Back in June, I posted about the Oregon Supreme Court’s decision in Strawn v. Farmers Insurance Company of Oregon. This class action involved payments for personal injury protection (PIP) coverage under auto insurance policies. Farmers used software to analyze claimed medical expenses in comparison with a database of charges for particular medical services in the region. It selected a particular percentile (at different times it chose the 80th, 90th and 99th percentiles) as a cutoff for what it would pay for a particular service (although it claimed that adjusters were authorized to override this in appropriate circumstances). The plaintiffs’ claim was that this process was arbitrary and a breach of the contractual obligation to pay “reasonable and necessary” medical expenses, as well as fraud. A class was certified and the case was tried to a jury. A judgment in favor of the class was entered for approximately $900,000 in compensatory damages and $8 million in punitive damages. The Oregon Supreme Court affirmed the verdict, rejecting Farmers’ arguments that it was denied the ability to present individualized defenses and that the plaintiff failed to prove class-wide reliance. The court also held that Farmers had waived its constitutional challenge to punitive damages because it had failed to adequately preserve a challenge to a waiver ruling by the trial court in its appeal to the Oregon Court of Appeals.
On October 5, 2011, Farmers filed a petition for certiorari in the U.S. Supreme Court (No. 11-445; e-mail me for a copy of the petition). This case presents the Supreme Court with an opportunity to decide what limitations the federal Due Process Clause places on state court class actions. Specifically, Farmers contends that the Due Process Clause bars a state court from ruling that individualized reliance on a fraud claim need not be proven on an individual basis in a class action, even though individual proof would be required in an individual case. In other words, a class action should not be able to alter substantive law. Farmers also argues that the Oregon Supreme Court, in finding that Farmers had waived its constitutional challenge to the punitive damages award, effectively created a new rule of state procedural law in a manner that violated due process. (There were also some interesting issues raised post-decision about some ex parte communications between plaintiff’s counsel and members of the Oregon Supreme Court. On reconsideration, after a recusal of the justice most directly implicated in some of the ex parte communications, the court reaffirmed its earlier decision. This is discussed in the cert petition, perhaps to give some flavor and background, but this issue is not expressly raised as a question presented.)
The cert petition was filed by Ted Boutrous, who argued Wal-Mart v. Dukes. The petition focuses in part on that decision, and seeks to extend the prohibition on “Trial by Formula” that was adopted by the Court in Dukes, chiefly based on the federal Rules Enabling Act, so that this principle would become a due process requirement in state court class actions. There was a petition for certiorari last term filed by Philip Morris involving somewhat similar due process issues in state court class actions. Justice Scalia granted a stay, but the Court ultimately denied certiorari (see my prior blog post about the Philip Morris case).
This is definitely a petition to follow for those keeping an eye on insurance class actions, and I will continue to follow it on this blog. Because this is a rare class action that actually went to trial, it provides the Supreme Court a relatively rare and unique opportunity to weigh in on due process issues. But at the same time it is clearly a case that is complicated factually and procedurally (as almost any class action would be by the time it gets through a trial and state court appeal). I expect the response to the petition will try to argue that the Oregon Supreme Court had some other independent grounds for its rulings on pertinent issues and that, in light of the facts, procedural history and nuances involved in the case, the constitutional issues are not “cleanly” presented in a way conducive to Supreme Court review. That is a typical tactic in opposing cert, especially where, as here, a case is likely to have some appeal on its merits. It will be interesting to see whether the Court takes this case up. If it does, the insurance industry and insurance lawyers will want to follow it closely.