Punitive damages: disproportionate enforcement

In March 2011, the Civil and Commercial Trial Court No. 5 of the City of Córdoba issued an unprecedented award of AR$ 2,000,000 in punitive damages against a snacks and drinks manufacturer (Cervecería y Maltería Quilmes).

The claim was filed by a consumer who found an intimate gel package from a well-known condom brand inside of a soft drink bottle purchased at the beginning of 2009.

According to the facts of the case, the plaintiff required the provision of a new bottle of soda, AR$ 1,500 for moral damages and AR$ 2,000,000 for punitive damages, on the grounds of the Consumer Protection Law (CPL).

In addition to denying the claim, the manufacturer stated that punitive damages are only applicable to extreme cases where serious negligence is demonstrated. Hence, the defendant explained the professionalism of its careful production proceedings and argued that no negligence could be attributed to its conduct.

Once the evidence stage ended, the Court admitted all the plaintiff’s claims based on certain arguments that must be detailed.

On one hand, the adjudication established that punitive damages shall be analyzed under the standard of conduct rules. Then, no negligence could be attributed to the manufacturing process performed by the defendant (ISO quality certified). Nevertheless, the Court understood that the existence of the gel package inside the bottle represents a compelling evidence that shall be counteracted against that produced by the defendant.

This piece of evidence -as stated by the Court- proves a gross negligence occurred at the bottle-filling procedure, and justifies the imposition of the fine.

With regard to the evidence, the Court underlined the difficulties inherent to the demonstration of negligence, and also emphasized that both parties must contribute in order to clarify the facts of the case. Considering the burden-shifting principle, the decision states that evidence contribution duty increases when a party has better means to prove the facts.

Although the safety of the manufacturing proceedings was proved, the Court concluded that the defendant was not able to explain the reasons of the placement of the defective product in the market.

Concerning the amount of the sanction, the ruling commented the 10:1 constitutional ratio relationship between compensatory and punitive damages that should be respected, with accordance to the guidelines provided by the Supreme Court of the United States in re “State Farm vs. Campbell”. However, the Court held that the Argentine applicable law provides the only enforceable cap for the fine.

In order to set the measure of the punishment, the adjudication refers to standards provided by Section 49 (CPL). Hence, the ruling stressed that the defendant’s negligence implied a serious health risk to the consumers. In addition, the Court remarked on the profits made by the manufacturer (monitoring costs avoidance) and the market share recognized by the defendant itself.

Although the award has been appealed, this Trial Court decision deserves particular attention as it might represent the first step to a more severe enforcement of punitive damages.

Punitive damages had been applied by the Courts since their enactment through the CPL amendment passed in April 2008 (Law No. 26.361). However, this is the most important fine that has been awarded to date, in economic terms. Furthermore, this fine constitutes the first sanction that exceeds damages granted for compensatory reasons, illustrating a great disparity between both categories.

Thus far, we will have to wait for the appeal outcomes and stay alert in order to identify if the decision represents the beginning of a judicial trend or simply a one-off precedent.