It started as an everyday lawsuit by some policyholders unhappy with their insurance company for choosing cheap repair parts. But the case turned anything but ordinary. First it grew into a nationwide class action, encompassing 4.7 million customers and a billion-dollar verdict. Then it expanded into a 20-year litigation nightmare for State Farm Mutual Automobile Insurance Co. and one of its in-house counsel.

For a fight that started over a few thousand dollars’ worth of car parts, so much more is now at stake. The policyholders’ latest suit alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). And it accuses State Farm, its in-house counsel and a co-conspirator of manipulating the election of an Illinois Supreme Court justice.

If the policyholders win, they could collect treble damages plus interest—some experts say that it could amount to more than $7 billion. And, if they win, they could have a significant impact on whether corporations can continue to use so-called dark money to influence elections.

And in-house lawyer William Shepherd is right at the center of it.

Even before the first lawsuit was filed, State Farm used Shepherd as its registered lobbyist in Illinois. In 1993 he joined with another insurance lobbyist to found the Illinois Civil Justice League (ICJL), a pro-business coalition that works “for fairness in the Illinois civil justice system.” But now the RICO suit accuses him, along with State Farm and the then-leader of ICJL, of doing the opposite—of subverting the civil justice system in a conspiracy to influence the state Supreme Court.

And the suit is moving forward. In late September a federal judge granted class action status to the plaintiffs. The RICO suit claims that the defendants defrauded policyholders out of a $1.05 billion lower court judgment in the first suit by engineering the election of Lloyd Karmeier to the Illinois Supreme Court. The alleged purpose was so that Karmeier could rule in State Farm’s favor and overturn the billion-dollar judgment.”From 2003 to the present, State Farm, [Edward] Murnane and Shepherd (collectively, “Defendants”) created and conducted the RICO enterprise described below to enable State Farm to evade payment of a $1.05 billion judgment affirmed in favor of approximately 4.7 million State Farm policyholders by the Illinois Appellate Court.”

“This case raises real questions about buying justice,” says Bruce Freed, a former longtime journalist on Capitol Hill. Freed is now president of the nonprofit Center for Political Accountability in Washington, D.C., which campaigns for corporate political disclosure and accountability. It publishes an index [see "Shine a Light," page 56] that benchmarks corporate political spending. “Judicial spending is unique because of the question of how justice should be dispensed,” Freed explains. “Companies should be very careful. This has ethical, legal and reputational consequences for both the business and the judicial system.”

State Farm declined requests for interviews with general counsel Jeffrey Jackson, who has announced that he is retiring in February, as well as with Shepherd. But company spokesman Justin Tomczak offered this statement: “We are disappointed in the court’s decision on the class certification question. We respectfully disagree with this ruling and [on Sept. 30] filed a leave to appeal with the Seventh Circuit. Plaintiffs have unsuccessfully asserted and reasserted these allegations for many years and should not be permitted to do so any longer.”

Not true, plaintiffs attorney Gordon Ball retorts. Ball, of Ball & Scott law offices in Knoxville, says that it took a yearlong investigation and then this racketeering suit to “uncover the true story about how Judge Karmeier was elected. This is the first time we’ve had a fair opportunity to tell this story.”

Dark money is at the heart of the campaign allegations. It’s the money, given by wealthy donors and corporations, that is funneled through nonprofit political action committees, or PACs, to support political campaigns. PACs do not have to disclose their donors.

As named defendants, Shepherd and State Farm are accused of funneling nearly $4 million in dark money—a stunning amount for a state judicial race—to support their judicial candidate. Karmeier ultimately was elected, and he did vote with the majority to overturn the billion-dollar judgment against State Farm.

That’s when the policyholders fought back with the RICO suit.

The case raises some serious questions for a democracy. For one thing: Is there is a clear line between legitimately supporting a candidate and improperly influencing an election? And exactly when does a company or its in-house counsel cross that line?

Joseph Belth, a professor emeritus of insurance at Indiana University and for 40 years the editor of the monthly periodical The Insurance Forum, calls it “one of the most troubling cases I’ve ever seen.”

If State Farm’s dark money got a state Supreme Court justice elected, then Shepherd could be the Dark Shadow who helped bring about the outcome. It started with his work on the executive committee of the ICJL, which operates its own PAC, called JUSTPAC. After founding the ICJL, Shepherd and a co-founder hired Edward Murnane to be president.

Four years later came the first round in what would become a nearly 20-year legal battle. In Avery v. State Farm, more than 4 million State Farm policyholders, led by a plaintiff named Michael Avery, filed a class action suit in Illinois state court accusing State Farm of approving the use of lower-quality parts for repairs, contrary to its policy language. The jury agreed, and after the trial judge tacked on $600 million in punitive damages, the plaintiffs were awarded nearly $1.2 billion in the breach of contract suit.

An outraged State Farm appealed. The state appeals court affirmed the judgment, but reduced it slightly to $1.05 billion. The author of that opinion was Justice Gordon Maag of the Fifth District Appellate Court, who all but put a target on his back for State Farm. Again the insurance company appealed the Avery judgment, this time to the Illinois Supreme Court, where it was argued in May 2003. But the court delayed its ruling for more than two years.

During the delay, the high court had a seat to fill. Judge Maag, a favorite of trial lawyers but not of State Farm, ran for it. So, according to the RICO complaint, State Farm went in search of its own candidate to oppose Maag and hopefully support its pending appeal of the $1.05 billion judgment. It found Illinois trial judge Lloyd Karmeier.

The company then allegedly worked through Shepherd and Murnane, who became the other named defendant in the RICO action. The complaint alleges that Shepherd, Murnane and the ICJL “functioned collectively as State Farm’s vehicle to: a) recruit Karmeier as a candidate, b) direct Karmeier’s campaign, c) lend credibility to that campaign via endorsement and d) assure that Karmeier’s campaign was well-funded.”

ICJL aided Karmeier with in-kind services and financial support funneled through its JUSTPAC. Murnane, the ICJL president, also served as the treasurer of JUSTPAC. He acted as Karmeier’s de facto campaign chief, the suit claims, taking his marching orders from Shepherd. In briefs State Farm has denied Shepherd’s involvement, disputed that Murnane ran Karmeier’s campaign and called its campaign contributions “minimal.”

Both the ICJL and the U.S. Chamber of Commerce are listed as unnamed co-conspirators in the RICO suit. Because the case is ongoing, even though it is not a party to the suit, U.S. Chamber spokesman Justin Hakes said that the chamber cannot comment on its political contribution policies or on being named a co-conspirator in the suit.

Karmeier handily won the election in 2004. The Avery plaintiffs filed a motion to disqualify Karmeier from participating in State Farm’s appeal because it said that the company and its employees had made direct contributions amounting to $350,000 to Karmeier’s campaign.

State Farm scoffed at the $350,000 figure in its brief. It accused plaintiffs of “grossly misrepresenting the magnitude of State Farm’s financial support … for Karmeier’s campaign.” It argued that its support “consisted of quite modest contributions” and said that the $350,000 figure was ‘incorrect and meritless.” The court refused to disqualify Karmeier, and he declined to recuse himself.

In 2005, in a split decision, the Illinois Supreme Court overturned the billion-dollar Avery judgment. As expected, Karmeier voted with the majority, in State Farm’s favor. The plaintiffs claim that Karmeier’s participation tainted the entire vote. Says Belth, the insurance professor: “I thought what State Farm allegedly did amounted to a subversion of the Illinois court system.”

Still the policyholders did not give up. They moved for a rehearing, but the state court denied their motion without comment. They petitioned the U.S. Supreme Court, but it refused. Then something happened out of the blue—the justices in 2010 decided, in a West Virginia case with remarkably similar facts to Avery, except that the big contributor was a coal company—that the 14th Amendment’s due process clause can require a judge to recuse himself.

Justice Anthony Kennedy wrote the majority opinion. It says that recusal is required not only when actual bias is shown or when the judge has an economic interest in the case’s outcome, but also when a case contains “extreme facts” that create a probability of bias.

Then Kennedy offered some advice to courts. He wrote, “We conclude that there is a serious risk of actual bias—based on objective and reasonable perceptions—when [one] with a personal stake in a particular case had a significant and disproportionate influence in placing the judge on the case by raising funds or directing the judge’s election campaign when the case was pending or imminent.”

Kennedy’s opinion then described a test for recusal. “The inquiry,” it states, “centers on the contribution’s relative size in comparison to the total amount of money contributed to the campaign, the total amount spent in the election, and the apparent effect such contribution had on the outcome of the election.” The West Virginia judge was ordered to recuse himself—and the Avery plaintiffs’ hopes soared.

They launched a yearlong investigation through their law firm and a former FBI agent into State Farm’s support for Karmeier. The probe uncovered Shepherd’s ties to the ICJL and Murnane. It also allegedly turned up evidence showing JUSTPAC’s $2 million in contributions to Karmeier and the U.S. Chamber’s $2 million in donations that ended up with Karmeier, far exceeding the $350,000 that plaintiffs previously knew about.

In late 2011 the plaintiffs again asked the Illinois Supreme Court to vacate its decision on the basis of this new information. State Farm again disputed the alleged contributions. The plaintiffs’ petition was denied without comment.

The following spring, plaintiffs filed the civil RICO suit in U.S. district court in East St. Louis, Illinois. It alleges that defendants created and conducted the RICO enterprise to evade payment of the $1.05 billion state judgment, with the help of the U.S. Chamber of Commerce and the ICJL. It depicts Shepherd’s alleged role as “a central figure” in Karmeier’s campaign. And it accuses Start Farm of “concealing its actions from the Illinois Supreme Court.” (The case is Hale v. State Farm.)

Ball, the plaintiffs’ lawyer, says that their probe turned up damning evidence. Among other things, he says, they found emails between the defendants and their associates; documents linking Shepherd and State Farm to Murnane, and Murnane to Karmeier; and evidence of the $4 million money trail. Because the emails and other evidence remain under seal, Ball is reluctant to discuss it in any detail.

But the complaint offers hints. The evidence allegedly shows that Murnane handled Karmeier’s fundraising, media relations and speeches, while in contact with Shepherd. The complaint claims that emails show “a contribution to JUSTPAC was viewed as a contribution to Karmeier.” It also alleges that the money trail shows State Farm and the U.S. Chamber accounted for 75-80 percent of Karmeier’s total contributions.

And the complaint accuses State Farm of “lying to and misleading the Illinois Supreme Court” about its support of Karmeier. Then, because the company mailed its statements to the Illinois Supreme Court, the suit accuses State Farm of using the U.S. mail in furtherance of its scheme to defraud. It alleges mail fraud, wire fraud and “deprivation of honest services through bribes and kickbacks,” in addition to racketeering.

At this writing, the RICO case is stayed pending appeal. In September, State Farm asked the U.S. Court of Appeals for the Seventh Circuit to overturn U.S. District Judge David Herndon’s ruling certifying the class action. “The enormity of the claimed damages and the harm from further litigation warrant review of the class certification order now,” State Farm’s brief argues.

In the appeal the company doesn’t tackle the merits. It focuses on procedural issues of why it believes that the class certification was wrong and should be reversed. Law firms representing State Farm include Taft, Stettinius & Hollister; Heyl, Royster, Voelker & Allen; Riley Safer Holmes & Cancila; Quinn Emanuel Urquhart & Sullivan; and Skadden, Arps, Slate, Meagher & Flom, among others.

On the plaintiffs’ side, besides Ball & Scott, the law firms include: Neal & Harwell; Lieff Cabraser Heimann & Bernstein; Hausfeld; and Clifford Law Offices.

So, is justice for sale in Illinois? Or across America? Although it doesn’t specifically attack Illinois, the Brennan Center for Justice at New York University School of Law decries “big money” contributions since the U.S. Supreme Court’s ruling in the 2010 Citizens United case that unleashed corporate donations. The center says that secretive, huge donations are undermining American democracy while “public trust in government has plummeted.”

In September the center published an analysis that shows increased spending by special interest groups across America to influence state Supreme Court races. “Special interests know that state Supreme Courts have tremendous power to shape the legal and policy landscape on everything from civil rights to tort reform, even beyond a state’s borders, and they have been pouring money into these races in recent years,” wrote Alicia Bannon, senior counsel in the center’s Democracy Program. “With the rise of outside spenders that do not disclose their donors, we can’t even identify potential conflicts of interest. This poses a major threat to the integrity of our justice system.”

The center suggests some fixes. For one thing, it promotes a model of small donor financing to counter the influence of big money. For another, it wants “a new legal context,” including more disclosure for money in politics.

But it’s not just the corporations. Rich individuals, unions and others can also take advantage of hiding in the shadows of dark money. And they are.

For example, also in September the ICJL released a study called “Justice for Sale III.” It is not about the State Farm case, but about hefty political donations by the Illinois Trial Lawyers Association, its PAC, and the top 25 plaintiffs firms and their lawyers and families. The ICJL study accuses the lawyers of collectively contributing $35.25 million over the past 15 years to political campaigns. “A truly staggering flow of plaintiffs bar cash,” it says.

But the figures actually may undermine ICJL’s own argument and hurt State Farm as well. If the figures are accurate, then the trial lawyers and friends spent an average of $2.35 million a year, spread over dozens of groups and candidates. In contrast, the RICO suit alleges that State Farm and the U.S. Chamber, with the ICJL’s help, spent nearly $4 million in one year, on one candidate.

This is how the ICJL study concludes: “It’s fair to ask: Is justice for sale in Illinois?”

If so, there seems to be no shortage of willing bidders.


Originally published on Corporate Counsel. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.