The U.S. Court of Appeals for the Eighth Circuit recently held that a reduction of a jury's punitive damages award from $5.8 Million to only $500,000 was appropriate where the jury's award was grossly excessive and in violation of the Due Process Clause.
A copy of the opinion is available at: Link to Opinion
An Arkansas car dealership acquired a used Ferrari and sent it to a certified Ferrari dealership for a pre-purchase inspection. The certified dealership recommended five repairs and discussed them over the phone with the first dealership. The first dealership declined two of the five repairs, one relating to the tire pressure monitoring system and the other relating to the car's exhaust headers.
The Recommended Services report was not sent to the dealership at this time. The dealership advertised the car online and referenced the pre-purchase inspection.
A consumer noticed the ad and found the car appealing because it referenced an inspection by a reputable certified dealership. The consumer contacted the first dealership to inquire about the car and requested a copy of the pre-purchase inspection report.
The first dealership sent the consumer an invoice from the certified dealership that reflected the declined repair to the tire pressure monitoring system but not to the car's exhaust headers. The first dealership verbally acknowledged that it declined a recommended repair of the tire pressure monitoring system, but did not mentioned the exhaust headers. The dealership told the consumer in text messages that the car was "turnkey" and "ready to go" which led the consumer to believe the certified dealership had identified no other problems.
The consumer and the dealership negotiated the price of the car with the dealership referencing the pre-purchase inspection in negotiations.
A separate buyer contacted the certified dealership directly and was told the car's exhaust headers were beginning to crack. This buyer raised the issue with the dealership who then contacted the certified dealer to discuss. The certified dealer sent over the Recommended Services report which showed the certified dealership recommended, and dealership declined, repairs to the exhaust headers.
The dealership contacted the original consumer and the car was sold to the consumer with a "Buyer Guide" which included a large, checked box next to the following statement: "AS IS - NO WARRANTY. YOU WILL PAY ALL COSTS FOR ANY REPAIRS. The dealer assumes no responsibility for any repairs . . . ." The one-page purchase form included a "DISCLAIMER OF WARRANTIES" section that states [dealership] "expressly disclaims all warranties, either expressed or implied, including any implied warranty of merchantability or fitness for a particular purpose." The first dealership did not disclose the issue with the exhaust headers.
The consumer had the car shipped to a local dealership where he noticed a smell of fuel on the short ride home in the car. The consumer had the car towed to a local garage specializing in Ferraris who discovered a fuel leak and the crack in the exhaust headers. The consumer told the dealership and they requested a second opinion from another certified Ferrari dealership in Washington, D.C. The D.C. dealership identified about $30,000 worth of repairs, including the fuel leak and cracked exhaust headers.
Dealership would not take back the car and the consumer sued the dealership. At trial, the consumer called the technician from the D.C. dealership who provided expert testimony that the cracked exhaust headers pose a safety risk to the car's occupants and because of the cars fuel leak it "could instantly ignite."
After parties finished presenting their evidence, the trial court denied the dealership's motion for judgment as a matter of law and submitted three claims to the jury: fraud, deceptive trade practices, and breach of warranty. The jury found for consumer on all claims and awarded him $20,201 in compensatory and incidental damages and $5.8 million in punitive damages.
The dealership then renewed its motion for judgment as a matter of law on all claims, and separately moved to alter or amend the judgment because it believed the jury's punitive damages award was unconstitutionally excessive. The trial court denied the renewed motion for judgment as a matter of law, but reduce the punitive damages award to $500,000.
Both parties appealed. The dealership argued for judgment as a matter of law on all claims, or at least, for a further reduction in punitive damages. The consumer argued for reinstatement of the jury's $5.8 million punitive damages award.
The Eighth Circuit first addressed whether the dealership was entitled to judgment as a matter of law. Because the availability of punitive damages depended on the success of consumer's fraud claim, the Eight Circuit first examined the fraud claim under Arkansas law.
The dealership analogized the case to Yarborough v. DeVilbiss Air Power, Inc., where the court granted summary judgment in favor of the defendant on a claim of fraud in the procurement of a contract for the purchase of a company under Arkansas law. 321 F.3d 728, 730–32 (8th Cir. 2003). Recognizing that Arkansas courts usually submit the question of justifiable reliance to the jury, the court in Yarborough granted summary judgment because no "reasonable jury could find that the plaintiffs' reliance was justifiable" based on the fact that "all the individuals involved were sophisticated businessmen represented by experienced counsel" and the parties altered their written agreement after the allegedly fraudulent oral guarantee was made, and the altered agreement did not include that oral guarantee. Id. at 731-732.
The Eighth Circuit noted here, unlike in Yarborough, none of the form documents explicitly addressed the current condition of the car. Furthermore, the Court noted that the Arkansas Court of Appeals has ruled "an 'as is' clause does not bar an action by the vendee based on claims of fraud or misrepresentation." Beatty v. Haggard, 184 S.W.3d 479, 487 (Ark. Ct. App. 2004).
Accordingly, the Eighth Circuit concluded the trial court did not err in denying the dealership's renewed motion for judgment as a matter of law on consumer's fraud claim.
Next, the Eighth Circuit reviewed the trial court's decision to reduce the punitive damages award.
Under the Due Process Clause of the Fourteenth Amendment, the trial court reduced punitive damages from $5.8 Million to $500,000. The dealership argued for greater reduction, and the consumer argued there should not have been any reduction.
"Although juries have considerable flexibility in determining the amount of punitive damages, the Due Process Clause serves as a governor and prohibits 'grossly excessive civil punishment.'" May v. Nationstar Mortg., LLC, 852 F.3d 806, 815 (8th Cir. 2017). The Eighth Circuit previously ruled that "[p]unitive damages are grossly excessive if they 'shock the conscience' of the court or 'demonstrate passion or prejudice on the part of the trier of fact.'" May, 852 F.3d at 815 (quoting Ondrisek v. Hoffman, 698 F.3d 1020, 1028 (8th Cir. 2012)).
The Court noted three factors serve as guideposts to determine whether a punitive damages award shocks the conscience: "(1) the degree of reprehensibility of the defendant's conduct; (2) the disparity between actual or potential harm suffered and the punitive damages award . . . ; and (3) the difference between the punitive damages award and the civil penalties authorized in comparable cases." Id. at 816.
In assessing the reprehensibility of a defendant's conduct, the Supreme Court of the United States instructs courts to consider whether the plaintiff's harm "was the result of intentional malice, trickery, or deceit, or mere accident." Campbell, 538 U.S. at 419. Here, the Eighth Circuit noted the dealership's behavior was not accidental. The Court noted that the trial record supports a finding of deceit, and the jury identified it. The Court held that this alone is sufficient to support a finding of reprehensibility. May, 852 F.3d at 816 ("The presence of just one indicium of reprehensibility is sufficient to render conduct reprehensible and support an award of punitive damages.").
The Eighth Circuit next considered the "disparity between actual or potential harm suffered and the punitive damages award (often stated as a ratio between the amount of the compensatory damages award and the punitive damages award)." Trickey, 705 F.3d at 802, 803 (quoting BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 580 (1996)).
Although the Supreme Court of the United States has rejected a strict mathematical formula, it has said that "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Campbell, 538 U.S. at 425. The Eighth Circuit has "repeatedly intimated that a four-to-one ratio is likely to survive any due process challenges given the historic use of double, treble, and quadruple damages as a punitive remedy." Trickey, 705 F.3d at 803 (quoting Wallace v. DTG Operations, Inc., 563 F.3d 357, 363 (8th Cir. 2009)).
Taking into account both compensatory and incidental damages, the consumer's actual harm amounts totaled $20,201. The ratio between this harm and the jury's $5.8 million punitive damages award is 1:287. The ratio between actual harm and the trial court's reduced amount of punitive damages ($500,000) is 1:24.75.
The consumer argued that when potential harm is properly factored in, the 1:287 ratio becomes a low single-digit, or even negative ratio and an otherwise excessive ratio may be justified by factoring in "the magnitude of the potential harm that the defendant's conduct would have caused to its intended victim . . . as well as the possible harm to other victims that might have resulted if similar future behavior were not deterred." TXO Prod. Corp. v. All. Res. Corp., 509 U.S. 443, 460 (1993). The consumer argued the cracked exhaust headers had the potential to cause catastrophic harm, but the Eight Circuit found the likelihood too speculative.
The dealership argued punitive damages must be reduced to a single digit ratio. The Eighth Circuit disagreed, noting it has affirmed ratios exceeding single digits in a case involving the fraudulent sale of a used car in Grabinski v. Blue Springs Ford Sales, Inc., 203 F.3d 1024, 1025–26 (8th Cir. 2000).
Finally, the Eighth Circuit considered the "disparity between the punitive damages award and the civil penalties authorized or imposed in comparable cases." May, 852 F.3d at 817 (quoting Campbell, 538 U.S. at 428). The Court once again considered Grabinski, where like the dealership, the defendants in Grabinski misrepresented the condition of the car. Id. A jury awarded Grabinski relatively low, but more than nominal, compensatory damages. Id. at 1026.
Collectively, the ratio between actual damages and punitive damages in Grabinski was 1:27, higher than the 1:24.75 ratio struck by the trial court in this case. Id. The Court held that this disparity does not raise due process concerns. Rather, it weighs in favor of affirming the $500,000 punitive damages award.
Accordingly, the Eighth Circuit affirmed the trial court's judgment substantially reducing the jury's punitive damages award.
Ralph T. Wutscher
Maurice Wutscher LLP
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