November 2014, Auto Dealer Today - Feature
Some “counts” (or “causes of action,” in lawyer-speak) in a lawsuit permit a plaintiff to recover only so-called “actual damages,” or the amount that the plaintiff can demonstrate she is out-of-pocket as a result of the defendant’s actions. Claims for breach of contract, for example, typically permit a plaintiff to recover only actual damages.
Other claims, however, carry the possibility of so-called “punitive damages,” or damages that are awarded to deter the defendant and others from engaging in bad behavior. Tort claims, such as fraud, are examples. Fraud claims — and other claims that can support punitive damages — pose a significant risk for car dealers engaging in practices that a jury might find particularly objectionable.
Here’s what I mean.
Lillian Lewellen, a 77-year-old widow, bought a car from Chad Franklin National Auto Sales North in Kansas City, Mo., based on an ad for $49-per-month payment plans. Lewellen’s monthly payment was $387, to an outside bank, but National Auto employees told her she would only have to pay $49 per month for five years and National Auto would send her a check for the difference.
The price charged included additional fees that the salesperson did not discuss with Lewellen. A National Auto employee initially recorded Lewellen’s monthly income as $920, the correct amount at that time. Another application document completed by a National Auto employee listed Lewellen’s monthly income as $18,000. National Auto subsequently sent Lewellen one check for $3,287, but no further payments. After spending that money, Lewellen defaulted on her car payments. Predictably, the bank repossessed the car.
Lewellen sued National Auto and its owner, Chad Franklin, for fraudulent misrepresentation and unlawful merchandising practices under the Missouri Merchandising Practice Act. A jury awarded Lewellen actual damages of $25,000 and punitive damages of $1 million against Franklin and National Auto for each claim. Ouch.
A trial court judge can in some circumstances reduce the amount of damages awarded by a jury. In this case, the judge reduced the punitive damages award against Franklin and National Auto to $500,000 and $539,050, respectively, pursuant to Mo. Rev. Stat. § 510.265. That section provides: “No award of punitive damages against any defendant shall exceed the greater of (1) Five hundred thousand dollars; or (2) Five times the net amount of the judgment awarded to the plaintiff against the defendant.”
Lewellen appealed to the Supreme Court of Missouri, arguing that her constitutional right to trial by jury was violated when the trial court reduced the punitive damages award for her fraudulent misrepresentation claim against Franklin. Franklin and National Auto cross-appealed, arguing that the amount of the punitive damages violated due process (essentially, that the damages were so high as to be unfair).
The high court stated that any change in the right to a jury determination of damages as it existed when the Missouri Constitution was adopted in 1820 is unconstitutional. As such, the high court determined that the statutory cap on punitive damages unconstitutionally infringed upon Lewellen’s right to a trial by jury protected by the Missouri Constitution.
The high court vacated the trial court’s reduction of punitive damages and awarded Lewellen $1 million in punitive damages against Franklin for fraudulent misrepresentation.
The high court also rejected Franklin and National Auto’s due process argument on cross-appeal. The high court stated that, in determining if a punitive damages award comports with due process, courts consider three guideposts: the reprehensibility of the defendant’s misconduct; the disparity between the harm and the punitive damages award; and the difference between the punitive damages award and penalties authorized or imposed in comparable cases.
The high court found that Franklin and National Auto targeted financially vulnerable, low-income persons, and that the defendants made consistent misrepresentations to consumers. The high court also found that a jury has discretion to determine that, when a particularly egregious act has resulted in only a small amount of economic damages, the usual single-digit ratio between punitive damages and compensatory damages may not be an appropriate measure of the limits of due process. While the high court acknowledged that the punitive penalties were larger than penalties authorized under the MMPA, the court ultimately determined that the penalties did not violate Franklin and National Auto’s due process rights.
So, the next time you find folks in your dealership behaving badly, you can tell them that you know a million reasons why they shouldn’t.
Thomas B. Hudson is a partner in the firm of Hudson Cook LLP and the author of several widely read compliance manuals available at CounselorLibrary.com. ©CounselorLibrary.com 2014, all rights reserved. Based on an article from Spot Delivery. Single print publication rights only, to Auto Dealer Monthly. HC# 4842-5653-0712 (3/14). [email protected]