Skadden Wins Landmark Victory for State Farm in Nationwide Class Action

In a summary judgment victory rendered in August, the California Superior Court in Los Angeles ruled in favor of Skadden client State Farm Mutual Automobile Insurance Company in a 33-million member nationwide class action in which the plaintiffs were seeking to recover up to $47 billion from the company.

Hill v. State Farm challenged the dividend and surplus decisions made from 1983 to 1998 by State Farm's board of directors at the company's headquarters in Illinois. The plaintiffs alleged that State Farm's surplus was too large and that its dividends to its policyholders were too small. Accordingly, the plaintiffs sought to have a California court and jury determine what amount of surplus would have been reasonable and prudent and to compel State Farm to distribute the excess to its policyholders across the nation. The plaintiffs claimed that the class was entitled to as much as $47 billion.

Skadden filed a summary judgment motion for State Farm, seeking dismissal of all of the plaintiffs' claims. The firm argued that the plaintiffs' claims were barred by the business judgment rule and by the plain language of the plaintiffs' insurance policies, which gave State Farm's board of directors discretion to determine what amount of dividends, if any, should be awarded to policyholders.

Judge Carolyn Kuhl granted Skadden's motion for summary judgment in favor of State Farm. In her opinion, Judge Kuhl ruled that the plaintiffs had failed to show that State Farm's board of directors had not properly exercised its business judgment with regard to surplus and dividends. In particular, Judge Kuhl held that State Farm's board was sufficiently informed and that there were "meritorious" rationales for State Farm's decision to accumulate surplus, rather than liquidate its surplus assets to pay dividends. In addition to rejecting plaintiffs' contract claims, Judge Kuhl held that plaintiffs could not use their claim for breach of the covenant of good faith and fair dealing to make an end-run around the business judgment rule and could not use their claims under California statutory law to attempt to create liability for State Farm's governance of its internal corporate affairs.