniens. The case is Gridley v. State Farm. Briefing will be completed November 6. Your guess is as good as mine as to when it will be argued.
We also had a decision issued on June 20 by our high court, Olivera v. Amoco Oil Co. (Docket Nos. 89497, 89511 cons.). I believe ATLA filed an amicus brief. I know that Lawyers for Civil Justice did, too. That case suggests to us that the Illinois Supreme Court is concerned about the application of our consumer fraud act. They did talk about what elements are required: that the plaintiff needed to show that there was actual deception; and that you needed to show proximate causation. So we are optimistic that they will give us a good hearing in our Avery case, whenever that is argued.
Let me mention a few cases in various statutes across the country. One of them is in California. It was filed last month by an Illinois lawyer seeking national certification in California. My guess is that he would have filed in Illinois, but perhaps he read Olivera as we did. Possibly there’s some room for optimism. Maybe he saw that Avery was accepted. I don’t know, but he’s filed this national class action in California.
The plaintiff—it’s not Elizabeth’s case, by the way—was driving a 1972 Chevy Nova, a classic car, as it’s described in the complaint. The wheel fell off, the Nova ran into another vehicle, and there was damage. The car was towed to a State Farm facility. One of our employees estimated the damage to the fender, and it had to be replaced. We were given a towing bill, which we paid. We were given other bills to repair the car, which we paid. That was three years ago.
Now we’ve been sued for fraud. We’ve been sued under 17200 because we didn’t find hidden damage to this vehicle. I just mention that. It’s a national class action. We have to defend it, and that’s going to be argued eventually in California.
We have an Oklahoma case, which is one of those states that I mentioned earlier, in which they have to approve our policy and our policy language before we can actually use them. In that state, if you have an automobile, it’s usually insured by a policy. If you have two automobiles, you’re going to get two policies. That’s the way things work in Oklahoma.
But we’ve been sued there because someone doesn’t like that rule and has accused us of capricious, improper behavior, even though we’ve gone through the department of insurance to have the approval of these forms issued. It’s a class action.
In Missouri and Georgia, we have two different cases, two different sets of lawyers. Both involve cases in which our policyholders’ automobiles were wrecked, total losses. Those facts, I think, will eventually be agreed upon.
In Missouri, our employees, in trying to assess the actual cash value of that vehicle—because that’s what our obligation would be to do, and then pay it—followed the National Automobile Dealers Association guide, or NADA. You may have heard of blue book, black book. That’s what they did. The allegation there is that we somehow defrauded the plaintiff because we used NADA.
In Georgia, we used a different valuation service. There are other services you can use. And we’re being sued for—you guessed it—not using NADA.
These cases also sue for injunctive relief. Say that you’re a businessperson. You’ve got numerous class action lawyers telling you how to run your business. What do you do?
What intrigues me most is a case that was filed in Illinois—and it’s still pending, so I want to be somewhat circumspect about this one, too, which started as a 48-state class consumer fraud claim. It’s national in scope and the trial judge in Illinois certified it. But it was originally certified in 33 states and the District of Columbia, with another 12 states in a flux class. So the reason that there were two classes is apparently because—Elizabeth can enlighten me on this one because I’m getting this through a couple of different hands here—in the 12-state “flux” subclass, the law is uncertain. So we’re going to put those cases over here. But we think that the law is certain in 33 states, and that’s going to be the certification: a 33 state class action.
That case involves a coverage dispute as to whether our insurance policy requires us to pay for certain elements to a damaged vehicle that’s been repaired. That same dispute is being played out across the United States in other forums in other states.
As this case is pending, the class keeps changing. The definition of the class keeps changing. The named plaintiff keeps changing. I think we’re on our third one now.
Some states that were in that 33-state group have ruled that the coverage is how we see it, i.e. that there isn’t any coverage for these damages.
Here’s my point. There’s a shifting definition of the class. And we’re talking about practices. We’re not talking about a product or one occurrence; we’re talking about national business practices that a lot of different lawyers want to tell us how to conduct.
We’re in a quandary. We need some policy here. We’ll play by the rules; just tell us what they are. I’m afraid that American business is going to die by a thousand cuts if we don’t get this right.
And what’s right? I don’t know. But we’ve got to figure out how we as a country want to be run. Are we going to be a market-based economy? Are we going to be some other kind of planned economy? Let’s make some decisions. But the way we’re doing it today is causing all kinds of problems.
Some time ago, a Nobel Prize–winning economist, George Steigler, was teaching his MBA students at the University of Chicago that it was the nondelegable duty for every generation of Americans to leave insoluble problems for the next generation. Because that’s what creates genius.
This may be an insoluble problem. But if we look at how long it’s taken the federal folks to look at class action reform—I think we’re in, what, 30 years now of class action studies, if we look at what’s going on in America with asbestos now, how much longer is it going to take for some kind of resolution? I don’t know what the fallout is going to be.
It’s my view—and these are all my views, not State Farm’s—that at the margin, we’re going to see transaction costs that are going to force consumers to pay more for whatever they’re buying—services and products. It’s inevitable. This litigation is very, very expensive.
At the other extreme, we’ll see fewer companies. They’ll go out of business. They’ll go into bankruptcy.
The question is, how much longer will it take before we reach these two extremes? I don’t know, but one thing is clear to me. We don’t have one group that will determine that. We’re fighting a war on a many, many fronts and we don’t know where we’re going to end up.