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Federal Court to Consider Constitutionality of Juiced-Up Statutory Damages Awards in Consumer Class Actions

New York’s consumer protection laws are particularly attractive to the plaintiff’s bar.  One reason is the availability of “statutory” damages under New York’s General Business Law (“GBL”).  While most states’ consumer protection laws limit plaintiffs’ recovery to their actual damages, if any, Sections 349 and 350 of the GBL guarantee minimum statutory damages of $50 (for a violation of § 349) and $500 (for a violation of § 350).  So, for example, a consumer who paid $5 for a bottle of juice with a purportedly deceptive label (and paid only a fraction of that price as the “premium” associated with the allegedly deceptive claim) might nevertheless seek to recover a total of $550 in statutory damages under the GBL—more than 100 times what he actually paid for the product.

When a single plaintiff seeks to recover statutory damages under the GBL, even a hundredfold multiplier is unlikely to result in a substantial damages award.  But a recent jury verdict in Montera v. Premier Nutrition Corp., No. 3:16-cv-6980 (N.D. Cal.), illustrates the potentially catastrophic consequences of applying this statutory scheme to class actions.  In Montera, a jury found that the maker of “Joint Juice” drink products had violated the GBL by making false claims about the beverage’s ability to provide consumers with “pain and/or arthritis relief.”  2022 WL 1465044, at *1 (N.D. Cal. May 9, 2022).  The jury decided that the class members’ actual economic damages—calculated according to what they would have paid for the product absent the false representation—amounted to $1.49 million.  Nevertheless, relying on the GBL’s statutory damages scheme, the class announced it would seek $140 million in statutory damages—equal to $550 for each of the 166,000 units of Joint Juice sold during the relevant period, plus interest.

Could the law possibly allow such a stunningly disproportionate damages award?  If the claim had been brought in New York state court, the answer is clearly no.  Under CPLR 901(b), plaintiffs cannot bring GBL “claims as class actions in state court unless they waive their rights to recover statutory penalties.”  Rodriguez v. It’s Just Lunch Int’l, 2018 WL 3733944, at *8 (S.D.N.Y. Aug. 6, 2018).  This makes good sense.  After all, the ostensible purpose of the GBL’s damages scheme is to encourage individual plaintiffs to bring lawsuits that might otherwise cost far more to litigate than the plaintiff would ever see in recovery.  For example, a consumer who bought a $5 bag of chips is unlikely to file a lawsuit seeking a theoretical maximum of $5 in actual economic damages, absent a statutory scheme that enabled her to recover more.  See Parker v. Time Warner Ent. Co., L.P., 331 F.3d 13, 22 (2d Cir. 2003) (explaining that the principal purpose of allowing “statutory damages awards on a per-consumer basis” is “to encourage the filing of individual lawsuits as a means of private enforcement of consumer protection laws”).  But this concern simply does not apply to class actions, where class members can aggregate their individual recoveries.  If, for example, 200,000 consumers bought a $5 bag of chips, their actual per-consumer damages would be small, but the aggregate recovery of the entire consumer class might reach hundreds of thousands of dollars—surely a large enough amount to encourage the plaintiff’s bar to take the case.  Thus, CPLR 901(b) reflects a common-sense, explicit judgment by the New York Legislature that per-consumer statutory damages are excessive and unnecessary in the class context.

Nevertheless, in a (highly debatable) ruling with no majority opinion, the U.S. Supreme Court held that Federal Rule of Civil Procedure 23—which governs class actions in federal court—preempts CPLR 901(b)’s statutory damages prohibition in class actions filed in federal court.  See Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393, 398 (2010).  The perplexing result is that “[s]tatutory damages are permissible in class actions alleging [GBL] violations brought in federal court”—even if those same damages would be impermissible in state court.  Famular v. Whirlpool Corp., 2019 WL 1254882, at *11 (S.D.N.Y. Mar. 19, 2019).  (NB: Defendants may wish to consider preserving their arguments that CPLR 901(b) prohibits aggregated statutory damages, even in federal court, as four of the nine Justices who decided Shady Grove have since been replaced, and the fractured decision is ripe for reevaluation.)

While Shady Grove appears to open the door to astronomical statutory damages awards in federal class actions, a number of federal courts have recognized that such “devastatingly large damages” may violate the Due Process Clause of the Fourteenth Amendment, which “prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor.”  Parker, 331 F.3d at 22 (quoting State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003)).  As the Second Circuit explained in dictum in Parker, per-consumer statutory damages in class actions “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.”  Id.; see also In re Hulu Priv. Litig., 2014 WL 2758598, at *23 (N.D. Cal. June 17, 2014) (“The aggregation of statutory damages claims potentially distorts the purpose of both statutory damages and class actions . . . .  In a sufficiently serious case, a defendant might invoke the Due Process clause to reduce the statutory award.” (citing Parker, 331 F.3d at 22)).

Although some courts have acknowledged the calamitous effect that aggregated statutory damages can have on class defendants, no federal court has squarely addressed whether, and under what circumstances, such a scheme would violate due process—likely because many of these cases settle before the court has an opportunity to consider the question.  See Parker, 331 F.3d at 22 (noting that the risk of aggregate statutory damages in consumer class actions can have “an in terrorem effect on defendants” that “may induce unfair settlements”); In re Scotts EZ Seed Litig., No. 12 CV 4727 (VB), 2017 WL 3396433, at *6 (S.D.N.Y. Aug. 8, 2017) (holding that court would not consider defendant’s due process objection to statutory damages in consumer class action until after “a jury has actually awarded damages, at which time defendants may make the appropriate motion for a reduction of that award”).  But, following the jury’s verdict in Montera, that may be about to change.

On the eve of trial in Montera, the defendant’s counsel argued in a motion in limine that the jury, not the court, should decide whether statutory damages were available on a per-consumer basis.  No. 3:16-cv-06980, ECF No. 201 at 7-10 (N.D. Cal. April 29, 2022).  But the court held that “[t]he determination of whether statutory damages or actual damages should be awarded . . . is a question for the Court and not the jury,” because such a question requires only that the court determine “if the actual damages or statutory damages is higher,” which the court considered to be a purely “legal question.”  Montera, 2022 WL 1465044 at *3.

In a footnote, however, the court acknowledged that the statutory damages recoverable by the class under the GBL could be “immense in comparison to the actual damages” suffered by class members.  Id. at *2 n.1.  Citing Parker, the court further recognized that “the due process clause might be invoked . . . to nullify [a distortedly high award of statutory damages] and reduce the aggregate damages award in a sufficiently serious case.”  Id. (internal quotation marks omitted).  But the court held it was premature to consider the constitutionality of any statutory damages award until after a “determination on actual damages” had been made by the jury.  Id.

Accordingly, after the jury awarded the class $1.49 million in actual damages at the conclusion of trial, the plaintiffs filed a motion asking the court to award $140 million in statutory damages—equal to the GBL’s $550 award multiplied by the 166,000 units sold, plus interest.  Montera, ECF No. 273 at 10-12 (N.D. Cal. June 9, 2022).  At the time of this writing, the plaintiffs’ motion to confirm the damages award is still pending, with a hearing set for July 15, 2022.

The Montera court’s ruling on damages could have a significant impact on the course of GBL suits in federal court going forward.  As Parker emphasized, statutory damages in consumer class actions can have punishing—and, in some cases, business-annihilating—effects on defendants that are wholly disproportionate to any actual harm suffered by the plaintiff class.  Moreover, such awards require no proof of willful or malicious conduct, which is typically needed to recover punitive damages over and above the plaintiffs’ actual injuries.  The Montera case is a vivid example of the problem.  The $140 million sought by the plaintiffs’ counsel represents a multiplier of almost 100 times the actual damages calculated by the jury—and far more than the total revenue earned by the defendant from its sale of the product. 

With all these potential ramifications in mind, the plaintiffs’ bar and companies that sell products in New York will no doubt be watching the court’s decision in Montera closely.  In our view, the Montera court would be well served to follow Parker’s lead and find that the Due Process Clause forbids strict-liability statutory damages awards that are grossly disproportionate to the class members’ actual economic injuries—awards which the New York Legislature indisputably intended to prohibit.