Eighth Circuit Okays 25:1 Ratio In Fraud Case

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Mayer Brown - Punitive Damages Blog

Ordinarily, a ratio of 25:1 would ring the death knell for a punitive damages award. But just as a 1:1 ratio is not always a safe harbor, a double-digit ratio is not always indicative of a punitive award that exceeds constitutional bounds.

Such is the case in Adeli v. Silverstar Automotive, Inc.

Adeli involved fraud in the sale of a used Ferrari. The used-car dealership failed to disclose—and appears to have affirmatively covered up the fact—that a certified Ferrari dealership had recommended, among other repairs, repairing or replacing the exhaust headers and that the selling dealership had elected not to make that repair.

While driving the car home, the purchaser detected a strong fuel smell. He brought it to a garage that specialized in Ferraris, which discovered a fuel leak and cracks in the exhaust headers.

After the used-car dealership refused to rescind the sale, the buyer brought suit. A federal jury found the seller liable for fraud and similar claims and awarded the buyer $20,201 in compensatory damages and $5.8 million in punitive damages. The district court reduced the punitive damages to $500,000, and both parties appealed.

The Eighth Circuit affirmed. Its decision is notable in two respects.

First, the court correctly rejected the plaintiff’s argument that the denominator of the ratio in this case should include not just the compensatory damages, but also the “potential harm” from the fraudulent non-disclosure, which he contended included “death, major burns from an explosion, or carbon-monoxide poisoning.”

The Eighth Circuit explained that, for potential harm to be considered, “[t]here must be some reasonable likelihood that the potential harm cited by the plaintiff might actually have occurred.” Concluding that “while these injuries were theoretically possible, the trial evidence does not show that they had any reasonable likelihood of occurring,” the court held that they should not be considered in the ratio analysis.

Second , although the court did not articulate it, the decision aligns comfortably with what my colleagues and I believe is the proper focus for evaluating whether a punitive award is unconstitutionally excessive—namely, whether the punitive award is greater than reasonably necessary to accomplish the state’s interests in retribution and deterrence.

As I described in a post about the Seventh Circuit’s decision in Saccameno v. U.S. Bank National Association, the ratio is an important guidepost, but it is not the be all and end all. Instead, what matters is such factors as the degree of reprehensibility of the conduct, whether the probability of detection of the tort is low and the likelihood of escaping liability is correspondingly high, whether the compensatory damages understate the full extent of the harm to the plaintiff, whether the compensatory damages outstrip the ill-gotten gain to the defendant and therefore already serve a deterrent and retributive function, and whether the defendant is subject to other consequences—either legal or reputational—that impart deterrence and retribution.

Adeli illustrates these principles. Though the ratio was high, the absolute amount of punitive damages—$500,000—is not shocking by modern standards. Moreover, several factors supported breaking the single-digit barrier, given the relatively small amount of compensatory damages. In particular, the fraud was deliberate and implicated safety; it was only happenstance that the fraud was discovered as quickly as it was; the compensatory damages did no more than remove the ill-gotten gain; and the defendant did not introduce evidence that it suffered any other consequences that could serve the goals of retribution and deterrence.

There are, of course, many cases in which the opposite is true—i.e., the punitive damages are multiple millions of dollars; the harm was self-disclosing (such as an alleged wrongful termination); the compensatory damages far exceed the defendant’s gain; and the defendant is subject to other consequences that serve deterrent and retributive purposes. In such circumstances, even a 1:1 ratio could be excessive.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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