Antitrust Law Daily Wrap Up, RICO—SDIll: Policyholders State RICO Claims Against State Farm for Allegedly Misrepresenting Its Participation in Judicial Election, (Mar 29, 2013)

By Tobias J. Gillett, J.D., LLM.

State Farm Mutual Automobile Insurance Co. policyholders have stated RICO claims against State Farm and two individual defendants allegedly involved in recruiting an Illinois Supreme Court justice and directing and funding his campaign in order to acquire a vote to overturn a $1.05 billion judgment the policyholders had obtained in the Illinois lower courts against State Farm, the federal district court in East St. Louis, Illinois has ruled (Hale v. State Farm Mutual Automobile Insurance Co., March 28, 2013, Herndon, D.).

State Farm allegedly committed mail fraud by misrepresenting to the Illinois Supreme Court its involvement in the justice’s campaign in order to permit the justice to vote in the judgment and to ensure the judgment was not vacated later.

In Avery v. State Farm Mutual Automobile Insurance Co., a class of State Farm policyholders obtained a $1.05 billion judgment against State Farm, which was upheld on appeal by an Illinois appellate court (Avery v. State Farm Mutual Automobile Insurance Co., 321 Ill. App. 3d 269 (Ill. App. Ct. 5th Dist. 2001)). On October 2, 2002, the Illinois Supreme Court accepted State Farm’s appeal. The case was briefed, argued, and submitted by May 2003, but remained without a decision until August 18, 2005.

From fall 2003 until November 2004, trial Judge Lloyd Karmeier campaigned for a vacant seat on the Illinois Supreme Court, ultimately winning election. According to the complaint, State Farm—acting through the Illinois Civil Justice League, Citizens for Karmeier, and related individuals—recruited Karmeier, directed his campaign, and contributed as much as $4 million of his $4.8 million campaign contributions.

On August 15, 2005, the Illinois Supreme Court overturned the $1.05 billion judgment against State Farm (Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill.2d 100 (Ill. 2005)), with now-Justice Karmeier voting for State Farm and participating in deliberations. After discovering State Farm’s involvement in Karmeier’s campaign, the policyholders petitioned the court to vacate that decision, but their petition was denied on November 17, 2011.

On May 29, 2012, the policyholders filed suit in federal court, alleging that State Farm and two individuals involved in Karmeier’s campaign had committed and conspired to commit violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The policyholders alleged that State Farm made written misrepresentations to the Illinois Supreme Court that concealed its involvement in Karmeier’s campaign to permit him to vote on the judgment in 2005 and withheld information in 2011 that could have led it to vacate the decision. The defendants moved to dismiss.

Rooker-Feldman doctrine. The court initially addressed the defendants’ contention that the policyholders’ complaint ran afoul of the Rooker-Feldman doctrine, which provides that only the U.S. Supreme Court has federal jurisdiction to review a judgment of a state court or claims “inextricably intertwined” with the state court judgment.

The court concluded that the Rooker-Feldman doctrine did not bar the policyholders’ claims. The policyholders did not request the court to review or overturn the Illinois Supreme Court’s judgment, nor did they attack its merits. Instead, the policyholders were asserting an independent legal claim, that the defendants had made fraudulent misrepresentations that resulted in the denial of their right to be heard before the full Illinois Supreme Court.

Res judicata and collateral estoppel. The court then took up the defendants’ argument that the policyholders’ claims were barred by res judicata and/or collateral estoppel because they had been conclusively adjudicated by the Illinois Supreme Court. The policyholders responded by contending that Avery addressed claims that State Farm had failed to properly pay for replacement automobile parts, while the present case concerned the defendants’ fraudulent actions in electing Karmeier.

As the parties in the lawsuits were the same, and Avery had been finally adjudicated, the issue for res judicata was whether the decisions constituted the same cause of action, and for collateral estoppel the issue was whether the issues presented by the two lawsuits were identical. Illinois followed a transactional approach for res judicata, under which claims would be considered the same cause of action “if they ar[o]se from a single group of operative facts, regardless of whether they assert[ed] different theories of relief.” Illinois also observed the doctrine of merger and bar, which precluded the litigation of claims that could have been litigated as well as those actually litigated.

The defendants argued that the Illinois Supreme Court had issued a final judgment on the merits in Avery and had rejected challenges to Karmeier’s participation, that the U.S. Supreme Court had denied the policyholders’ petition for certiorari, and that the policyholders alleged the same core of operative facts that they alleged in their previous challenges. The policyholders countered that the Avery judgment had been obtained by fraud, that their current case alleged a separate wrong from that presented in Avery, and that the defendants’ misrepresentations had prevented an adjudication on the merits. The court concluded that it could not decide at this stage “what merits were reached regarding the issues in contained in plaintiffs’ complaint at bar” or “whether plaintiffs had a full and fair opportunity to litigate those issues.”

RICO Claim

Statute of limitations. The court proceeded to address the defendants’ claim that the four-year statute of limitations applicable to RICO claims had expired before the policyholders filed their complaint, because it began accruing in 2005 with the Illinois Supreme Court’s decision, or in 2006 with the U.S. Supreme Court’s denial of certiorari. The defendants responded that they had not suffered their RICO injury until at least September 19, 2011, when State Farm mailed its second brief denying its role in Karmeier’s election.

The court concluded that the statute of limitations had not run on the allegations in the policyholders’ complaint. The complaint contained two predicate acts of mail fraud, one on January 31, 2005 and one on September 19, 2011. Therefore, the policyholders had not sustained their RICO injury until at least September 19, 2011.

Even if the statute of limitations would have otherwise barred the claims, the court concluded that fraudulent concealment and equitable tolling would have tolled the limitations period until September 19, 2011. The complaint alleged that State Farm had failed to disclose the roles played by certain individuals in establishing the organization that engineered Karmeier’s campaign and directed funds from State Farm executives to him, and did not reveal information until September 2011 that would have connected State Farm to the organization.

Proximate cause. The court next reviewed the defendants’ argument that the policyholders had not alleged causation because the Avery decision was expected to be decided before Karmeier took office, because Karmeier did not cast the deciding vote in Avery, and because the policyholders did not demonstrate that State Farm’s contributions to Karmeier influenced his decision. The court explained that in a civil RICO action “proximate cause is determined by examining whether a direct relationship exists between the injury asserted and the injurious conduct alleged.”

The court concluded that the policyholders had sufficiently alleged that the defendants’ conduct had proximately caused their injury. The policyholders had alleged that State Farm had engaged in a scheme to (1) “select its own candidate for the vacant Illinois Supreme Court seat and place him on the Court to insure a decisive vote and (2) to keep the candidate on the bench despite State Farm’s support.” They also alleged that State Form had employed the US. mail to make misrepresentations to further this scheme, and that Karmeier refused to recuse himself and voted to overturn the judgment. The policyholders’ allegations were sufficient to demonstrate a causal link between State Farm’s conduct and the policyholders’ injury.

Pattern of racketeering activity. The court proceeded to address the defendants’ contentions that the policyholders had not established a pattern of racketeering activity because their claims were based on a single fraudulent scheme, rather than multiple predicate acts, and because the policyholders had not alleged a threat of future racketeering activity or facts that would show either closed or open-ended continuity. The court explained that a RICO claim requires a pattern of racketeering activity consisting of at least two predicate acts within a ten year period, and “either (1) a series of related predicate acts extended over a substantial period of time—also known as ‘closed-ended continuity,’ or (2) that the past predicate acts by their very nature project into the future with a threat of repetition—known as ‘open-ended continuity.’”

The court found that the policyholders had alleged a pattern of racketeering activity. They had alleged a scheme extending over a seven-year period, and two predicate acts of mail fraud occurring within a ten year period. Therefore, they had “alleged continuity and a pattern of racketeering.”

RICO enterprise. The court also rejected the defendants’ argument that the policyholders had failed to allege a RICO enterprise because they had not shown that State Farm and the other members of the enterprise had associated for the purpose of helping State Farm to avoid the $1.05 billion judgment, rather than merely to elect Karmeier, the necessary relationships between the enterprise members, or the longevity of the enterprise. The court explained that a RICO claim must allege an enterprise consisting of “a purpose, relationships among those associated with the enterprise, and longevity sufficient to permit these associates to continue to pursue the enterprise's purpose.”

The court found that the policyholders had adequately alleged a RICO enterprise. Their complaint had named and described the relationships between State Farm and 15 other individuals and/or organizations that were alleged participants in the enterprise. The policyholders’ allegations sufficiently described the enterprise, the relationships among its members, and its longevity.

The court also rejected arguments by two individual defendants that the policyholders had not shown that they had committed any of the predicate acts, that they were not parties to Avery, that the policyholders had not shown “that their relationships with State Farm facilitated the representations made by State Farm,” and that their actions were protected political speech under the First Amendment. The court explained that RICO “requires proof of participation in the operation or management of the enterprise,” but it did not require “significant control” over it. The complaint alleged that both individuals were involved in recruiting Karmeier, in directing his campaign, and it ensuring the flow of funds to Karmeier from State Farm. Moreover, the First Amendment argument should be addressed at the summary judgment stage, not on a motion to dismiss, according to the court.

Predicate acts. In addition, the court rejected the defendants’ argument that State Farm’s 2005 and 2011 mailings could not serve as predicate acts due to the Noerr-Pennington doctrine and the proposition that “servicing legal documents cannot constitute mail fraud” articulated in the Eleventh Circuit’s 2002 decision in United States v. Pendergraft, 297 F.3d 1198. The Noerr-Pennington doctrine did not protect petitioning activity based on fraudulent misrepresentations, and the Pendergraft decision only applied to the mailing of litigation documents without “an intent to deceive.”

RICO conspiracy. Finally, the court held that the policyholders had stated a RICO conspiracy claim. Since the court had found that the policyholders had stated a substantive RICO claim, the policyholders’ allegations that the defendants had conspired to carry out that violation “by agreeing to commit at least two predicate acts” were “sufficient to assert that there was an agreement between the defendants to engage in unlawful activity.” Therefore, the court denied the defendants’ motion to dismiss.

The case is No. 12-0660-DRH.

Attorneys: Charles F. Barrett (Charles Barrett, PC) for Mark Hale. Joseph A. Cancila, Jr. (Schiff Hardin LLP) for State Farm Mutual Automobile Insurance Co.

Companies: State Farm Mutual Automobile Insurance Co.

Cases: RICO IllinoisNews