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Beware of Punitive Damage Risk

You should pay attention to a September 1, 2003 verdict in an Independence, Missouri court. Even though the actual damages awarded to the consumer in that case were just $25,000, the jury awarded an additional $840,000 in punitive damages against a business.

Publications for lawyers are featuring this verdict and claiming that it is a "practical opportunity" for attorneys in other cases. You do not want one of those "other cases" to be you.

The punitive damages awarded were 34 times the actual damages. On December 11, 2002, the United States Supreme Court issued an opinion limiting punitive damages to a single-digit ratio or less than 10 times actual damages. It is argued that several exceptions to the Supreme Court's single-digit rule apply to the Missouri case, including relatively small actual damages, damages difficult to discover, deliberate fraud, a safety issue and repeat conduct.

When plaintiff's attorneys have clients with small damage cases, they are going to look for ways to fall under one of the single-digit rule exceptions and ask for substantial punitive damages.

The Missouri case involves an auto dealership's sale of a used pickup. The salesperson told the purchaser the vehicle had never been in an accident and it had been traded in by an older couple. That statement turned out to be false. Instead, the pickup had been in a roll over accident and sold for salvage.

Every business person, whether you sell vehicles or not, should pay attention to the Missouri verdict. Any plaintiff's attorney bringing a claim against you on behalf of a customer or an employee will be looking for ways to assert punitive damages against you. You should follow the 9 steps listed below to guard against any lawsuit, particularly suits involving punitive damage claims.

1) Be Honest
Let everyone in your organization know you require them to be honest in all of their dealings with customers, vendors and anyone else with whom they come into contact on behalf of your organization. Make this a rule in your employee handbook (if you don't have an employee handbook that is updated each year – we can help) and enforce your policy.

2) Don't Oversell
The courts and regulatory agencies draw a line between "puffing" a product and misrepresentations. This is not a bright line and it appears to shift from time to time. Talk to all of your sales people about what they can and cannot say. This is a tricky area. I am always willing to meet with sales people to help navigate this tricky terrain.

3) Disclose What You Know
If you know of a defect, disclose it. And do so in writing. Once the defect is disclosed, then you can use your sales talent to describe why, notwithstanding the defect, your product or service best fits the customer's needs. In some industries, you may want a checklist form that you can include with every sale.

4) Stand Behind Your Goods or Services
Every business should have a written warranty. When we work with a business, we make sure the business clearly describes what it will cover and what it will not cover. Refer to this warranty in your sales documents, in your shipping documents, in your invoices and on your web page.

5) Limit Your Liability
The most important part of any written warranty are the limitations on that warranty. Should you be liable for unknown problems outside your control? Of course not. When we draft warranties, we clearly limit liability for unknown problems, implied warranties and other areas of risk. After all, unless you are an insurance company, you should limit your liability to that which you can control.

6) Limit the Damages for What You Will Be Liable
The second most important part of any written warranty is the damage limitation. The big money in damage cases is consequential and punitive (discussed below) damages. You can stand behind your product or service by offering repairs, replacement products or substitute services and disclaim liability for hotel lodging, air fare, psychological counseling or any other "consequential damages." Once again, you are not an insurance company. You can stand behind your products or services without giving away blank checks.

7) Limit Your Liability for Punitive Damages
Your written warranty can also provide that you are not liable for any punitive damages. The purpose is to stand behind your products or services, not allow windfalls for litigious customers and their attorneys.

8) Don't Get Punished for Your Good Deeds
It can be good business to solve your customers' problems even when you did not do anything wrong and you are not obligated to do so. By providing this gratuitous solution, however, are you voluntarily assuming liability for similar problems in the future? In a separate but related question, is your gratuitous service subject to an implied warranty? You can make clear that the answer to both questions is no by using a goodwill service agreement that details the customer's problem, acknowledges you are under no obligation to solve the problem and limiting liability for your solution. We have worked with a number of clients in a variety of industries to create Goodwill Service Agreements so they are not punished for their good deeds.

9) Keep Cases Out of Court (agree to arbitrate)
There is an absolute, sure-fire way to keep cases against you out of court and away from "runaway juries." That sure-fire strategy is a written arbitration agreement. These agreements have been the subject of litigation in the last few years. Fortunately, the United States Supreme Court has struck down the Ninth Circuit Court of Appeals attempts to invalidate arbitration agreements. The result is that you can absolutely, positively use arbitration agreements with your employees, your customers and your vendors to keep disputes out of court. The only catch, however, is that your agreement must be carefully drafted and must avoid a number of pitfalls. You should resolve to protect your business with this strategy immediately.

You may have questions about how you can successfully implement strategies to protect your business from excessive punitive damage claims. Please feel free to call me. I am happy to answer your questions.

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