GM Ignition and the “Benefit of the Bargain” Theory

Last week, Judge Jesse M. Furman issued a 103-page ruling disposing of New GM’s partial motion to dismiss.  At the crux of the opinion were plaintiffs’ two damages theories.

First, as the court put it, plaintiffs “pursue an unprecedented theory of damages, one that turns not on whether the vehicles at issue were sold with known, latent defects … but rather on the alleged reduction in resale value of the vehicles due to damage to New GM’s reputation and brand.”  Not surprisingly, given the court’s tone in characterizing the theory, the court ruled the first theory was “unsound.”

Second, plaintiffs also seek damages based on a much more well-established methodology: the benefit of the bargain theory.  As the court described that theory:

The gravamen of the benefit-of-the-bargain defect theory is that Plaintiffs who purchased defective cars were injured when they purchased for x dollars a New GM car that contained a latent defect; had they known about the defect, they would have paid fewer than x dollars for the car (or not bought the car at all), because a car with a safety defect is worth less than a car without a safety defect.

Although New GM argued that this theory too failed “across the board” and that it “always requires a plaintiff to prove manifestation of the alleged defect,” the court held that while different jurisdictions have reached different conclusions, in many jurisdictions the damages theory is viable:

New GM is wrong in arguing that the benefit-of-the-bargain defect theory must fail because New GM did not warrant that its cars would have a particular resale value in the future.  The benefit-of-the-bargain defect theory does not compensate a plaintiff for a decrease in resale value — the brand devaluation theory does. 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. That form of injury has been recognized by many jurisdictions.

On a related note, the court held that plaintiffs’ claims were not moot since the “recalls, even those sufficient to remedy the defects, do not compensate Plaintiffs fully for the damages sought here.”