Due process forgotten: the problem of statutory damages and class actions.

• Author: Scheuerman, Sheila B.

1. INTRODUCTION

   "A billion here and a billion there, and pretty soon you're talking about real money." (1)

   In the past several years, the due process limits on punitive damages have garnered a great deal of attention from courts, (2) scholars, (3) and practitioners. (4) While punitive damages have been under the analytical microscope, statutory damages--civil penalty amounts prescribed by legislatures for violations of particular statutes (5)--have been all but forgotten. When combined with the procedural device of the class action, aggregated statutory damages claims can result in absurd liability exposure in the hundreds of millions--or even billions--of dollars on behalf of a class whose actual damages are often nonexistent.

   Despite presenting the risk of grossly excessive punishment that prompted the development of due process limits on punitive damages, courts have yet to uniformly apply the now familiar punitive damages due process framework to aggregated statutory damages. (6) Indeed, most courts confronted with the issue of grossly excessive statutory damages sought in class actions have engaged in a quintessential judicial punt: declining to consider any due process limit until after the class has been certified and a verdict entered. As a practical matter, this means that the court will never reach the due process issue. That is, once a class is certified, a statutory damages defendant faces a bet-the-company proposition and likely will settle rather than risk shareholder reaction to theoretical billions in exposure even if the company believes the claim lacks merit.

   A recent example of this phenomenon is the so-called FACTA class action (7)--class litigation under the Fair and Accurate Credit Transactions Act (FACTA), (8) which requires retailers to redact all but the last five digits of a credit card number as well as the expiration date from a printed receipt. (9) Under FACTA, a plaintiff can seek actual damages or statutory damages of "not less than $100 and not more than $1,000."10 When pursued as a nationwide or statewide class action, the statutory damages create devastating liability that would put the defendant out of business simply for failing to redact information from a retail receipt. (11) For instance, in a recent class action in California district court, the potential minimum statutory damages award was nearly half of the defendant's net worth. (12) Similarly, in a FACTA class action against Cost Plus, Inc., the court noted that "even the minimum statutory damages of $340 million would put Defendant out of business." (13) A nationwide FACTA class action against Chuck E. Cheese sought $1.9 billion, even though the company's net income the prior year was only $68 million. (14) A FACTA class suit against the Vitamin Shoppe sought between $22.7 million and $227 million in statutory damages, though the company's securities filings reflected only $31 million in equity and $161 million in total assets. (15) And a FACTA class action against clothing retailer Charlotte Russe sought statutory damages of $220 million to $2.2 billion, despite that the company's total stock equity was only $206 million. (16) As the court there noted, "an award of even the minimum statutory damages ... would destroy [d]efendant's business." (17)

   Although a few scholars have identified the potential due process implications of statutory damages, no one has thoroughly examined the question. (18) Using the FACTA cases as a paradigm, this Article assesses the current due process jurisprudence regarding statutory damages, and proposes an analytical framework that would remain true to the intent of FACTA and similar statutory damages regimes, while giving more than mere lip service to a defendant's due process rights.

   Part II examines the theoretical rationale underlying both statutory damages and class actions: making individual claims marketable. This Part explains how combining the class action with statutory damages invites over-deterrence, a fact aptly demonstrated by the FACTA class actions.

   Part III describes the constitutional framework for analyzing constitutional excessiveness under the Due Process Clause. This Part shows how the modern due process standard for punitive damages--known as the BMW guideposts--in fact evolved from a test developed in early Supreme Court precedent analyzing the constitutional limits on statutory damages.

   Part IV examines modern judicial treatment of due process challenges to aggregate statutory damages awards. First, this Part discusses how courts confronted with due process challenges to statutory damages have refused to apply the BMW guideposts. Second, this Part addresses the alternative method courts have taken to due process statutory damages challenges: avoidance.

   Finally, Part V argues that the modern BMW standard should apply to aggregate statutory damages awards, and should be considered during the class certification phase of proceedings. Using the FACTA class actions as an illustration, this Part concludes that there is no principled reason to ignore the BMW guideposts, the history of the constitutional excessiveness standard, or the reality of modern class action litigation.

2. THE CLASS ACTION MEETS STATUTORY DAMAGES

   At their cores, both statutory damages and the class action mechanism are aimed at encouraging litigation. (19) The class action makes small individual claims marketable by aggregating the claims of multiple individuals into one suit. (20) Similarly, statutory damages guarantee a minimum recovery, and thus make a violation that may result in nominal or no actual damages more attractive to pursue. (21) When these two litigation-inducing mechanisms are combined, however, the risk of over-deterrence arises. (22) In short, where a statute provides statutory damages as well as attorneys' fees, the class action is unnecessary to render the suit marketable.

   1. Litigation Incentives of the Class Action

      As the Supreme Court has observed, "'[t]he policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.'" (23) Simply put, "'[a] class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor.'" (24) As Professor Richard Epstein has explained, three conditions underlie the litigation incentive theory of the class action:

      The first of these is that the number of individuals similarly situated with respect to a common defendant is very large. The second is that the loss sustained by each individual is relatively small. The third is that the administrative costs of individual suits turn out to be quite high. In these circumstances, we can now see the consequences of a rule that allows each aggrieved individual to bring his own suit. Quite simply, he will not accept this invitation if the costs of litigation exceed the level of recovery, which could easily happen with the high price of lawyers. (25) Thus, the "addition effect" (26) of the class action brings together what would otherwise be unmarketable individual claims. "This concept ... has become a leading justification for the modern class action." (27)

      By making these claims marketable, the class action serves a deterrent function (28) in two ways. First, the class action uncovers wrongdoing that otherwise would escape detection. (29) Second, it requires the "wrongdoers to give up their ill-gotten gains." (30) Class actions thus provide an incentive to sue that would not exist if the plaintiffs had to proceed individually. (31)

   2. Litigation Incentives of Statutory Damages

      Like the class action, (32) statutory damages are intended to make individual litigation marketable. (33) Statutory damages allow a plaintiff to recover a prescribed sum in lieu of (34)--or sometimes in addition to (35)--actual damages. Thus, statutory damages provide an incentive to pursue a lawsuit where actual damages are "small or difficult to ascertain." (36) For instance, Congress included the statutory damages provisions of the Truth in Lending Act (TILA) because "it is difficult to prove any actual monetary damage arising out of a disclosure violation." (37) Thus, TILA's statutory damages provision was enacted "to make it worthwhile for an individual to bring an enforcement action even if actual damages amounted to only a few dollars." (38)

      Furthermore, like class actions, statutory damages act as a deterrent to wrongful conduct. (39) Statutory damages "encourage private attorneys general to police [a defendant's conduct] even where no actual damages exist." (40) The Supreme Court has recognized the deterrent function of statutory damages, noting that statutory damages are designed "to sanction and vindicate the statutory policy." (41) The very function of a minimum amount of damages is to add cost to the defendant's wrongful conduct. In the intellectual property area, for example, Congress specifically has explained that the goal of statutory damages provisions is to provide a "strong incentive" for compliance with the law. (42)

      Class actions and statutory damages, then, serve a similar function: encouraging litigation by offsetting disincentives to suit where the alleged wrongdoing involves nominal financial harm.

   3. Statutory Damages + Class Action = Unintended Consequences

      Separately, statutory damages and class actions aim to respond to the risk that certain wrongs, namely those resulting in paltry financial losses, will go unaddressed. Combining the litigation incentives of statutory damages and the class action in one suit, however, creates the potential for absurd liability and over-deterrence. One of the FACTA class actions--Kesler v. Ikea U.S. Inc. (43)--illustrates this problem. In Kesler, an Ikea store provided the plaintiff with a merchandise receipt that included the expiration date...