For certain causes of action, Congress and state legislatures authorize the recovery of a specified amount of damages set by statute, rather than requiring the plaintiff to prove actual damages. A legislature typically chooses this route to incentivize individual plaintiffs to bring claims, either because actual damages are relatively small or difficult to show. But the availability of such statutory damages in the class-action setting may create a risk of staggeringly large awards—often for technical or inadvertent violations of a statute. The possibility of such awards may violate the Constitution’s prohibition, embodied in principles of due process, on imposing “grossly excessive” punitive damages. Relatedly, defendants have argued that because of the enormous settlement pressures in these cases, when the accumulation of statutory damages not only far exceeds any injury, but also could potentially annihilate the defendant, “a class action is [not] superior to other available methods for fairly and efficiently adjudicating the controversy” as required by Federal Rule of Civil Procedure 23(b)(3). These arguments have met with modest success in the courts.
The seminal punitive damages case is BMW of North America, Inc. v. Gore, in which the Supreme Court held that the Due Process Clause of the Fourteenth Amendment prohibits “grossly excessive” awards of punitive damages. In determining the excessiveness of an award, courts assess whether there is a “reasonable relationship” between “the compensatory award and the punitive award.” The Supreme Court in BMW and subsequent decisions has identified certain guideposts for that inquiry, such as the reprehensibility of the defendant’s conduct, the disparity between the actual or potential harm and the punitive damages award, and the comparable civil penalties for the defendant’s conduct. A number of courts—best exemplified by the 2nd Circuit’s decision in Parker v. Time Warner Entertainment Co.—have stated that these standards also apply when assessing constitutional limits on an award of aggregated statutory damages in a class action.
In Parker, the 2nd Circuit explained that the combination of “minimum statutory damages awards on a per-consumer basis . . . with the class action mechanism . . . may expand the potential statutory damages so far beyond the actual damages suffered that the statutory damages come to resemble punitive damages — yet ones that are awarded as a matter of strict liability, rather than for the egregious conduct typically necessary to support a punitive damages award.”In such a circumstance, “the due process clause might be invoked . . . to nullify that effect and reduce the aggregate damage award.”
Some defendants have successfully used this argument to fend off the threat of enormous potential awards of statutory damages. For example, in Leysoto v. Mama Mia I, Mama Mia restaurant faced a class action under the Fair and Accurate Credit Transactions Act (FACTA), which provides statutory damages of between $100 to $1,000 when a merchant fails to adequately redact a customer’s credit or debit card information from a printed receipt. The plaintiffs alleged that Mama Mia had improperly printed receipts approximately 46,000 times, and even though none of the customers suffered any actual injury, the plaintiffs sought statutory damages of between $4.6 million and $46 million.
In part because Mama Mia had only $40,000 in total assets, the federal court for the Southern District of Florida denied class certification, holding that a class action was not superior to individual actions because “the threat of annihilation associated with certification does not serve the purpose of the legislation [and therefore] individual actions against Mama Mia are a superior method to adjudicate any remaining FACTA disputes.” To be sure, the Leysoto court grounded its analysis in Rule 23’s superiority requirement rather than due process, but the result was the same.
Courts are divided over the exact role that due process plays in deciding class certification. Some courts, such as the 9th Circuit in Bateman v. American Multi-Cinema, Inc., have suggested that these considerations are irrelevant until after a large aggregated damages award has been rendered (See also Murray v. GMAC Mortg. Corp.). If Congress chose not to enact an express bar or cap on statutory damages in the class-action setting, these courts believe that they should not second-guess that silence.
Other courts, however, have recognized the fallacy (in our view) of that approach. Deferring the due-process inquiry until after an adverse class-wide verdict of millions or perhaps even billions of dollars will, in most cases, amount to rejecting the inquiry for all time, because the certification of a class seeking enormous aggregated damages creates intense pressure on the defendant to settle, regardless of the merits of the underlying claims. Accordingly, when damages would be “enormous and completely out of proportion to any harm”––as the 11th Circuit noted in London v. Wal-Mart Stores––some courts have concluded that the scale of the requested statutory damages should be considered in determining whether the putative class is superior to other forms of adjudication as required by Rule 23(b). Due process concerns are critical to that analysis. As Judge Wilkinson of the 4th Circuit advised in a concurring opinion in Stillmock v. Weis Markets, “[r]ather than considering annihilative damages as they bear on due process, it is preferable for a district court to address them in the context of Rule 23(b)(3)’s superiority requirement [because] doing so gives the district court discretion to avoid a serious constitutional problem.”
In sum, whenever a class action seeks to aggregate statutory damages in a manner that could result in an award grossly disproportionate to actual damages caused by the defendant’s acts, the defendant should consider challenging certification on due process grounds and for failure to meet the superiority requirement of Rule 23(b)(3). Although some courts have rejected or expressed skepticism of this argument, they may change their tune if the threatened statutory damages would bankrupt the defendant. For example, the 9th Circuit noted in Bateman that it was reserving the question of whether a “showing of ‘ruinous liability’ would warrant denial of class certification in a FACTA or similar action.” Even if a defendant cannot make this showing in district courts within the 9th Circuit (or other jurisdictions following a similar rule) because the award would be enormous, but not annihilating, defendants should consider preserving this argument for potential en banc or Supreme Court review.