After sending emails to more than 50 million subscribers, a website faced $25 billion in potential liability under Washington’s Commercial Electronic Mail Act, which imposes statutory damages of up to $500 per violation. Similarly, an entertainment company was sued for more than $100 million for allegedly disclosing subscribers’ personal information in violation of the Cable Communications Policy Act, which provides minimum damages of up to $1,000 per plaintiff. As these examples illustrate, the combination of statutory damages and the class action device can transform even technical statutory violations into high-stakes—and even “potentially annihilating”—litigation.
As numerous courts have now recognized, classwide awards of statutory damages may run afoul of the due-process clause. For a defendant in a class action considering a due-process challenge, there are two key considerations: the applicable legal standard and procedural timing.
In 1996, the U.S. Supreme Court held in BMW v. Gore that due process forbids “grossly excessive” punitive damages awards. And in the 2003 case State Farm Mut. Auto Ins. Co. v Campbell, the high court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.”. Although the Supreme Court has not yet decided, some courts have assumed that Gore demands a similar relationship between a plaintiff’s actual harm and any award of statutory damages (see the 2nd Circuit’s 2003 opinion in Parker v. Time Warner Entm’t Co.). Other courts have distinguished Gore, instead applying St. Louis, Iron Mountain & Southern Railway Co. v. Williams, which recognized that a statutory damages award may violate due process if it is “so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.” Although these standards could well converge in the future, a defendant who mounts a due-process challenge should consider addressing both lines of cases.
A second consideration is procedural timing. At the pleadings stage, courts have largely concluded that a due-process challenge to classwide statutory damages is premature (see the 2008 Northern District of Illinois case Centerline Equip. Corp. v. Banner Pers. Serv.).
However, at class certification, many courts have refused to certify statutory damages claims under Rule 23(b)(3)’s “superiority” requirement, citing “the disproportionality of a damage award that has little relation to the harm actually suffered by the class, and on the due process concerns attended upon such an impact” (see the 2007 Central District of California case Seig v. Yard House Rancho Cucamonga, LLC).
Other courts have rejected this approach, reasoning, for example, that a due-process challenge is not ripe until after entry of a judgment (see the 2010 Western District of Missouri case Hammer v. JP’s Sw. Foods, LLC), or that the “proportionality of the potential liability to actual harm” is “not an appropriate reason to deny class certification under Rule 23(b)(3)” (see the 9th Circuit’s 2010 decision in Bateman v. Am. Multi-Cinema, Inc.). But even these rulings leave open the possibility that due process could preclude certification of a class that threatens “ruinous liability” or contravenes legislative intent. Still others suggest that, on the right factual record, due process could warrant decertification of a class (see the Middle District of Florida’s March opinion in Bush v. Calloway Consol. Group River City, Inc.).
Following class certification, defendants have attempted to oppose classwide statutory damages on summary judgment (see the Western District of Oklahoma’s 2010 opinion in In re Farmers Ins. Co.) and in framing jury instructions (see the 2008 District of Oregon case Ashby v. Farmers Ins. Co.). Although not right for every case, such an approach could succeed in the appropriate circumstances (e.g., on a plaintiff’s motion for summary judgment on damages and liability).
Finally, although results have been mixed, most courts agree that due process is appropriately addressed following entry of a verdict. Compare the 2001 Western District of Texas case Texas v. Am. BlastFax, Inc., in which the court reduced a $2.34 billion statutory damages award to $459,375, finding the jury’s award “inequitable and unreasonable”, with the 2007 6th Circuit case Zomba Enters. v. Panorama Records, Inc., in which the court upheld a statutory damages award 44 times greater than actual damages in single-plaintiff litigation.
The upshot is that, in this evolving area of law, defendants in appropriate cases should look for opportunities throughout the litigation to oppose classwide statutory damages based on due process. In addition to the obvious benefit of ultimately prevailing on this argument in the district court or on appeal, the possibility of a favorable ruling can also play a valuable role in achieving a settlement on terms favorable to the defense.