A federal appeals court has dealt a setback to the argument that the constitutional principles limiting punitive damage awards also apply to excessive statutory remedies. That said, legal arguments against excessive statutory damages are far from dead and further litigation of the issue is inevitable.

Last month, in Harris v. Mexican Specialty Foods, the U.S. Court of Appeals for the 11th Circuit addressed whether the statutory damages provision in the Fair Credit Reporting Act (FCRA) is invalid on its face or as applied because it produces excessive penalties in class actions. It questioned whether the damages provision was punitive and went on to find that the trial court acted prematurely in dismissing the case without fact-finding and in concluding that the FCRA’s statutory damages were facially excessive.

The Supreme Court has repeatedly applied due process principles to rein in punitive damage awards in recent years. Just last year, in Exxon Shipping Co. v. Baker, it held that a punitive damages award was excessive because it exceeded the compensatory damages award.
We have argued in a number of cases that constitutional principles limiting punitive damages awards also limit statutory remedies. The argument is supported by BMW v. Gore, the U.S. Supreme Court’s leading modern-day punitive damages decision, which explicitly relied on an earlier statutory penalty case for the proposition that a "punitive award may not be 'wholly disproportioned to the offense.'" It is further supported by Parker v. Time Warner Entertainment Co., where the U.S. Court of Appeals for the Second Circuit warned, with respect to statutory damages in a class action, that "in a sufficiently serious case the due process clause might be invoked."

In a class action context, poorly drafted statutes providing for minimum penalties or statutory damages for each violation can create the same problems presented by excessive punitive damages.  For example, dozens if not hundreds of class actions have been brought under the FCRA, seeking statutory penalties of $100 to $1,000 for each class member.  And, in the past year, many Uniform Commercial Code class actions have been brought in connection with vehicle-finance transactions.  These lawsuits seek recoveries equal to 10 percent of principal and 100 percent of finance charges for alleged defects in notices to consumers whose cars were repossessed. Also, the Unfair and Deceptive Acts and Practices statutes of many states provide minimum penalties of $25 to $100 for each violation.

To make it worse, these harsh penalties can be imposed in the absence of or in addition to any actual damages. Clearly, litigation over excessive statutory damages is not going away.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its skill in litigation defense and avoidance, including pioneering work in pre-dispute arbitration programs; its guidance in structuring and documentation of new consumer financial services products; and its experience with the full range of federal and state consumer credit laws throughout the country. 

For further information, please contact:

Alan S. Kaplinsky 215.864.8544 kaplinsky@ballardspahr.com
Jeremy T. Rosenblum 215.864.8505 rosenblum@ballardspahr.com
John L. Culhane, Jr. 215.864.8535 culhane@ballardspahr.com
Barbara S. Mishkin 215.864.8528 mishkinb@ballardspahr.com

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