Toyota Accelerator Recall Lawsuits Could Cost $10 Billion

In the last two weeks a few class-action lawsuits against Toyota have been announced (one by the Orange County DA, one in Phoenix, and a few others). Central to all of these lawsuits is the allegation that Toyota knowingly mislead consumers in regards to unintended acceleration problems, which is technically known as “consumer fraud.”

For the record, there are degrees of fraud. Fraud as a result of stupidity or negligence is different than intentional acts that will knowingly injure another party. For example – accidentally writing a bad check from an account you closed is definitely considered fraud, but it’s not the same as stealing someone else’s checkbook and writing what you know to be a bad check. Intent is important.

Toyota’s problem is, it’s very difficult to argue that their actions weren’t intentionally designed to hurt consumers. Here’s how allegations of fraud at Toyota break down (and why they’re probably going to lose billions when it’s all over):

What Toyota Has Done Wrong

1. Hiding the truth about floor mats. It’s a near certainty that executives at Toyota knew about floor mat problems in 2008. Last month’s congressional hearings uncovered a presentation given to a group of senior Toyota execs that bragged about “negotiating” away a NHTSA floor mat recall and saving $100 million. This is damning evidence, and Toyota is clearly in the wrong here.

2. Failing to recall parts despite clear problems. There have been multiple instances in the last decade of Toyota finding a problem with one of their vehicles and internally deciding the problem doesn’t present a “safety risk,” only to be over-ruled by NHTSA at a later date. They also have recalled problems in one region without issuing the same recall in another (i.e. recalling cars in Japan for a design problem, but not recalling cars in the USA for the same issue). These incidents can be used to show Toyota management has a pattern of trying to “sweep problems under the rug.”

3. A general lack of transparency with potential quality and safety issues. Toyota has a bad track record when it comes to acknowledging consumer concerns about quality and safety, and even when they do acknowledge them, they often fail to give a clear indication of what exactly will be done. Acceleration issues aside, the best example of Toyota’s poor transparency is the Tundra frame rust issue. Toyota was aware of rusting Tundra frames for more than a year before doing a recall…and then only because NHTSA opened a full investigation.

What Constitutes Fraud

It’s important to note that we’re not talking about criminal fraud, where the burden of proof is “beyond a reasonable doubt.” Instead, we’re talking about demonstrating fraud in a civil court, which only requires a “preponderance” of evidence that favors the plaintiff. In plain English, that means that Toyota can lose a civil trial if the judge and/or jury believes there’s more than a 50% chance that Toyota acted wrongly.

This is a very low threshold, and based on the documents uncovered in the congressional hearing alone it’s likely Toyota would lose a civil lawsuit alleging consumer fraud. However, the question is How much could they lose?

Potential Damages and Liability

Here are some areas that class action attorneys are arguing for damages and liability:

1. Loss of use. Attorneys will argue that loss of a vehicle’s use for a couple of weeks between the gas pedal recall announcement and the availability of a fix has a financial component.

2. Loss of vehicle value. Some attorneys are already arguing that because of Toyota’s problems, individual consumers have lost money in the form of lower resale value. This is going to be tough to prove – resale value rises and falls, and no one has a right to “expect” a certain amount of retained value with such an uncertain investment…so it’s difficult to prove damages here.

3. Loss of stock value. This one is going to be very easy to prove – if it can be shown that Toyota showed a “conscious indifference” towards quality and safety issues surrounding unintended acceleration, stock holders can argue that they bought stock under false pretenses and therefore were owed compensation.

4. Mental anguish. Attorneys will certainly argue that Toyota consumers suffered mentally as a result of the uncertainty surrounding their safety record. However, can they put a price tag on this anguish? Hard to say.

5. Punitive. This is where the big money is at. Punitive damages are often far in excess of compensatory damages, and sometimes ridiculous in value. Example:

In 1994, a jury awarded $2.86 million in punitive damages to a woman who claimed her McDonald’s coffee was “defective” because it was “too hot.” The $2.86 million figure was the equivalent of 2 days worth of McDonald’s national coffee revenues.

Punitive damages are awarded when the defendant’s conduct is both egregious and either:

1. Malicious in intent
2. Evidence of gross negligence or “conscious indifference”
3. A willful disregard for the rights of others

It’s very hard to prove Toyota had “malicious” intent. However, gross negligence and or “conscious indifference” seems highly likely based on the evidence of a negotiated recall. It could also be argued that Toyota’s decisions to continue selling vehicles despite being aware of safety issues could be considered “willful disregard” for the rights of consumers, hence the allegations of consumer fraud.

Bottom Line: Attorneys in the know are saying Toyota’s total legal risk is anywhere from $2 billion to $10 billion, depending upon how well the litigants can prove punitive damages are warranted. However, it’s fair from certain that Toyota will lose any pending civil litigation. The likelihood is that a long, long court battle will ultimately result in a small settlement (a few hundred dollars at most) for a few million Toyota owners.

It will cost Toyota billions, but that’s the way these things go. Toyota’s execs should have considered this possibility when they were busy trying to “negotiate” away a recall late last year.

What do you think – is a multi-billion dollar settlement karma or attorneys gone wild?