Tarnished brand doesn’t give consumers right to sue: GM judge

July 19, 2016

(Reuters) – Corporate scandal is like a spot of rot on a piece of fruit: Even if the rot hasn’t ruined the whole apple, you’d rather pick a different one. It’s the downside of corporate branding. One wormhole can make the whole brand seem unappetizing to prospective customers. Or, to put the phenomenon in a real-world context, after news broke that GM failed to recall cars with a potentially deadly flaw in their ignition switch mechanism, sales of GM cars and trucks dipped, even though they weren’t affected by the defect. The GM brand was at least temporarily devalued by the ignition switch scandal.

But the punishment wasn’t restricted to the company. According to plaintiffs’ lawyers in the enormous, multi-pronged litigation over the defective ignition switches, every owner of a GM vehicle was harmed by the devaluation of GM’s brand. Under their expansive theory, all GM cars and trucks lost value because of GM’s alleged misconduct – so GM should have to compensate all of the owners of those cars and trucks. They asserted the automaker’s liability could be as much as $10 billion.

That number now seems unattainable. On Friday, U.S. District Judge Jesse Furman of Manhattan rejected the plaintiffs’ “brand devaluation” theory, finding that it has not been recognized as a cause of action by any previous judge. “Courts have consistently limited consumer protection claims to those consumers who have themselves purchased a product that is alleged to be defective,” he wrote, in a characteristically thorough 103-page opinion.

As the judge explained, there is a difference between brand devaluation allegations and the economic loss claims by owners of cars that were subject to the recall for defective ignition switches. GM’s lawyers at Kirkland & Ellis had argued that even owners of cars affected by the defect could not allege damages for supposedly diminished resale value. Judge Furman, however, said those car owners were asserting a well-recognized “benefit of the bargain” cause of action because they supposedly didn’t get what they paid for when they bought the cars.

“The benefit-of-the-bargain defect theory does not compensate a plaintiff for a decrease in resale value,” the judge wrote. “The benefit-of-the-bargain defect theory compensates a plaintiff for the fact that he or she overpaid, at the time of sale, for a defective vehicle.”

But Judge Furman found that claims based on brand devaluation – a vastly bigger category than benefit-of-the-bargain claims – are too nebulous. For one thing, the judge said, compensating consumers based on such a speculative theory could end up taking money away from plaintiffs with more tangible claims. And for another, the concept of brand devaluation could conceivably apply in situations beyond defective products.

“The value of a brand can suffer from all sorts of actions,” Judge Furman wrote. “Assume, for example, that Apple were to launch several new products that were viewed as busts and that its reputation suffered as a result, causing Apple products to be viewed as less ‘cool’ and their resale value to decline. If a consumer could recover for brand devaluation, anyone owning an Apple product could conceivably bring a claim against Apple  To state the point is to make clear what the consequences of recognizing the brand devaluation theory would be.”

No court, according to Furman, has allowed claims based on brand devaluation – not even the judge overseeing the Toyota sudden acceleration litigation, which the plaintiffs cited in their brief. Lead counsel Steve Berman of Hagens Berman Sobol Shapiro and Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein, had argued that Judge Furman should be the first to permit the novel theory to move forward because GM’s supposed wrongdoing was unprecedented. The judge disagreed. “The number of defects, the extent of New GM’s concealment of those defects, and the scope of the recalls involved in this case may well exceed the allegations in any prior consumer protection case,” he said. “But the difference is one of degree rather than of kind. Indeed, one need not look beyond the world of automobiles to find many cases in which alleged defects and the concealment thereof did damage to a manufacturer’s reputation for quality and/or safety.”

In fact, according to Judge Furman, penalizing a corporation for devaluing its own brand might exceed the deterrent purpose of tort litigation. Such companies are already punished in the market and liable to consumers who bought defective products. The marginal punitive benefit of forcing the company to pay additional plaintiffs for tarnishing its brand probably wouldn’t be worth the cost, the judge said.

That’s little comfort, of course, to car owners who regret buying vehicles from a company that allegedly covered up a deadly defect. Class lawyer Berman told my Reuters colleague Jessica Dye that plaintiffs would appeal Judge Furman’s dismissal of billions of dollars of claims. GM’s recall was “unprecedented,” Berman said. “The law should be able to react to this.”

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