Punitive Damages: How Much is Too Much?

November 2007, Auto Dealer Today - WebXclusive

by Thomas B. Hudson, Esq. - Also by this author

Nury Chapa sued Tony Gullo Motors I, L.P. and its sales representative for breach of contract, fraud and Texas Deceptive Trade Practices Act (DTPA)violations in connection with her purchase of a car. Chapa alleged that Gullo Motors made fraudulent representations, delivered a lower-end model car rather than a higher-end model, made promises it did not keep and forged various documents.

The jury found in favor of Chapa on all her claims and awarded $7,213 in economic damages, $21,639 in mental anguish damages and $250,000 in exemplary damages on the fraud claim.

The Texas Court of Appeals affirmed the trial court’s findings of liability. The appellate court also found that the amount of the exemplary damage award for the fraud claim was excessive and suggested a remittitur of $125,000. “Remittitur” is a $5 word that means “reduction.” When a jury gets out of hand and awards a plaintiff a sum that is unreasonable, the defense lawyer can file a “motion for remitter.” That’s what happened here, and when both parties disliked the suggestion of $125,000 in punitive damages, both parties appealed.

The Texas Supreme Court found that Gullo Motors’ fraudulent actions merited exemplary (punitive) damages, but that the $125,000 remittitur exceeded the constitutional limits on exemplary damages. The U.S. Supreme Court has on several occasions addressed the question of whether a punitive damages award can be so large that it violates the defendant’s constitutional rights and has made noises about the relationship that punitive damages awards should have to the award of actual damages.

The trial court’s award of punitive damages was about nine times the plaintiff’s actual damages award. The appellate court halved the award, but that reduction wasn’t enough for the high court, which remanded the case to the appellate court to determine a constitutionally permissible remittitur.

In this decision, the appellate court first examined the degree of reprehensibility of Gullo Motors’ conduct. The appellate court found that there was no physical harm to Chapa (only an economic harm caused by fraud), there was no reckless disregard of health or safety, there wasn’t any extreme financial hardship as a result of Gullo Motors’ conduct, and the fraud did not involve repeated acts.

The only reprehensible aspect of Gullo Motors’ conduct was that Chapa’s harm was the result of deceit. Evidence of the deceitful conduct included forged signatures, a misrepresentation by the dealer that it was unable to take the car back upon Chapa’s request, switching of contracts, alteration of documents and threats.

The appellate court then examined the disparity between the actual harm suffered and the exemplary damages award. The appellate court found that such a high ratio of actual damages to exemplary damages should be reserved for “cases with facts demonstrating the most egregious level of reprehensibility.”

Finally, the appellate court compared the exemplary damages to civil penalties authorized under the Texas Occupations Code and the Texas DTPA in comparable cases. Based on these findings, the appellate court suggested an exemplary damage award of $50,000, thereby reducing the ratio of exemplary damages to actual damages to less than 2-to-1.

So, this dealer dodged a bullet, if you can call having to pay a punitive damage award of “only” $50,000 dodging a bullet.

If you are a Texas dealer, you can take some comfort in this decision. The court’s award of punitive damages – less than twice the actual damages award – should help keep Texas jury awards under control. The decision isn’t binding in other states, but you can count on seeing defendants in other states arguing that courts should adopt the Texas court’s reasoning.

But don’t take too much comfort; the exact relationship between punitive damages and actual damages necessary for a finding of unconstitutionality is still a bit murky. The best protection against large punitive damage awards is to avoid all that reprehensible and deceitful behavior in the first place.

Chapa v. Tony Gullo Motors I, L.P., 2007 WL 2127139 (Tex. App. July 26, 2007)

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