State Farm Ducks Racketeering Trial With $250 Million Accord

(Bloomberg) -- State Farm agreed to pay $250 million on the brink of a trial to customers who claimed the company tried to rig the Illinois justice system to wipe out a $1 billion jury verdict from 19 years ago.

The customers were seeking as much as $8.5 billion in damages in a civil racketeering trial that was set to start Tuesday in federal court in East St. Louis, Illinois. A judge granted preliminary approval to the accord and set a final fairness hearing for December.

The biggest U.S. auto insurer was accused in the case of leading an effort to recruit a judge friendly to its cause for the Illinois Supreme Court, secretly funding Judge LLoyd Karmeier’s 2004 election campaign by funneling money through advocacy groups that didn’t disclose donors. Under the federal Racketeer Influenced and Corrupt Organizations Act, any damages would have been tripled.

The company denied any wrongdoing in settling the claim. The settlement “is made simply to bring an end to the entire litigation,” and “to avoid protracted litigation and appeals that could continue for several more years,” said company spokesman Jim Camoriano.

State Farm “has consistently denied participating in a RICO scheme and to this day denies any role in electing Judge Karmeier,” Bob Clifford, attorney for the plaintiffs, said in an interview Tuesday. “Now they agree to pay a quarter of a billion dollars, and I think that speaks for itself.”

The settlement came after the jury was selected last week and just before opening statements were set to begin. That probably shows State Farm was spooked by the risk of an adverse verdict, said law professor David Logan, of Roger Williams University in Bristol, Rhode Island.

“Corporations generally don’t part with that kind of money just before the opening statement of a trial unless they got a really negative vibe from the jury that was impaneled,” Logan said. The settlement for far less than what plaintiffs were seeking isn’t unusual, he added. “Two hundred and fifty million dollars in hand may be worth declining a shot at a billion, that only would come after many appeals.”

The plaintiffs were seeking $1 billion in damages based on the original verdict and $1.8 billion in interest, plus tripling under the RICO law.. The jury would have determined damages and the judge would have decided on the interest.

The settlement ends more than 20 years of litigation over by State Farm customers who alleged they were given generic car parts of lower quality than original equipment for more than a decade, violating the terms of their insurance policies.

Illinois Jury

In 1999, an Illinois state court jury awarded the customers $456 million for breach of contract, and the trial judge added $730 million in damages on a fraud claim. An appellate court reduced the verdict to $1.056 billion, but it was one of the largest class-action awards in U.S. legal history.

In 2004, Karmeier, a Republican who had been a circuit judge in rural Washington County for almost two decades, was elected to the Illinois Supreme Court. A year later, that court threw out the award, and the U.S. Supreme Court refused to review the case, seemingly ending the litigation.

The plaintiffs sought to revive the suit following a 2009 U.S. Supreme Court ruling in a lawsuit involving the coal-mining company Massey Energy Co., which found that judges have to recuse themselves in some cases involving their top campaign contributors.

The plaintiffs said State Farm spent more than $3.5 million on Karmeier’s election and continued to conceal its role even during the attempt to reinstate the original claim. The appeal was rejected, and months later, the policyholders filed the new racketeering lawsuit in federal court. The plaintiffs are the same people who sued more than 20 years ago.

The class of customers covered by the deal will include policy holders in the U.S. in all but two states who were insured by a vehicle casualty policy with State Farm from July 28, 1987 to Feb. 24, 1998, and were given generic parts for repairs or reimbursed for such lesser-valued equipment, according to the settlement agreement. Customers in Tennessee and Arkansas weren’t part of the original suit because there was prior litigation in those states, so they aren’t part of the current settlement.

Karmeier, 78, has been Illinois court’s chief justice since 2016. He wasn’t sued in the civil racketeering case, but he was scheduled to be a witness in the trial.

Clifford said was looking forward to questioning Karmeier on the stand this week, but wouldn’t speculate on whether the judge’s expected appearance influenced State Farm’s decision to settle.

Karmeier didn’t immediately respond to an email seeking comment.

The case is Hale v. State Farm Mutual Automobile Insurance Co., 12-cv-00660, U.S. District Court, Southern District of Illinois (East St. Louis).

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