State Farm pays $250 million to avoid civil racketeering trial

State Farm pays $250 million to avoid civil racketeering trial

With today’s news cycles, it’s sometimes hard to believe that anything still happens outside of Washington DC. You probably didn’t hear about it, but something pretty remarkable happened in early September in Illinois: State Farm, the “good neighbor” insurance company, agreed to pay $250 million to settle a civil racketeering case which was about to go to trial in Illinois.

That figure is not a misprint. State Farm voluntarily settled for a quarter of a billion dollars in a civil case.

State Farm denied wrongdoing, as corporate defendants always do when they settle civil cases. But one has to figure it was pretty worried if it rolled over and parted with that much money.

The origins of this legal dispute are complicated and go back decades. Basically, it all began when customers brought a lawsuit claiming they received inferior parts when State Farm paid for vehicle repairs. That resulted in a 1999 verdict for more than a billion dollars against State Farm in Illinois state court.

Naturally, State Farm appealed the verdict all the way to the Illinois Supreme Court. While the case was pending, a sitting Supreme Court justice retired. That meant a vacancy opened on the court which would be deciding the fate of the case. And that’s where the legal thriller-level of intrigue and backroom dealing begins.

It apparently occurred to State Farm that it might be worth the effort to put a friendly justice on the court where the huge verdict against it was pending. According to the plaintiffs, State Farm then decided to bankroll a previously obscure Republican candidate, Lloyd Karmeier, for the vacant seat.

This resulted in the most expensive judicial election up to that point in history. Karmeier and his Democratic opponent spent $9.3 million trying to win the seat. Karmeier won that election in 2004. He took his seat on the court, and then - you guessed it - cast the deciding vote taking away the billion-dollar plus verdict against State Farm.

The problem is not so much that State Farm paid for a large part of Karmeier’s election campaign. According to the plaintiffs, the problem is that it did so secretly. They alleged that State Farm essentially used proxies to funnel millions of dollars to Karmeier. This concealment effort prevented two things: (1) an open discussion of Karmeier’s donors and what they might expect for their largesse, and (2) consideration of whether Karmeier should participate at all in hearing an appeal of a huge verdict against State Farm.

After the Illinois Supreme Court killed the class action, the plaintiffs did not give up. Instead, they brought a new, separate action for racketeering. They alleged that State Farm engaged in a quasi-criminal scheme to rig the Supreme Court in its favor.

State Farm denied those claims, of course, but it ultimately paid a quarter billion dollars rather than face a jury. In doing so, it prevented an ugly scenario: a state Supreme Court justice (surprisingly, Karmeier still is one) being forced to testify in federal court about a secret “electioneering” effort of one of the largest insurance companies in America.

There are a few observations which readily come to mind about this whole sordid affair.

First, judicial elections matter. State Farm obviously thought so, because it quietly pumped millions of dollars into the campaign of its go-to candidate.

Second, judicial elections need to be absolutely transparent. Because judges are supposed to be neutral and free of political influence, it’s critical to know who is funding their campaigns - and possibly trying to exercise influence over their decisions.

Third, judges need to recuse themselves for cases where there is any question about their ability to be impartial. People in Illinois will probably have doubts about the fairness of their civil justice system, and the Illinois Supreme Court in particular, for many years because of this.

Fourth, never underestimate how far corporate defendants will go to try and get their preferred outcomes in court. State Farm’s conduct in this case sounds like something straight out of a John Grisham novel. According to the plaintiffs, it literally tried to rig the highest court in Illinois in its favor. The racketeering claims it faced are usually reserved for heinous forms of organized crime, like drug cartels and money laundering operations.

Predictably, State Farm denied the allegations. However, when it was time to face a jury and defend itself, it chose to pay a quarter billion dollars instead. That makes one wonder if it’s really such a good neighbor after all.

We’ve criticized confidentiality agreements (otherwise known as secret settlements or “hush money” deals) for years. Several months ago, this blog discussed how confidentiality agreements allowed Harvey Weinstein to continue his abusive behavior for years.

Now a Pennsylvania grand jury has come out with a deeply troubling report about abuse in the Catholic Church. The report describes decades of abuse in Pennsylvania committed by priests and covered up by church officials. It contains the following recommendation:

[W]e need a law concerning confidentiality agreements. They've become a hot topic in recent months in sexual harassment cases - but it turns out the church has been using them for a long time. [Church] records contained quite a few confidentiality agreements, going back decades: payouts sealed by silence. There are arguments on both sides about whether it's proper to use these agreements in securing lawsuit settlements. But there should be no room for debate on one point: no non-disclosure agreement can or should apply to criminal investigations. If the subject of a civil lawsuit happens also to concern criminal activity, then a confidentiality agreement gives neither party either the right or the obligation to decline cooperation with law enforcement. All future agreements should have to say that in big bold letters. And all this should be enacted into a law.

We couldn’t agree more. It’s become painfully obvious that confidential settlements have allowed sexual predators to get away with illegal and downright horrifying behavior. No one can argue with a straight face anymore that the benefits of this practice outweigh the harms.

Even the issues surrounding Donald Trump’s payment to adult film actress Stormy Daniels arise from confidentiality. The payment itself would not have been illegal - except that everyone involved in making the deal failed to report it. Whatever one thinks about President Trump or the entire situation, it’s just one more example of how hush money settlements create problems in criminal and civil law.

There are certainly cases where the parties might want to keep the amount of a settlement confidential. An abused person might, for example, just not want opportunistic friends to know they received six or seven-figure money. An agreement on that point isn’t a problem if it’s freely negotiated between the parties. The problem is that many confidential agreements are much broader: they impose gag orders prohibiting discussion of the conduct which caused the case to be brought.

One might reasonably ask why the law on confidential settlements hasn’t been reformed already. The regrettable answer is that many wealthy and powerful people - including corporate executives, high-ranking clergy, and rich individuals - like being able to buy silence. At this point, however, we’ve seen enough abuse to know that their desire to pay for secrecy can cause great societal and legal harm. It also tilts the legal playing field in favor of the rich and well-connected, giving them yet another advantage over less wealthy adversaries.

The time has come to place legal limits on confidentiality for legal disputes. If Congress won’t take up the issue, then the individual states need to step up. Otherwise, some of the most shocking forms of sexual abuse, along with other criminal or otherwise repugnant behavior, will continue to get swept under the rug.

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