Perez, Miguel v. Z Frank Oldsmobile ( 2000 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 99-2742, 99-2854, 00-1701 & 00-1786
Miguel Perez,
Plaintiff-Appellee, Cross-Appellant,
v.
Z Frank Oldsmobile, Inc.,
Defendant-Appellant, Cross-Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 97 C 8950--Harry D. Leinenweber, Judge.
Argued June 1, 2000--Decided July 31, 2000
Before Bauer, Easterbrook, and Manion, Circuit Judges.
Easterbrook, Circuit Judge. This $8,000 dispute
about a used car has led to an $800,000 judgment
against Z Frank Oldsmobile. Punitive damages
exceeding $500,000 and attorneys’ fees near
$240,000 make up the bulk of the award. These
damages are at least an order of magnitude too
high, and final decision about attorneys’ fees
must abide the outcome on remand.
Jack Bowler bought a new car from Z Frank in
1993, trading in his 1990 Oldsmobile Cutlass
Supreme. The odometer showed about 28,000 miles.
Z Frank resold the car to Miguel Perez, who had
asked to buy a single-owner, low mileage auto.
Perez drove the Oldsmobile some 50,000 miles
through 1997. When he offered it in trade to a
different dealer, however, he learned that the
odometer was incorrect. By tracing the chain of
title back with the aid of state authorities,
Perez learned that he had been the car’s eighth
owner and that Moe Pour (the fourth owner, doing
business as Portage Auto Sales) had rolled the
odometer back roughly 70,000 miles.
Perez sued Z Frank and Pour under 49 U.S.C.
sec.32710(b), which creates jurisdiction to
enforce the Motor Vehicle Information and Cost
Savings Act of 1972, recodified in 1994 as
Chapter 327 of Title 49. Section 32703 prohibits
odometer tampering. Z Frank did not violate
sec.32703, but sec.32705(a) required it either to
disclose the Oldsmobile’s true mileage or confess
inability to determine that mileage, and Z Frank
did neither. Perez believes that Z Frank should
have figured out from General Motors’ warranty
records, which maintenance workers accessed by
computer, that a rollback had occurred. This
supported a claim under sec.32710(a):
A person that violates this chapter or a
regulation prescribed or order issued under this
chapter, with intent to defraud, is liable for 3
times the actual damages or $1,500, whichever is
greater.
Illinois has an essentially identical provision,
625 ILCS 5/3-112.1(e)(1), adding that "[a]ny
recovery . . . under this Section shall be offset
by any recovery made pursuant to the federal
Motor Vehicle Information and Cost [sic] Act of
1972." 625 ILCS 5/3-112.1(e). Both federal and
state statutes provide that violators must
reimburse prevailing plaintiffs’ legal expenses.
Perez also sought to recover damages under state
tort law.
Perez paid Z Frank $11,000 for the car. A
jury’s special verdict establishes that the
difference between fair market value of the car,
given its actual mileage, and the actual purchase
price was $7,900. The jury also assessed damages
of $3,000 for repairs required by the car’s extra
mileage, $10,000 for loss of use while the car
was being repaired, $3,600 for finance charges on
the loan Perez took out to buy the car, and
$30,000 for "aggravation, humiliation, or
inconvenience", for total compensatory damages of
$54,500. In post-judgment motions the district
judge chopped the compensatory award down to
$11,500, stating that the evidence did not
establish that the difference in mileage caused
the losses of which Perez complains. 1999 U.S.
Dist. Lexis 9462 at *4-5 (N.D. Ill. June 10,
1999). Perez appeals, contending that the jury’s
figure was justified, but we think that any error
runs in Perez’s favor. The $7,900 difference
between the $11,000 market value of a car with
28,000 miles (as Perez supposed) and the $3,100
value of a car with about 100,000 miles (the
actual figure) reflects elements such as
anticipated repair costs and diminished use.
That’s why a high-mileage car sells for less than
a low-mileage car. To allow cumulative awards for
the difference in market value, and repairs, and
loss of use, and "inconvenience," is quadruple
counting. Gardynski-Leschuck v. Ford Motor Co.,
142 F.3d 955 (7th Cir. 1998). See also Haluschak
v. Dodge City of Wauwatosa, Inc., 909 F.2d 254
(7th Cir. 1990) (describing damages of $7,500
before trebling in another odometer case as
excessive). Even if Z Frank sold Perez a hunk of
scrap with no engine and square wheels, the loss
could not logically exceed the purchase price
less salvage value, for Perez could sell it to a
junk yard and buy a functioning car. As for the
finance charge: a buyer’s loss does not depend on
how much of the purchase price was borrowed or
how long it took to repay the loan. To evaluate
economic loss correctly, the court should add
prejudgment interest on the overpayment (here
$7,900) from the time of sale, using the rate at
which the judgment debtor pays for capital. See
In re Oil Spill by the Amoco Cadiz, 954 F.2d
1279, 1331-33 (7th Cir. 1992). The buyer loses
the use of this money and should be compensated
for its time value whether he buys the car with
cash or on credit. But Perez does not seek
prejudgment interest, and Z Frank does not
contend that $11,500 is too high, so we leave the
compensatory damages as the district judge set
them.
In separate answers, the jury concluded that Z
Frank misstated the mileage "with the intent to
defraud plaintiff" and that a punitive award is
warranted. The jury assessed $550,000 in punitive
damages against Z Frank. The "intent to defraud"
finding required trebling of the award for the
odometer rollback. The judge deducted the entire
treble-damages award of $34,500 from the punitive
award, cutting it to $515,500. Thus the total
judgment against Z Frank after all post-trial
motions was $550,000: $11,500 in compensatory
damages, $23,000 (double this) to achieve
trebling under the odometer statutes, and
$515,500 in punitive damages. Perez correctly
observes that the district court committed a
logical error in this process. It reduced the
punitive award because Illinois law forbids
cumulative damages multipliers and punitive
damages for a single wrong. See, e.g., Harris v.
Manor Healthcare Corp., 111 Ill. 2d 350, 366, 489
N.E.2d 1374, 1381 (1986); Verdonck v. Scopes, 226
Ill. App. 3d 484, 491, 590 N.E.2d 545, 550 (2d
Dist. 1992). The district judge therefore should
have reduced the punitive award by $23,000, to
$527,000, rather than by the full odometer award
after trebling. The total then would have been
$561,500 rather than $550,000. But for reasons
yet to come the award must be reduced rather than
increased.
Z Frank’s claims of trial error are
unpersuasive and do not require discussion. As
for the sufficiency of the evidence: Pour rather
than Z Frank did the tampering, and it is not
clear that anyone at Z Frank lied to Perez; the
most one could say is that the sales staff should
have known what the maintenance staff either knew
or should have deduced from GM’s database. Still,
Z Frank the corporation "knew" what its
maintenance workers knew, and it did not have in
place any procedures to disseminate this
information, though managers must have
appreciated that failure to communicate could
lead its sales force to misrepresent matters on
occasion. Because Z Frank does not contest the
jury’s conclusion that it misstated the mileage
"with the intent to defraud", we need not pursue
the question whether any person (or the corporate
entity) acted with that mental state. Cf. Farmer
v. Brennan, 511 U.S. 825 (1994). Frauds often
escape detection, and the need to augment
deterrence of concealable offenses is a principal
justification of punitive damages. See A.
Mitchell Polinsky & Steven Shavell, Punitive
Damages: An Economic Analysis, 111 Harv. L. Rev.
869 (1998); Richard Craswell, Deterrence and
Damages: The Multiplier Principle and its
Alternatives, 97 Mich. L. Rev. 2185 (1999).
Although a damages multiplier of some kind is
in order, what is the right multiple? Optimal
deterrence is achieved when damages equal the
harm done by the wrong, divided by the
probability of detecting the injury and
prosecuting the claim. This is an application of
Gary S. Becker, Crime and Punishment: An Economic
Approach, 76 J. Pol. Econ. 169 (1968), a theory
of sanctions that played a role in his receipt of
a Nobel Prize in 1992. For example, if a wrong
causes $5,000 injury and is redressed one time in
five, the optimal damages are $25,000. That
redresses the injury to victims as a whole, and
the injurer then can decide what precautions are
appropriate. (A firm such as Z Frank must work
out, for example, how much to spend investigating
the history of the used cars it receives and
coordinating the operations of its sales and
maintenance staffs.) For a more complete
explanation applied to punitive damages, see
Keith N. Hylton, Punitive Damages and the
Economic Theory of Penalties, 87 Geo. L.J. 421
(1998). The punitive award even as reduced by the
judge is 45 times compensatory damages (and 65
times the difference in market price, the best
measure of both the customer’s loss and the
dealer’s gain). Are odometer rollbacks detected
that infrequently? When it is so hard to be
certain, it is appropriate to rely on rules of
thumb. Both the state and federal odometer
statutes supply such a rule: treble damages. Both
say that the wrongdoer "is liable for 3 times the
actual damages or $1,500, whichever is greater."
They do not say something like "3 times the
actual damages, or $1,500, or any other
multiplier the jury prefers, whichever is
greatest."
When a federal statute provides for treble
damages (or some other multiplier), judges
regularly conclude that punitive damages may not
be added. Congress has specified the multiplier,
which judges and juries alike must respect. Thus,
for example, Shea v. Galaxie Lumber &
Construction Co., 152 F.3d 729, 734 (7th Cir.
1998), holds that punitive damages may not be
added to the statutory double damages for wilful
violations of wages and hours requirements under
the Fair Labor Standards Act. We have concluded
that the anti-retaliation section of the FLSA
does permit punitive damages, because retaliation
claims are not covered by the double-damages
rule, Travis v. Gary Community Mental Health
Center, Inc., 921 F.2d 108 (7th Cir. 1990), but
that decision has been controversial; other
circuits have held that because some portions of
the FLSA provide for multipliers, punitive awards
are impermissible across the board. E.g., Snapp
v. Unlimited Concepts, Inc., 208 F.3d 928 (11th
Cir. 2000). No court believes that punitive
damages may be awarded for antitrust violations,
the best known of the federal treble-damages
statutes, although some kinds of antitrust
violations are concealable. See Brown v.
Presbyterian Healthcare Services, 101 F.3d 1324,
1331-32 (10th Cir. 1996) (holding that punitive
damages may not be awarded for violations of
federal antitrust laws). Indeed, no case of which
we are aware holds that, when Congress specifies
a damages multiplier, the jury may select a
different and higher multiplier by awarding
punitive damages under federal law.
When denying Z Frank’s motion to reduce the
punitive award, the district judge wrote that
"odometer roll backs are a nationwide problem
[that] needs to be deterred. Both the state of
Illinois and the United States have seen fit to
enact statutes to deal with this problem. An
award of punitive damages such as the one awarded
by the jury in this case will not fall on deaf
ears. Automobile agencies who would not be scared
off by a small award of compensatory damages,
even if the award is trebled, will undoubtedly be
scared off by this award of over one-half million
dollars." 1999 U.S. Dist. Lexis 9462 at *11.
Indeed they will be "scared off" by awards 40 or
more times the loss (and, in this case, 65 times
the profit from the wrong). They may be scared
right out of the used-car business. Excessive
awards tend to discourage participation in the
underlying economic activity, for some level of
error by employees is a risk of doing business.
Auto dealers also would be terrified by the
prospect of a judge ordering the Army to drive an
M1-A1 main battle tank through their showrooms,
flattening their inventory. High penalties deter
more, but this is not to say that higher always
is better. One problem with an excessive penalty
is that it attracts too many enforcers, who
pursue private riches. This concern has led to
proposals to decouple damages from recovery, so
that the defendant pays more than the plaintiff
receives, with the difference going to the public
fisc. E.g., Marcel Kahan & Bruce Tuckman, Special
Levies on Punitive Damages: Decoupling, Agency
Problems, and Litigation Expenditures, 15 Int’l
Rev. L. & Econ. 175 (1995). Section 32710 does
not take that approach, however, nor does it say
that more is always better. Congress decided that
the right penalty is trebling, with a minimum of
$1,500 to ensure some sting even when the harm is
slight. The district judge, like the jury,
obviously believed this inadequate. But
disagreement with an Act of Congress is not a
good reason to amerce a defendant.
Adequacy of deterrence cannot be evaluated by
limiting attention to private awards. Section
32709 authorizes both civil suits and criminal
prosecutions by the United States, plus civil
suits by states. Section 32709(a) is particularly
telling. It permits the United States to enforce
the odometer-tampering rules by civil suits for
damages and prescribes "a civil penalty of not
more than $2,000 for each violation. A separate
violation occurs for each motor vehicle or device
involved in the violation. The maximum penalty
under this subsection for a related series of
violations is $100,000." Rolling back the
odometer (or lying about the mileage) on one car
can support no more than a $2,000 penalty; for 25
cars the penalty is $50,000 at most; and the
maximum penalty for more than 50 cars is
$100,000. What sense could it make to have a
statutory cap of $100,000 on the civil penalty
for 50 or more violations yet allow a jury to
impose a $550,000 penalty for a single violation?
Punitive damages are a form of civil penalty,
going to a victim rather than the public but
serving the same function. Section 32709
demonstrates that for violations of this statute
the sky is not the limit. A victim is entitled to
treble damages, and the maximum civil penalty on
top of trebling is $2,000 per car, plus criminal
penalties under sec.32709(b) for really severe
infractions.
If the federal odometer statute does not
authorize punitive damages, how about the state
odometer statute? The state law is essentially
identical to the federal, going out of its way to
ensure that plaintiffs do not recover
cumulatively under the two laws. When Illinois
enacts a twin to a federal law, state judges
generally hold that the state law has the same
meaning as the federal. Luken v. Lake Shore &
M.S. Ry., 248 Ill. 377, 383, 94 N.E. 175, 178
(1911); Branson v. Department of Revenue, 168
Ill. 2d 247, 254, 659 N.E.2d 961, 965 (1995). In
Verdonck the state’s appellate court announced
this approach to 625 ILCS 5/3-112.1 in
particular. 226 Ill. App. 3d at 491, 590 N.E.2d
at 550. See also Buechin v. Ogden Chrysler-
Plymouth, Inc., 159 Ill. App. 3d 237, 253, 511
N.E.2d 1330, 1339-40 (2d Dist. 1987). Moreover,
sec.3-112.1(e) says that the defendant is liable
in an amount equal to the sum of treble damages
(or $1,500 if greater) plus attorneys’ fees;
greater damages cannot be "equal to" the
statutory formula. Thus we predict that the
Supreme Court of Illinois would hold that
punitive damages may not be awarded for
violations of 625 ILCS 5/3-112.1.
Perhaps anticipating this conclusion, Perez
added claims under the common law of Illinois.
Any conduct that violates 625 ILCS 5/3-112.1,
Perez insisted, also is common law fraud and
therefore supports an award of punitive damages.
Perez also contended that Z Frank told other
lies--in particular, that the car had only one
prior owner and was in good condition.
Unfortunately, neither the district judge nor the
jury distinguished among potential bases for
punitive damages. The jury was not asked, for
example, to make separate awards for the mileage
misrepresentation and for any other
misrepresentations. Indeed, we cannot be certain
that the jury found any other misrepresentations.
It found that Z Frank violated the odometer
statutes with intent to defraud, but its separate
verdict with respect to the common-law claim is
ambiguous. It answered "yes" to the question:
Did Z Frank Oldsmobile, Inc. know the false
statement or statements of material fact it made
in connection with the sale of plaintiff’s
vehicle were false, or did it make the same
statement or statements with a reckless disregard
of whether they were true or false?
This not only is a compound question, making a
simple "yes" ambiguous, but also fails to specify
which "statement or statements" were false. Just
the statements about the odometer, or were some
other statements false? The question did not
permit the jury to find, for example, that Z
Frank’s statements about mileage were
intentionally false, but statements about the
condition of the car were negligently false (or
even true). A single false statement on any
subject would lead to a "yes" answer. Differences
in the burden of persuasion further compound
matters: the judge instructed the jury that Perez
had to establish common-law fraud by clear and
convincing evidence, while issues concerning
accuracy of the odometer were to be decided by a
preponderance of the evidence. Because this
question came immediately after the odometer-
statute question, the jury may well have
concentrated on statements about mileage. That
possibility finds support in the jury’s punitive
awards: $550,000 against each of Pour and Z
Frank, although Pour was responsible only for
odometer tampering. Perhaps the jury thought Z
Frank less responsible than Pour on this account
(for Pour rolled back the mileage) and more
responsible for other deceits, but exactly
offsetting differences would be surprising.
Because the verdict is ambiguous, however, we
must consider separately the possibility of
punitive tort awards for fraud about the odometer
and about other matters.
Illinois has never squarely faced the question
whether punitive damages may be awarded under the
common law when 625 ILCS 5/3-112.1, which does
not itself authorize punitive awards, covers the
same ground. One appellate decision (Verdonck)
assumes that the answer is yes, provided that the
awards are not cumulative, but the litigants did
not present the issue for decision. Cf. Ciampi v.
Ogden Chrysler Plymouth, Inc., 262 Ill. App. 3d
94, 634 N.E.2d 448 (2d Dist. 1994). For the
reasons we have already given when explaining why
punitive damages are not proper under state and
federal odometer statutes, the best answer to
this question--and the one we predict that the
Supreme Court of Illinois will adopt when it
finally considers the issue--is no. What point
would the statutes serve if in the end the common
law of fraud were the effective authority to
award damages? The state’s legislature could have
said that the award is to be determined under the
law of fraud, or it could have written that
treble damages are just a minimum, preserving to
plaintiffs all common-law remedies. But neither
state nor federal law contains a savings clause
for tort remedies. Federal law provides that
state odometer statutes are not preempted, 49
U.S.C. sec.32711, but lacks a similar provision
for state tort law. The Illinois odometer statute
does not say that common-law claims are
unaffected. Both statutes provide that the right
award is the greater of treble damages or $1,500.
Treble damages are a form of punitive damages.
See Vermont Agency of Natural Resources v. United
States ex rel. Stevens, 120 S. Ct. 1858, 1869-70
(2000); Texas Industries, Inc. v. Radcliff
Materials, Inc., 451 U.S. 630, 639 (1981). The
legislative decision to have a multiplier of
three is not honored when a court permits a jury
to select a different punitive multiplier.
Although one federal appellate decision more than
a generation old concludes that punitive damages
under state common law are compatible with the
federal odometer statute, see Edgar v. Fred Jones
Lincoln-Mercury of Oklahoma City, Inc., 524 F.2d
162 (10th Cir. 1975), more recent decisions have
drawn its methodology into question. E.g., Geier
v. American Honda Motor Co., 120 S. Ct. 1913
(2000); Rice v. Gustavel, 891 F.2d 594, 597 (6th
Cir. 1989). But this is not a subject we need
pursue, given our conclusion that the Supreme
Court of Illinois would treat the state’s own
odometer law as establishing the maximum award
for misrepresentations about mileage.
Punitive awards for the single-owner and good-
condition representations would not cover the
same ground as the odometer-tampering statutes,
so they cannot be ruled out. But neither can this
award be sustained on that ground, given the
verdict’s ambiguity. We therefore remand for a
new trial, limited to Perez’s claim that Z Frank
committed frauds other than misrepresenting the
car’s mileage. Compensatory damages have been
fixed, so the trial will be limited to liability
for frauds other than mileage and, if liability
is established, to punitive damages. The judge
should tell the jury about the damages for the
rollback, so that jurors will not be tempted to
confer duplicative recovery, and should ensure
that any further punitive recovery is reasonable
in relation to the award already made. Illinois
(we are confident) would not treble the damages
for the more serious misrepresentation concerning
mileage yet allow unlimited damages for puffery
such as "this car is in good condition."
Even criminal sentencing, once the subject of
unbridled discretion by district judges, is now
controlled by principles of proportionality. If
the United States had prosecuted Z Frank
Oldsmobile, Inc., for what it did to Perez, the
maximum penalty would have been a fine of
$11,500. See U.S.S.G. sec.2N3.1(a) (setting an
offense level of 6 for a single odometer
violation), sec.8C2.4(d) (fine of $5,000 for a
level 6 offense by an organization, though an
increase to the victim’s actual loss is
authorized by sec.8C2.4(a)(3)). (We disregard the
culpability adjustment under sec.8C2.5, which
cannot be calculated on this record, but for a
modestly sized organization such as an auto
dealership this adjustment could not
substantially increase the fine for a first
conviction.) Illinois does not treat violation of
625 ILCS 5/3-112.1 as a crime, so its legislature
has not opted for a higher punishment than
Congress specified. Punitive damages should not
be used as an escape hatch, subject only to the
whim of judge and jury.
Although the parties have devoted considerable
attention to constitutional limits on punitive
damages, see BMW of North America, Inc. v. Gore,
517 U.S. 559 (1996), these come into play only
after the assessment has been tested against
statutory and common-law principles. When the
Supreme Court is asked to review a state court’s
award, the Constitution is the only constraint,
for the state judges determine the meaning and
application of state law. But when a plaintiff
seeks punitive damages in a federal case, it is
unnecessary to look for limits in the
Constitution. See Donovan v. Penn Shipping Co.,
429 U.S. 648, 649 (1977) ("[t]he proper role of
the trial and appellate courts in the federal
system in reviewing the size of jury verdicts is
. . . a matter of federal law."); Browning-Ferris
Industries v. Kelco Disposal, Inc., 492 U.S. 257,
277-80 (1989). Federal judges may, and should,
insist that the award be sensible and justified
by a sound theory of deterrence. Random and
freakish punitive awards have no place in federal
court, and intellectual discipline should be
maintained. Zaz Designs v. L’Oreal, S.A., 979
F.2d 499 (7th Cir. 1992); Kemezy v. Peters, 79
F.3d 33 (7th Cir. 1996); Cass R. Sunstein, Daniel
Kahneman & David Schkade, Assessing Punitive
Damages, 107 Yale L.J. 2071, 2078-79 (1998). If
the award is well justified, then it is also
constitutionally sound; and if it is not
justified, then a new trial may be awarded using
"federal standards developed under Rule 59"
(Browning-Ferris, 492 U.S. at 279) without
resorting to constitutional reasoning.
Because we are remanding for further
proceedings, we also vacate the award of
attorneys’ fees and costs, which should be
recalculated in light of the final outcome.
Still, two comments are in order.
First, the district court’s total award of
$236,911, see 2000 U.S. Dist. Lexis 2037 (N.D.
Ill. Feb. 18, 2000), is awfully hard to swallow.
It represents more than 1,200 hours at $185 per
hour, or about two-thirds of a year’s billable
time for a hard-working lawyer. How can a case
this simple, which required only three trial days
and led to a compensatory award of $11,500, have
commanded that investment of resources? In
Haluschak, an odometer case that yielded
compensatory damages of $7,500 before trebling,
the plaintiffs’ legal costs were only $12,560--
and Haluschak was tried twice! This question
requires careful attention on remand.
Second, the district court assumed that the
reasonableness of attorneys’ fees must be
assessed in relation to the total award,
including punitive damages. If either the state
or federal odometer statute supported punitive
damages, that might be so. Given our holding that
any recovery in excess of $34,500 depends on
state tort law, however, the award looks
unreasonable, for no sensible person spends
$236,000 in pursuit of $34,500 (or even $163,500,
treble the jury’s original compensatory award).
See Cole v. Wodziak, 169 F.3d 486 (7th Cir.
1999). The state and federal odometer-tampering
statutes authorize awards of attorneys’ fees only
for success in obtaining recoveries under those
statutes. Illinois does not provide for fee-
shifting in tort cases. Outlays in pursuit of
common-law punitive damages therefore must be
borne by Perez and may not be shifted to Z Frank.
See Roche v. Fireside Chrysler-Plymouth, Mazda,
Inc., 235 Ill. App. 3d 70, 86-87, 600 N.E.2d
1218, 1228-29 (2d Dist. 1992).
Reversed and Remanded