Update: On November 5, 2013, the Supreme Court handed down a merit decision in this case.  Read the analysis here.

Read the analysis of the oral argument here.

On February 26, 2013,  the Supreme Court of Ohio will hear oral argument in the case of Cullen v. State Farm Mutual Automobile Insurance Company, 2012-0535. This case involves a number of issues regarding the certification of class action lawsuits. This is the second major class action the Court is hearing this month.  Read about the other one here.

For background on some class action fundamentals, read this post.

Justice French has recused herself from this case.  Justices do not have to give reasons for recusals, and none has been offered.  Judge Matthew McFarland of the Fourth District Court of Appeals will be sitting in her stead.

Background

Michael Cullen, later the class representative, reported windshield damage to State Farm in 2003, and was transferred to a Lynx agent. State Farm subcontracted the handling of “glass-only” damage claims to Lynx Services. Cullen agreed to have his windshield repaired rather than replaced. He alleges that Lynx and State Farm developed a script that Lynx representatives would use to get claimants to select windshield repair instead of replacement.

Cullen claims that under his policy, he should have received a check for the full replacement value of his windshield, minus his deductible. He alleged that the Lynx agent he spoke with did not inform him of all the options available to him—and in particular omitted this “pay-out” option whereby claimants could obtain a check for the entire amount of the windshield minus the deductible, and repair the windshield at their own expense. Cullen’s claims for breach of contract, bad faith and breach of fiduciary duty, center around State Farm’s nondisclosure of all of a claimant’s options, alleging that State Farm saved substantial money by pushing repair rather than replacement for windshield glass-only damage.

The trial court  found that Cullen had met all the requirement of class certification, and certified the class using this definition: “All persons and business entities covered under an Ohio motor vehicle insurance policy issued by [State Farm] who made a ‘Glass Only’ physical damage comprehensive coverage claim on or after January 1, 1991 for cracked, chipped or damaged windshields and received a chemical filler or patch repair, or payment thereof, instead of a higher amount for actual cash value or replacement cost of the windshield. The lesser of the amount of the actual cash value or the replacement cost of the windshield for each claim must exceed the insured’s applicable deductible.”

The class definition included two subclasses—insureds whose claims were administered by Lynx, and those whose claims were not administered by Lynx.

Court of Appeals Decision
State Farm appealed the certification order. In a split decision, the Eighth District Court of Appeals affirmed in part and reversed in part.

The appeals court majority affirmed the certification of the case as a class action—the ruling challenged by State Farm in its appeal to the Supreme Court. But the majority also found that the trial court’s findings went too far into the merits of the case, particularly its finding that a cash pay-out option was available and that State Farm had failed to disclose that option. The appeals court also reversed as to the class definition, directing the trial court to exclude claimants whose windshields were replaced after a repair.

The dissenting judge found that commonality had not been established, as required by Civ.R.23(A)(2).  She also believed State Farm had established that a class could not be manageable. State Farm sought a hearing en banc before the Eighth District, which was denied.

At The Supreme Court

State Farm’s Arguments

State Farm appealed to the Supreme Court of Ohio. The main theme of its argument is that the trial court and Eighth District approved the certification of the class without analyzing certain factual issues necessary to determine whether the requirements of Civ. R. 23 are met. This, it argues, is important in light of the U.S. Supreme Court’s decision in Wal-Mart v. Dukes, which explained that the plaintiff “must be prepared to prove that there are in fact common questions of law or fact”—i.e., the court must consider some factual issues on the merits to determine compliance with Civ. R. 23. State Farm thus argues that the Eighth District wrongly presumed that each individual class member’s insurance policy entitled him or her to cash payments of the cost of windshield replacement. By accepting the plaintiffs’ theory of the case, the lower court ignored significant merits-based questions regarding individual class members’ entitlement to damage, and ultimately, there are enough questions about disputed, individual elements of liability that the predominance element of Rule 239(B)(3) is not met. State Farm also raises a number of arguments about other aspects of the class certification, including a Daubert challenge to the expert testimony used as a basis for class certification, along with a challenge to the use of a computer algorithm to identify class members.

Cullen’s Arguments

Cullen argues that the trial court’s certification of the class was supported by extensive discovery and fact-finding hearings which showed that common questions of law predominate. Cullen adds that State Farm is merely rehashing factual determinations that have already been made at the trial court level. He argues that State Farm is trying to defeat class action status by pointing out some minor differences in particular fact patterns, which is not sufficient to defeat certification. Additionally, Cullen argues that State Farm’s Daubert challenges are being asserted for the first time on appeal; that Cullen himself is an adequate representative of all the subclasses, having been a State Farm policyholder for eighteen years; and that State Farm has a wealth of information at its disposal that would allow the class members to be identified with reasonable effort, notwithstanding the use of a computer algorithm.

Key Precedent

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) (explaining that “there is nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action, and indeed, such a procedure contravenes the Rule by allowing a representative plaintiff to secure the benefits of a class action without first satisfying the requirements of the Rule.”)

Ojalvo v. Board of Trustees of Ohio State Univ., 12 Ohio St.3d 230 (1984)  (citing Eisen for the propositions that “class action certification does not go to the merits of the action” and that the trial court’s resolution of the commonality element of Rule 23 “need [not] have been made with respect to the actual merits of the case beyond the necessity of establishing the validity of certification under [Rule 23].”).

Wal-Mart v. Dukes, 131 S.Ct. 2541 (2011),  (characterizing Eisen’s  statements regarding inquiry into the merits as “purest dictum…contradicted by our other cases” and suggesting that merits inquiry is permissible at the class certification stage).

State Farm’s Proposed Propositions of Law

1. In ruling on class certification, courts may and should examine merits issues that are relevant to the Civ. R. 23 requirements.
2. The lower court’s reliance on Plaintiff’s proposed expert testimony as a basis for class certification was an abuse of discretion in the absence of an adjudication of State Farm’s Daubert challenges.
3. A class definition may not condition class membership on disputed, individual elements of liability.
4. Plaintiff’s assurance that unspecified, hypothetical computer algorithms can be used to identify class members does not satisfy the requirement that class members can be identified with reasonable effort.
5. Where class members not only heard allegedly scripted statements, but had individual unscripted discussions and were influenced by other individual considerations, individual questions predominate.
6. It is an abuse of discretion to certify a subclass without a representative who is a member of the subclass.
7. Rule 23(B)(2) does not authorize class actions where the named plaintiff lacks standing to seek declaratory or injunctive relief or where the relief sought merely lays a basis for money damages.

Amici

A number of amici have filed briefs in support of State Farm. The American Tort Reform Association, U.S. Chamber of Commerce, Ohio Alliance for Civil Justice and the Ohio Chamber of Commerce argue that state and federal courts have misinterpreted the dicta in Eisen (“We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.”). They point out that Eisen was not deciding certification, but was instead deciding which party should bear the cost of notice to the class. That dicta has since been extended from the cost-of-notice issue to the issue of class certification. The U.S. Supreme Court corrected those misapplications in Dukes, but Ohio courts continue to cite Eisen for the proposition that the merits are not to be considered at the class certification stage. Finally, the amici argue that the misapplication of Eisen has led to widespread problems with erroneous certification of classes, which carries significant public policy indications because of the risk that defendants will be more willing to settle prematurely.

The American Financial Services Association emphasizes a three-step process for predominance analysis: (1) identify issues for trial, (2) determine which issues are common, and (3) weigh the comparative importance of common vs. noncommon issues. It argues that instead of using this formula, the lower court used a truncated analysis that considered only whether there were common issues, without weighing the importance of those common issues against the issues that would require individual evidence.

Grange Indemnity Insurance Company argues three points: (1) a class action is an exceptional procedural device that should require the plaintiff to meet the stringent requirements of Rule 23 by submitting sufficient evidence, (2) common questions do not predominate just because a defendant has used a centralized policy or procedure, and (3) the cost and risk of litigating a class action has the potential to lead defendants to settle meritless claims, which should cause courts to use extreme caution before certifying large classes.

Ohio Chemistry Technology Council and Washington Legal Foundation argue that the individual questions here—whether individual class members were misled about settlement options or were dealt with in bad faith—mean that the predominance requirement is not yet. They also argue that the class is insufficiently “cohesive,” meaning that the relief sought must be “final” to the class as a whole. This is a problem where, as here, a (B)(2) class is combined with a (B)(3) class, and the class contains former policyholders who have no basis for seeking an injunction against State Farm’s current practices. Finally, like some of the other amici, they argue that certification in this case will lead to a slippery slope of extortionate and meritless class actions against large companies.

National Association of Mutual Insurance Companies and the Ohio Insurance Institute add additional support on the merits of State Farm’s seven propositions of law. Like State Farm, they argue that the class was certified based on erroneous factual and legal assumptions (i.e. that the insurance policies provided all policyholders with a cash replacement option for damaged windshields, and that a cracked windshield must always be replaced instead of repaired). These assumptions are wrong because of significant differences in the policies of class members, the differences in the conversations they had with the defendants and repair shops about repairing or replacing windshields, the cost of replacement of the class members’ windshields based on the makes and models of their cars, and the deductibles specified in each policy. The amount of individual and noncommon issues prevents the plaintiffs from meeting the commonality requirement.

Nationwide Property and Casualty Insurance Company and other Nationwide companies focus on the issue of identifying the class and its members. They argue that the plaintiffs’ arguments about using State Farm databases or computer records to identify class members is vague and inadequate. The entire purpose of a class action is defeated where analysis of the merits of each individual putative class member’s claim must be done in order to determine who is in or out of the class. They also argue that Cullen lacks standing in this case, because he has not alleged facts suggesting that he actually wanted replacement instead of repair, that he asked State Farm for replacement, that his request for replacement was ever refused by State Farm, or that his repaired windshield failed to perform in any way. In support of this argument, they point to a factually similar insurance class action case that Cullen’s lawyer’s pursued using a different plaintiff who was later determined to lack standing because he never made a demand for additional policy benefits that was refused by the insurance company. Finally, they argue that once and for all, the Supreme Court should clarify that there is no presumption in favor of class action, and that the court must examine actual evidence to determine whether each Rule 23 requirement has been met before certifying the class.

Student Contributor: Greg Kendall