Legal Update

November 2022

The importance of consumer protection laws can seem unfathomable when you see a label on a sweater reminding you to remove the child before laundering, but laws prohibiting deceptive trade practices and false advertising exist because the incentives to run roughshod over consumers are significant. Since the individual harm resulting from consumer fraud is often small, those laws often provide for statutory damages to give consumers an incentive to pursue their claims and for producers to refrain from defrauding customers. For businesses selling and promoting their products nationally, statutory damages can mount quickly. This article discusses Monera v. Premier Nutrition Corp., 2022 U.S. Dist. LEXIS 144491 (N.D.Ca. August 12, 2022) to illustrate the damages issues that arise in these civil cases.

 

The importance of consumer protection laws can seem unfathomable when you see a label on a sweater reminding you to remove the child before laundering, but laws prohibiting deceptive trade practices and false advertising exist because the incentives to run roughshod over consumers are significant. Since the individual harm resulting from consumer fraud is often small, those laws often provide for statutory damages to give consumers an incentive to pursue their claims and for producers to refrain from defrauding customers. For businesses selling and promoting their products nationally, statutory damages can mount quickly. In Monera v. Premier Nutrition Corp., 2022 U.S. Dist. LEXIS 144491 (N.D.Ca. August 12, 2022), the court dealt with one of those cases where recovery under the statute would be nearly $100 million or more than 60 times the actual economic loss of consumers in just one state.

Background

Premier Nutrition Corporation (“Defendant”) marketed a number of “health” and dietary supplements, including Joint Juice, which the advertising and product labeling suggested contained ingredients that promoted improved joint health and functionality. As the court found in a prior ruling on the admissibility of Plaintiff’s damages expert, Defendant “marketed its product to encourage consumers to drink the product regularly and to make multiple purchases.” Plaintiff contended that the ingredients highlighted in Defendant’s advertising, glucosamine and chondroitin, did not actually work.

Plaintiffs from several states filed class action cases against the company under their respective state consumer protection statutes on behalf of individuals in their states who had purchased Joint Juice. Mary Beth Montera (“Plaintiff”) brought her case on behalf of New York consumers that purchased the product. Montera was the first case to go to trial. The jury apparently agreed with Plaintiff and awarded the plaintiff class $1,488,079 in actual damages, the full amount that New York consumers paid for their 166,249 units of Joint Juice.

Actual damages, however, only tell part of the story. New York General Business Law sections 349, which prohibits deceptive acts or practices, and 350, which prohibits false or misleading advertising, contain statutory damages provisions that allow plaintiffs to recover the greater of actual damages or $50 in the case of violations of § 349 or $500 for violations of § 350.

Based on the jury’s findings, plaintiff moved for entry of judgement in favor of the class based on statutory damages. “Plaintiff [requested] the imposition of $8,312,450.00[[1]] in statutory damages under GBL § 349(h) and $83,124,500[[2]] in statutory damages under GBL § 350-e, for a total of $91,436,950.” Defendant contended that statutory damages should be calculated on a per person basis, not per unit. It argued that, if statutory damages applied, the amount should be based on the number of class members, not the number of units of Joint Juice that they purchased.

Plaintiff also sought prejudgment interest on the damages. Defendant disagreed, citing several cases where prejudgment interest was denied.

Court Findings

Statutory Damages

The court understood Defendant’s contention that statutory damages apply on a per person basis rather than a per unit basis as a due process argument that, if granted on a per unit basis, statutory damages would be disproportionate to the actual injury the plaintiff class incurred. The court acknowledged that concerns over statutory damages had a long history of challenges dating to early 20^th century. In a 1919 decision, the U.S. Supreme Court addressed an Arkansas law regulating the fares railroad companies could charge for transporting passengers for intrastate travel. Violations of the law would result in a penalty of between $50 and $300. The Court concluded that given “due regard for the interests of the public, the numberless opportunities for committing the offense, and the need for securing uniform adherence to established passenger rates, we think it properly cannot be said so severe and oppressive as to be wholly disproportionate to the offense or obviously unreasonable.”[3] The question, the Montera court reasoned, was where the threshold for “wholly disproportionate” or “obviously unreasonable” is.

The court looked to guidance from cases involving the Telephone Consumer Protection Act (TCPA), a federal statute that proscribes certain abusive telemarketing practices and imposes a $500 penalty for each violation of the statute. As the court noted, “if a defendant makes thousands or even millions of calls in violation of the statute, the statutory damages reach atmospheric levels.”[4] While there were many cases that reduced what were determined to be excessive penalties, the court was unable to find any that provided a rational, systematic approach to determining how to make that reduction. Faced with this conundrum, another judge in the Northern District of California decided to not reduce the statutory damages at all. In Perez v. Rash Curtis & Assocs., Judge Rogers, concluding that the cases reducing statutory damages under the TCPA “arbitrarily reduced the damages amount to a lower number without any well-reasoned analysis,”[5] declined to lower the statutory damages amount. The parties settled the case before the Ninth Circuit reviewed the decision.

In this case, Judge Seeborg elected to follow the U.S. Supreme Court’s guidance on the constitutionality of punitive damages awards in State Farm Mutual Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003). In State Farm, the Court expressed a three-factor test to evaluate the reasonableness of punitive damages:

1. The degree of reprehensibility of the defendant’s misconduct;
2. The disparity between the actual or potential harm suffered by the plaintiff and the punitive (or in this case, statutory) damages award; and
3. The difference between the punitive damages awarded by the jury and civil penalties authorized or imposed in comparable cases.

With regard to the first factor, reprehensibility is evaluated by “considering whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident.”[6] The court found that, while the harm was purely economic, it was not merely incidental or accidental. Defendant continued to promote the health benefits of Joint Juice despite numerous studies showing that glucosamine and chondroitin, in the amounts contained in the product, had no effect on joint health. While there was no physical harm from consuming the beverage, there was an “intangible harm” because consumers relied on the product to alleviate joint pain and arthritis, but still required surgery or other medical treatment. The court concluded reprehensibility pointed both to reducing and allowing the statutory damages as set forth in the law.

The second factor, the ratio of statutory damages to actual damages, favored reducing the award. State Farm held that a ratio of punitive damages to compensatory damages higher than a single digit would rarely satisfy due process. In this case, the statutory award, as calculated, would be more than 60 times the jury’s determination of actual damages. While there are differences between punitive damages, which enhance compensatory damages, and statutory damages, which substitute for actual damages, the court concluded that the disparity between them favored reduction of the statutory damages amount.

The third factor, comparison of punitive damages to civil penalties, was not actually applicable since the statutory damages was, in essence, a civil penalty. The court considered that a statutory damages calculation brought, as here, in federal court could result in a $91,436,950 judgment, while the same case brought in New York state court would have yielded only the $1,488,078 actual damages, smacked of arbitrariness and favored reduction.

Ultimately, balancing the factors set out in State Farm as best it could, the court decided to award the statutory damages under § 349 (the $50 per violation) only.[7] This resulted in an award that was only 5.59 times the jury’s determination of actual damages.

Prejudgment Interest

The court found that New York law provided for prejudgment interest generally to be added to an award for an action. In response to Defendant’s claim that numerous courts had declined to award prejudgment interest, the court pointed out that nearly all of them were addressing claims based in federal law, where the decision to award prejudgment interest is left to the discretion of the court. Under the New York statute however, prejudgment interest is intended to compensate the plaintiff for loss of the use of funds ultimately awarded, and courts had awarded interest as a matter of course in cases involving pecuniary losses.

The statutory interest rate under New York law is 9 percent and “shall be computed from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred. Where such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date.”[8]

The court determined that prejudgment interest was appropriate for the reduced statutory damages award. It agreed with Plaintiff’s damages expert’s analysis that calculated interest based on Defendant’s distributors’ reports of sales during the class period. Some of the distributors reported actual daily or weekly sales; others only reported sales for the month. For those not providing more detailed information, the monthly sales were assumed to have occurred on the last day of the month resulting in a more conservative interest calculation. The court awarded $4,583,004.90 in prejudgment interest through the date of its decision.

Conclusion

Statutory damages arise in many contexts, particularly consumer statutes, where actual losses tend to be low enough that either plaintiffs will lack economic incentives to pursue a claim or defendants would consider customers actual losses as a mere cost of doing business. There is, however, a risk that a fixed dollar amount contained in the statute can lead to wildly disproportionate statutory damages awards, particularly in cases involving low dollar, high volume products. This lack of proportionality can implicate Constitutional due process considerations, and courts need a rational approach to resolving that concern. In this case, the court looked to Supreme Court guidance on punitive damages to bring what it considered a disproportionately large statutory damages award to a more appropriate level.

 

[1] 166,249 units times $50 equals $8,312,450.

[2] 166249 units times $500 equals $83,124,500.

[3] 2022 U.S. Dist. LEXIS 144491 at *10, citing St. Louis, I.M. & S Ry. Co. v. Williams, 251 U.S. 63, 67 (1919). It is worth noting that in 2022 dollars, $300 would be equivalent to approximately $5,150.

[4] Ibid. at *13.

[5] 2020 U.S. Dist. LEXIS 68161 *25 (N.D. Cal. Apr. 17, 2020).

[6] 2022 U.S. Dist. LEXIS 144491 at *17, quoting State Farm at 419.

[7] Defendant had also raised a concern over duplicate damages awards: that the two statutory provisions resulted in multiple awards for the same conduct. By eliminating a recovery under § 350, the court mooted that argument altogether.

[8] N.Y. C.P.L.R. § 5001(b).

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Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.

Mr. Molder has served as valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.

Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.

Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”

Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.