Who Needs Fraud? A Negligent Misrepresentation that a Product’s Design Met ANSI Standards Fuels $5M Punitive Damages Award

By Patricia J. Baxter and Nate Bohlander

In a case of first impression, the Third Circuit Court of Appeals upheld a $5 million award of punitive damages in the context of a negligent misrepresentation and found possible future harm to the public to be an appropriate factor in deciding whether punitive damages should be awarded. In Brand Mktg. Grp. LLC v. Intertek Testing Servs., N.A., Inc., No. 14-3010, 2015 WL 5255078 (3d Cir. Sept. 10, 2015), David Brand requested that Intertek inspect Mr. Brand’s Thermablaster, a gas heater that required no outdoor ventilation. Since the heaters were being manufactured overseas, Intertek inspected the product at the manufacturer’s facility in China. Intertek thereafter represented that the product was compliant with applicable American National Standards Institute (ANSI) standards. Mr. Brand subsequently sold several thousand Thermablasters to a third party. When the buyer learned that the product did not, in fact, meet ANSI standards, it compelled Mr. Brand to repossess the heaters and refund the purchase price.

Mr. Brand brought suit against Intertek, claiming negligent misrepresentation. At trial, Intertek’s representative testified that heaters such as the Thermablaster carried a significant risk of overheating and carbon monoxide poisoning. He testified that Intertek’s process of testing was incomplete, that several Intertek engineers had been found making representations that the machines complied with ANSI without running the test, and that Intertek did not translate the ANSI standards into Chinese for the Chinese inspectors. A jury found in favor of Mr. Brand, and awarded over $1 million in past and future compensatory damages and $5 million in punitive damages. Intertek filed post-trial motions arguing that punitive damages were not per se available in a negligent misrepresentation claim. The District Court disagreed, and an appeal followed.

In affirming the District Court’s ruling, the Third Circuit Court of Appeals tackled a case of first impression in Pennsylvania, and held that punitive damages are available in negligent representation claims. The Court subscribed to the PA Supreme Court’s rationale in Hutchison ex rel. Hutchison v. Luddy, 870 A.2d 766 (Pa. 2005) that the disciplinary and deterrent effects of punitive damages are as important in negligent cases as they are in fraud cases. Intertek was aware that its testing was critical to the economic welfare of manufacturers and the health of the public at large. Despite knowledge of an inadequate testing process, Intertek chose to certify ANSI compliance without implementing any additional precautionary measures.

The Court also rejected Intertek’s argument that the punitive damage award was “grossly excessive” and in violation of the Fourteenth Amendment’s Due Process Clause. Intertek cited the U.S. Supreme Court’s holding in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003), which prohibited the use of punitive damages to punish defendant’s conduct when it bore no relationship to the harm incurred by the plaintiff. However, the Brand Court opined that Intertek had over-read State Farm, which only prohibited consideration of potential public harm when that harm was unrelated to the plaintiff’s case. As the potential harm which could befall the public as a result of Intertek’s negligence arose from the same conduct that injured Mr. Brand in the instant matter, the Brand Court held that it could properly be considered.

What becomes clear from this ruling is that, when a company’s conduct creates a serious, widespread (but not yet realized) danger to the public, that company may nonetheless be facing more than compensatory damages. Punitive damages are not just reserved for fraud anymore. Negligent conduct, however unintentional in nature, could put your company at risk for damages not traditionally covered by insurance.