Court ordered to review damage award

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By Eric Freedman
Automotive News / August 22, 2005

Much too muchIssue: Should Ford Motor pay the $10 million in punitive damages assessed against it in a fraud suit?
Outcome: Calif. Supreme Court says no and orders appeals court to reconsider the size of the award.

When is $52,435 perhaps too little and $10 million likely too much?

When it’s the punitive damages Ford Motor Co. must pay for a "pattern of corporate fraud" by not disclosing the lemon status of vehicles traded in or reacquired through using owner appreciation certificates, the California Supreme Court held.

The court said punitive damages are warranted by Ford’s policy of evading buy-back and disclosure requirements of California law. But the court rejected the methods used by the plaintiffs and an intermediate court to calculate punitive damages.

The case

In 1998, Greg and Jo Ann Johnson bought a used 1997 Taurus from a Ford dealership in Clovis, Calif. The salesman told the Johnsons there had been no significant repairs, even though the previous lessees had "experienced repeated and seemingly unrepairable difficulty with the transmission," according to the court.

The previous lessees had unsuccessfully asked Ford to take back the Taurus as a lemon, according to the court, but Ford decided the car didn’t qualify for mandatory repurchase. Instead, Ford issued a $1,500 owner appreciation certificate to the dealership, which credited the car to the previous lessees’ purchase of a new pickup.

The previous lessees weren’t told about the certificate, though. The Johnsons learned about it only after repeated complaints about the transmission, the court said. The law requires manufacturers that reacquire or help dealerships reacquire lemons to disclose the problems to purchasers and lessees.

Ford denied intentional wrongdoing and said it acted in good faith, according to counsel Michael O’Reilly, who said the company shouldn’t be assessed punitive damages.

"We accept the court’s conclusion that we should have disclosed (the car’s history) but don’t accept their conclusion that we deliberately violated the law," O’Reilly said.

The dealership paid a $100,000 settlement.

There was evidence at trial about Ford’s corporate policies and practices concerning reacquired vehicles and about the number and value of owner appreciation certificates issued annually in California. The Johnsons estimated that Ford saved $6,000 to $10,000 on each certificate for a vehicle it otherwise would have had to reacquire. Using a figure of 1,000 vehicles a year, they estimated Ford’s wrongful profits at $6 million to $10 million.

A Fresno County jury awarded $17,811 to compensate the Johnsons, plus $10 million in punitive damages.

The Court of Appeal upheld Ford’s liability, stating Ford’s "entire customer response program was structured precisely to short-circuit lemon law claims whenever it plausibly could." But the court deemed the amount of punitive damages excessive and slashed it to $53,435, about triple the compensatory amount.

The ruling

In the new decision, the Supreme Court said punitive damages may deter future misconduct, but it found insufficient evidence to force Ford to give up all the alleged $10 million in fraudulent profits from owner appreciation certificates. For example, the court said, there was no proof that all certificate transactions involved defective vehicles subject to the lemon law, noting that Ford also used the certificates to resolve a variety of complaints that didn’t involve defects.

Yet reducing punitive damages to only a "small multiple" of $17,811 was unjustified in light of Ford’s "practice of engaging in, and profiting from, wrongful conduct similar to that which injured" the Johnsons, wrote Justice Kathryn Werdegar in the majority opinion.

The Supreme Court ordered the appellate court to reconsider the size of the punitive damage award but set no maximum, minimum or formula.

Plaintiffs’ lawyer William Krieg of Fresno says the question will be balancing Ford’s repeated misconduct and resulting profit with a "reasonable relationship" to compensatory damages. "Somewhere in the millions of dollars is what Ford gained selling lemon buy-backs without disclosure and being able to get a lot more money for those cars than they would have," Krieg says.

Ford’s O’Reilly says the company expects that the Court of Appeal will again award only $53,435.