The Texas Supreme Court has an undeniable reputation for being pro-business, anti-punitive damages and highly suspect of jury verdicts in civil disputes.
The justices, of course, deny they are biased against juries and say big damage awards are acceptable when there is evidence of fraud and malice that amounts to felony misconduct.
This week, the state’s highest court is being presented a case that could determine which narrative is true.
The case, according to legal experts, will either be one of the largest punitive damage verdicts reinstated by the state Supreme Court in decades or it could be the death of exemplary damages in many types of civil disputes in Texas.
The appeal features some of the most prominent lawyers in Texas, including former state Supreme Court chief justices Wallace Jefferson and Tom Phillips facing off against each other.
In a highly unusual move that demonstrates the significance of the case, the influential Texas Automobile Dealers Association and the Texas Motorcycle Dealers Association have filed an amicus brief warning the state’s highest court about the importance of the case on their business and the law.
Mercedes-Benz v. Carduco is a decade-long, nine-digit dollar dispute between two businesses. Harlingen car dealership Carduco claims that elite auto manufacturer Mercedes-Benz USA and three of its executives intentionally devised a scheme to defraud the South Texas car dealer by sabotaging his business.
A Nine-Digit Judgment
Dallas trial lawyer Pete Marketos, a partner at Reese Marketos, points out that his client, Carduco owner Renate Cardenas, is not the typical plaintiff. Cardenas came to the U.S. from Mexico as an orphan at age 11. After serving in the U.S. Army during the Korean War, he went to college on the GI Bill. Cardenas then owned and operated a Texaco Station for many years, buying clunkers for $100, fixing them and reselling them for $200. He opened his first car dealership in 1971.
“Does that sound like someone who is trying to abuse the court system to get rich unfairly?” Marketos told The Texas Lawbook in 2013. “What happened to my client can happen to any business in Texas.”
During a two-week trial conducted in Cameron County in February 2013, Marketos presented evidence that Cardenas purchased the dealership from his son in 2008 for $7 million with the understanding from Mercedes-Benz USA officials that he would be able to move the dealership from Harlingen to the more affluent McAllen.
Cardenas claims Mercedes-Benz actually pressured him and his son to relocate their operation to McAllen. Mercedes-Benz officials intentionally hid from Cardenas that they were secretly negotiating with a competitor to open a dealership in McAllen, which they knew would severely damage revenue and profits at Carduco, according to Marketos.
“Mercedes devised and carried out a scheme to ‘work around’ Texas motor vehicle statutes and to inflict harm so substantial as to drive Renato’s dealership out of business,” Marketos and Jefferson wrote in their brief to the Texas Supreme Court. “Mercedes’ corporate representatives admitted that the information passed on to Carduco was false, misleading and untrue.”
After a two-week trial in 2013, a Cameron County jury unanimously ruled for Carduco and awarded $15 million in compensatory damages. The jury also found “beyond a reasonable doubt” that Mercedes’ conduct violated the state’s deceptive trade practices laws and ordered the automaker to pay $115 million in punitive damages.
Appellate Arguments
On appeal, lawyers for Mercedes essentially ignore the jury’s findings that their clients are liars and cheats and instead focus on the fact that the two parties had a written contract that allowed the company to do what it did.
The Thirteenth Court of Appeals in Edinburg upheld the jury’s findings of fact and the $15 million in actual damages, but the three-judge panel tossed out the punitive damage verdict and instead said the most Mercedes-Benz could be forced to pay under Texas law is $600,000.
The court of appeals appears to have based its $600,000 punitive damage revision on Texas criminal laws that set fines for convicted defendants in third-degree felony cases at $10,000 per charge. The appeals court judges, however, failed to note that the criminal penalty also calls for the defendants to serve multiple years in prison.
Both parties appealed to the Texas Supreme Court, which is scheduled to hear oral arguments Tuesday.
“While hugely excessive punitive damages have been of valid concern, the court of appeals’ opinion swings the pendulum too far the other way,” Jefferson and Marketos wrote in their brief to the high court. “Appellate courts should police only for constitutional exorbitance – they should not annihilate punitive damage awards.
“The reviewing court has neither the capacity, nor the constitutional prerogative, to replace its judgment for that of the factfinder,” they stated.
Carduco lawyers point out that the punitive damage ratio to actual damages awarded by the jury were 6.5 to 1. The Supreme Court, in a series of decisions, has ruled that punitive damage awards should be limited to three-to-one or four-to-one. In this case, the Fourteenth Court of Appeals reduced it to 0.04-to-one.
Several corporate general counsel, speaking privately to The Texas Lawbook, said such a small punitive damage award is laughably low and would essentially mean the end of punitives if the court of appeals’ decision is adopted by the Supreme Court.
“The court of appeals’ remitted damage figure is out of line with constitutional guidelines for evaluating punitive damage awards and out of proportion with the stakes at issue in this case,” Jefferson and Marketos said in briefs. “The court of appeals’ dangerous expansion of the importance of the criminal comparator will seriously weaken the Legislature’s intent that criminally equivalent conduct is more worthy of punitive deterrence.
“If allowed to stand, the court of appeals’ decision will not dissuade, but empower similar acts of corporate fraud in the future, undermining the integrity of business relationships in Texas,” Carduco argues.
Lawyers for Mercedes-Benz argue that the Fourteenth Court of Appeals got it half right by eliminating the punitive damage verdict issued by the trial judge and jury.
“Carduco should take nothing in this case,” Phillips, now a partner at Baker Botts in Austin, wrote in a brief to the state Supreme Court. “It has no right to punitive damages and no viable due process challenge to the remittitur of its excessive $115 million award.
“No punitive damage judgment of such magnitude has survived appeal in this state since the United States Supreme Court decided State Farm Mutual Automobile Insurance Company v. Campbell in 2003,” he argued.
But Mercedes-Benz simultaneously claims that the court of appeals completely got it wrong by upholding the jury’s findings that the automaker committed fraud and violated the state’s deceptive trade practices laws.
The defendants argue that the $15 million in compensatory damages also should be zeroed out because Carduco’s complaints are “directly contradicted” by the terms of the contract that the car dealer signed with Mercedes-Benz.
“The court of appeals’ opinion improperly allows a sophisticated party to rewrite a commercial contract by claiming that the defendants induced it to believe it had a bargain for oral terms in direct conflict with the terms of the signed agreement,” Phillips wrote. “This result is indefensible.
“No contract is safe under the court’s opinion,” the brief states. Marketos and Jefferson, in reply briefs to the justices, say that Mercedes’ arguments ignore one critical fact: that Carduco signed the contract only after Mercedes officials repeatedly lied to or misled the dealership.
Enter TX Car Dealers Association
The case has attracted one particularly politically powerful interest group: The Texas Automobile Dealers Association.
The TADA, joined by the Texas Motorcycle Dealers Association and the Texas Recreational Vehicle Association, filed a brief last week asking the state Supreme Court to rule in favor of Carduco and against Mercedes.
TADA General Counsel Karen Phillips told the justices that the relationship between car dealers and the automakers is “fiduciary in nature” and is “bound together in good faith and dependent upon fair dealing.”
“The use of fraud, misrepresentations and intentional omissions have no place in the motor vehicle franchiser-franchisee relationship,” Phillips wrote. “MBUSA embarked upon a scheme to defraud Mr. Cardenas and best the transfer, with a planned result that Mr. Cardenas would lose his business, his investment and his franchise.”
The TADA argued that Mercedes is using a “boilerplate section” of its contract to try to get away with its fraudulent and harmful conduct.
“For MBUSA to subsequently argue that Mr. Cardenas could not reasonably rely on MBUSA’s statements regarding the critical issue of his dealership’s location due to a boilerplate provision in its standard agreement undercuts the expectation of good faith between original equipment manufacturers and their franchisees, as established by Texas statute,” Phillips stated.
“The fraud by MBUSA was both material and relied upon,” she wrote. “The fraud here cannot stand as it impacts not only the parties but the community at large.”
Editor’s Note: The Texas Lawbook wrote an extensive article about this case in August 2013 in which legal experts predicted the dispute would eventually make it to the Texas Supreme Court. That article can be read here.