Eleventh Circuit Upholds Graves Amendment

Congress enacted the Graves Amendment in August 2005 to bar vicarious liability claims against long-term lease and rental car companies. Often challenged in the courts, the dependability of the Graves Amendment has been undermined by inconsistent court rulings that subject lessors to the liability the Graves Amendment intends to prevent.

The U.S. Court of Appeals for the Eleven Circuit in Garcia v. Vanguard Car Rental USA, Inc., found Congress had the authority to enact the Graves Amendment under the Commerce Clause of the U.S. Constitution. See 540 F.3d 1242, 1252-53 (11th Cir. 2008). It also found that the Graves Amendment blocks vicarious liability of lessors arising out of motor vehicle accidents involving their lessees. Although Garcia does not answer all the questions pertaining to lessor liability in these instances, it represents the first time a federal appellate court has handed down a decision concerning the Graves Amendment that offers some relief for passive lessors against liability created by their lessees.

Background

The Garcia case arose from a three-car accident involving a rental car. Jose Garcia and Nelson Ruiz died from the accident, and Israel Lopez suffered severe injuries. The car rental company anticipated a claim for vicarious liability and therefore filed a declaratory judgment action seeking a declaration that the Graves Amendment pre-empts such claims. The estates and surviving spouses of Jose Garcia and Nelson Ruiz then filed wrongful death actions against the car rental company. The U.S. District Court for the Middle District of Florida granted summary judgment in favor of the car rental company. On appeal, estates and spouses of Jose Garcia and Nelson Ruiz presented the court with the issues of: 1) whether the Graves Amendment pre-empts the claims asserted by the estates and spouses of Jose Garcia and Nelson Ruiz; and 2) whether Congress had the authority to enact the Graves Amendment.

Decision/Analysis

The answer to both issues is “yes.” The Eleventh Circuit Court of Appeals affirmed the grant of summary judgment in favor of the car rental company, finding the claims asserted by the estates and spouses of Jose Garcia and Nelson Ruiz are pre-empted by the Graves Amendment and are not within its savings clause. The court also found that Congress had the power to enact the Amendment under the Commerce Clause.

In this case, the suit against the car rental company was based upon the dangerous instrumentality doctrine and not upon any negligent or culpable action of the car rental company. Under the dangerous instrumentality doctrine, strict vicarious liability is imposed upon the owner of a motor vehicle who voluntarily entrusts that motor vehicle to an individual whose negligent operation causes damage to another. This doctrine applies to lessors of vehicles like the car rental company involved in the Garcia case.

In 1999, the Florida legislature imposed statutory caps on the amount of vicarious liability car rental companies could face under this doctrine. The statute provides, in part, that:

The lessor, under an agreement to rent or lease a motor vehicle for a period of less than 1 year, shall be deemed the owner of the vehicle for the purpose of determining liability for the operation of the vehicle or the acts of the operator in connection therewith only up to $100,000 per person and up to $300,000 per incident for bodily injury and up to $50,000 for property damage. If the lessee or operator of the vehicle is uninsured or has any insurance with limits less than $500,000 combined property damage and bodily injury liability, the lessor shall be liable for up to an additional $500,000 in economic damages only arising out of the use of the motor vehicle. See Fla. Stat. '324.021(9)(b)(2).

This statute clearly imposes strict liability against a car rental company for the negligent acts of its lessee while placing a cap on the damages that can be awarded. The estates and spouses of Jose Garcia and Nelson Ruiz rely on this statute to sue the car rental company.

Graves Amendment Pre-emption of State Law

The first issue questioned is whether or not the Graves Amendment pre-empts this statute and precludes the estates and spouses of Jose Garcia and Nelson Ruiz from bringing wrongful death suits against the car rental company.

The Graves Amendment has two operative provisions, a pre-emption clause and a savings clause. The pre-emption clause provides:

An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof by reason of being the owner of the vehicle (or an affiliate of the owner) for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if (1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles, and (2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner). 49 U.S.C. '30106(a).

The claims the estates and spouses of Jose Garcia and Nelson Ruiz assert against the car rental company are clearly within the scope of this provision. Therefore, the Graves Amendment pre-empts these claims unless they fall within the statute's savings clause.

The savings clause provides:

Nothing in this section supersedes the law of any state or political subdivision thereof '

(1) imposing financial responsibility or insurance standards on the owner of a motor vehicle for the privilege of registering and operating a motor vehicle; or ' (2) imposing liability on business entities engaged in the trade or business of renting or leasing motor vehicles for failure to meet the financial responsibility or liability insurance requirements under state law. See 49 U.S.C. '30106(b).

The savings clause exempts from pre-emption laws that impose financial responsibility or insurance standards, or laws that penalize the failure to meet the financial responsibility or liability insurance requirements under state law. Therefore, states may suspend the license and registration of, or otherwise penalize, a car owner who fails to meet the financial responsibility requirement or who fails to pay a judgment resulting from a collision, but they cannot impose judgments against rental car companies based solely on the negligence of their lessees.

The estates and spouses of Jose Garcia and Nelson Ruiz argued their claims were within the savings clause because the Florida statute was a financial responsibility law. The court rejected this argument, interpreting the term “financial responsibility” as referring to “insurance-like requirements” and not vicarious liability provisions. The court concluded that the pre-emption clause would be surplusage if the liability provision of the Florida statute was construed as a “financial responsibility” requirement. Therefore, the Graves Amendment pre-empts the liability claims against the lessor under the Florida statute.

Congressional Power to Pre-empt State Law

The next issue questioned is whether Congress can enact this pre-emptive legislation under the Commerce Clause. Under the Commerce Clause, Congress may regulate purely intrastate activities when they “substantially affect” or have a “substantial relation to” interstate commerce. The commercial leasing of cars is, in the aggregate, an economic activity with substantial effects on interstate commerce. This categorization stems from the size and national scope of the industry, and because rental cars are frequently employed as instrumentalities of interstate commerce.

For regulation of intrastate activities to survive review under an aggregation analysis, Congress need only have a rational basis for concluding that the intrastate activity would undermine the lawful Commerce Clause goals of a federal statute if left untouched. Congress could have perceived strict vicarious liability for the acts of lessees as a burden on the commercial leasing of cars industry because the costs of strict vicarious liability against rental car companies are borne by someone, most likely the customers, owners, and creditors of rental car companies. This liability would make rental cars more expensive and thereby inhibit interstate commerce. Additionally, if the costs are passed on to the owners of car rental companies, it could drive less-competitive companies out of the marketplace and inhibit entry into the market, potentially reducing options for consumers. Therefore, Congress had a rational basis for enacting the Graves Amendment, and Congress had the authority to enact same.

Conclusion

The Garcia case is an important case of first impression. No other federal appellate court has analyzed the pre-emptive scope of the Graves Amendment or its constitutionality. The decision in Garcia is binding over federal cases originating in the states of Alabama, Florida, and Georgia. It is not binding upon federal cases originating in other states, but is persuasive authority for district courts in other states and for other U.S. Courts of Appeal.

The Garcia case was recently followed in an en banc decision by the Fourth District Court of Appeal of Florida in Vargas v. Enterprise Leasing Co., 2008 WL 4756388 (Fla. 4th DCA, Oct. 31, 2008) (not released for publication). The facts of Vargas involve a rental car accident where the plaintiff alleged the lessee to be at fault for the accident. The plaintiff also sued the car rental company under the dangerous instrumentality doctrine. The plaintiff relied on the same Florida statute as the plaintiffs in the Garcia case. Though the Vargas court followed the analysis of Garcia without detour, the court certified the pre-emption question to the Florida Supreme Court, as there is a split decision between the Florida District Courts of Appeals.

Unless the U.S. Supreme Court reverses the Garcia decision or overrules the Vargas decision in another case, the focus in future cases is likely to be whether the statute at issue is a financial responsibility or a strict liability statute. In the ordinary course of business, vehicle lessors should maintain insurance that meets or exceeds the insurance coverage requirements under applicable state law to demonstrate financial responsibility and to avoid the uncertainty of exposure to strict liability for a lessee's accidents.

Although lessors will not be free of disputes under the Graves Amendment, the Garcia and Vargas decisions give lessors an off ramp from vicarious liability for the lessees' accidents on roads and highways in the United States.

Connie Ariagno ([email protected]) is a litigation partner in the Dallas office of Patton Boggs LLP. David G. Mayer ([email protected]), a member of this newsletter's Board of Editors, is a Business Transactions partner in the firm's Dallas office. His areas of focus include energy, infrastructure, technology, and aviation. Mayer is the author of Business Leasing For Dummies and founder of Business Leasing and Finance News, available at www.pattonboggsblfn.com (BLFN). The authors gratefully acknowledge the assistance of Tyson Wanjura, a Patton Boggs Business Transactions associate in the preparation of this article.

Congress enacted the Graves Amendment in August 2005 to bar vicarious liability claims against long-term lease and rental car companies. Often challenged in the courts, the dependability of the Graves Amendment has been undermined by inconsistent court rulings that subject lessors to the liability the Graves Amendment intends to prevent.

The U.S. Court of Appeals for the Eleven Circuit in Garcia v. Vanguard Car Rental USA, Inc., found Congress had the authority to enact the Graves Amendment under the Commerce Clause of the U.S. Constitution. See 540 F.3d 1242, 1252-53 (11th Cir. 2008). It also found that the Graves Amendment blocks vicarious liability of lessors arising out of motor vehicle accidents involving their lessees. Although Garcia does not answer all the questions pertaining to lessor liability in these instances, it represents the first time a federal appellate court has handed down a decision concerning the Graves Amendment that offers some relief for passive lessors against liability created by their lessees.

Background

The Garcia case arose from a three-car accident involving a rental car. Jose Garcia and Nelson Ruiz died from the accident, and Israel Lopez suffered severe injuries. The car rental company anticipated a claim for vicarious liability and therefore filed a declaratory judgment action seeking a declaration that the Graves Amendment pre-empts such claims. The estates and surviving spouses of Jose Garcia and Nelson Ruiz then filed wrongful death actions against the car rental company. The U.S. District Court for the Middle District of Florida granted summary judgment in favor of the car rental company. On appeal, estates and spouses of Jose Garcia and Nelson Ruiz presented the court with the issues of: 1) whether the Graves Amendment pre-empts the claims asserted by the estates and spouses of Jose Garcia and Nelson Ruiz; and 2) whether Congress had the authority to enact the Graves Amendment.

Decision/Analysis

The answer to both issues is “yes.” The Eleventh Circuit Court of Appeals affirmed the grant of summary judgment in favor of the car rental company, finding the claims asserted by the estates and spouses of Jose Garcia and Nelson Ruiz are pre-empted by the Graves Amendment and are not within its savings clause. The court also found that Congress had the power to enact the Amendment under the Commerce Clause.

In this case, the suit against the car rental company was based upon the dangerous instrumentality doctrine and not upon any negligent or culpable action of the car rental company. Under the dangerous instrumentality doctrine, strict vicarious liability is imposed upon the owner of a motor vehicle who voluntarily entrusts that motor vehicle to an individual whose negligent operation causes damage to another. This doctrine applies to lessors of vehicles like the car rental company involved in the Garcia case.

In 1999, the Florida legislature imposed statutory caps on the amount of vicarious liability car rental companies could face under this doctrine. The statute provides, in part, that:

The lessor, under an agreement to rent or lease a motor vehicle for a period of less than 1 year, shall be deemed the owner of the vehicle for the purpose of determining liability for the operation of the vehicle or the acts of the operator in connection therewith only up to $100,000 per person and up to $300,000 per incident for bodily injury and up to $50,000 for property damage. If the lessee or operator of the vehicle is uninsured or has any insurance with limits less than $500,000 combined property damage and bodily injury liability, the lessor shall be liable for up to an additional $500,000 in economic damages only arising out of the use of the motor vehicle. See Fla. Stat. '324.021(9)(b)(2).

This statute clearly imposes strict liability against a car rental company for the negligent acts of its lessee while placing a cap on the damages that can be awarded. The estates and spouses of Jose Garcia and Nelson Ruiz rely on this statute to sue the car rental company.

Graves Amendment Pre-emption of State Law

The first issue questioned is whether or not the Graves Amendment pre-empts this statute and precludes the estates and spouses of Jose Garcia and Nelson Ruiz from bringing wrongful death suits against the car rental company.

The Graves Amendment has two operative provisions, a pre-emption clause and a savings clause. The pre-emption clause provides:

An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof by reason of being the owner of the vehicle (or an affiliate of the owner) for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if (1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles, and (2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner). 49 U.S.C. '30106(a).

The claims the estates and spouses of Jose Garcia and Nelson Ruiz assert against the car rental company are clearly within the scope of this provision. Therefore, the Graves Amendment pre-empts these claims unless they fall within the statute's savings clause.

The savings clause provides:

Nothing in this section supersedes the law of any state or political subdivision thereof '

(1) imposing financial responsibility or insurance standards on the owner of a motor vehicle for the privilege of registering and operating a motor vehicle; or ' (2) imposing liability on business entities engaged in the trade or business of renting or leasing motor vehicles for failure to meet the financial responsibility or liability insurance requirements under state law. See 49 U.S.C. '30106(b).

The savings clause exempts from pre-emption laws that impose financial responsibility or insurance standards, or laws that penalize the failure to meet the financial responsibility or liability insurance requirements under state law. Therefore, states may suspend the license and registration of, or otherwise penalize, a car owner who fails to meet the financial responsibility requirement or who fails to pay a judgment resulting from a collision, but they cannot impose judgments against rental car companies based solely on the negligence of their lessees.

The estates and spouses of Jose Garcia and Nelson Ruiz argued their claims were within the savings clause because the Florida statute was a financial responsibility law. The court rejected this argument, interpreting the term “financial responsibility” as referring to “insurance-like requirements” and not vicarious liability provisions. The court concluded that the pre-emption clause would be surplusage if the liability provision of the Florida statute was construed as a “financial responsibility” requirement. Therefore, the Graves Amendment pre-empts the liability claims against the lessor under the Florida statute.

Congressional Power to Pre-empt State Law

The next issue questioned is whether Congress can enact this pre-emptive legislation under the Commerce Clause. Under the Commerce Clause, Congress may regulate purely intrastate activities when they “substantially affect” or have a “substantial relation to” interstate commerce. The commercial leasing of cars is, in the aggregate, an economic activity with substantial effects on interstate commerce. This categorization stems from the size and national scope of the industry, and because rental cars are frequently employed as instrumentalities of interstate commerce.

For regulation of intrastate activities to survive review under an aggregation analysis, Congress need only have a rational basis for concluding that the intrastate activity would undermine the lawful Commerce Clause goals of a federal statute if left untouched. Congress could have perceived strict vicarious liability for the acts of lessees as a burden on the commercial leasing of cars industry because the costs of strict vicarious liability against rental car companies are borne by someone, most likely the customers, owners, and creditors of rental car companies. This liability would make rental cars more expensive and thereby inhibit interstate commerce. Additionally, if the costs are passed on to the owners of car rental companies, it could drive less-competitive companies out of the marketplace and inhibit entry into the market, potentially reducing options for consumers. Therefore, Congress had a rational basis for enacting the Graves Amendment, and Congress had the authority to enact same.

Conclusion

The Garcia case is an important case of first impression. No other federal appellate court has analyzed the pre-emptive scope of the Graves Amendment or its constitutionality. The decision in Garcia is binding over federal cases originating in the states of Alabama, Florida, and Georgia. It is not binding upon federal cases originating in other states, but is persuasive authority for district courts in other states and for other U.S. Courts of Appeal.

The Garcia case was recently followed in an en banc decision by the Fourth District Court of Appeal of Florida in Vargas v. Enterprise Leasing Co., 2008 WL 4756388 (Fla. 4th DCA, Oct. 31, 2008) (not released for publication). The facts of Vargas involve a rental car accident where the plaintiff alleged the lessee to be at fault for the accident. The plaintiff also sued the car rental company under the dangerous instrumentality doctrine. The plaintiff relied on the same Florida statute as the plaintiffs in the Garcia case. Though the Vargas court followed the analysis of Garcia without detour, the court certified the pre-emption question to the Florida Supreme Court, as there is a split decision between the Florida District Courts of Appeals.

Unless the U.S. Supreme Court reverses the Garcia decision or overrules the Vargas decision in another case, the focus in future cases is likely to be whether the statute at issue is a financial responsibility or a strict liability statute. In the ordinary course of business, vehicle lessors should maintain insurance that meets or exceeds the insurance coverage requirements under applicable state law to demonstrate financial responsibility and to avoid the uncertainty of exposure to strict liability for a lessee's accidents.

Although lessors will not be free of disputes under the Graves Amendment, the Garcia and Vargas decisions give lessors an off ramp from vicarious liability for the lessees' accidents on roads and highways in the United States.

Connie Ariagno ([email protected]) is a litigation partner in the Dallas office of Patton Boggs LLP. David G. Mayer ([email protected]), a member of this newsletter's Board of Editors, is a Business Transactions partner in the firm's Dallas office. His areas of focus include energy, infrastructure, technology, and aviation. Mayer is the author of Business Leasing For Dummies and founder of Business Leasing and Finance News, available at www.pattonboggsblfn.com (BLFN). The authors gratefully acknowledge the assistance of Tyson Wanjura, a Patton Boggs Business Transactions associate in the preparation of this article.