Early versions of search algorithms relied on webmaster-provided information such as the keyword meta tag or index files in engines like ALIWEB. Meta tags provide a guide to each page's content. Using metadata to index pages was found to be less than reliable, however, because the webmaster's choice of keywords in the meta tag could potentially be an inaccurate representation of the site's actual content. Inaccurate, incomplete, and inconsistent data in meta tags could and did cause pages to rank for irrelevant searches.[dubious – discuss] Web content providers also manipulated some attributes within the HTML source of a page in an attempt to rank well in search engines. By 1997, search engine designers recognized that webmasters were making efforts to rank well in their search engine, and that some webmasters were even manipulating their rankings in search results by stuffing pages with excessive or irrelevant keywords. Early search engines, such as Altavista and Infoseek, adjusted their algorithms to prevent webmasters from manipulating rankings.
A poor 404 page and user interaction with it, can only lead to a ‘poor user experience’ signal at Google’s end, for a number of reasons. I will highlight a poor 404 page in my audits and actually programmatically look for signs of this issue when I scan a site. I don’t know if Google looks at your site that way to rate it e.g. algorithmically determines if you have a good 404 page – or if it is a UX factor, something to be taken into consideration further down the line – or purely to get you thinking about 404 pages (in general) to help prevent Google wasting resources indexing crud pages and presenting poor results to searchers. I think rather that any rating would be a second order scoring including data from user activity on the SERPs – stuff we as SEO can’t see.
QUOTE: “(Google Panda) measures the quality of a site pretty much by looking at the vast majority of the pages at least. But essentially allows us to take quality of the whole site into account when ranking pages from that particular site and adjust the ranking accordingly for the pages. So essentially, if you want a blunt answer, it will not devalue, it will actually demote. Basically, we figured that site is trying to game our systems, and unfortunately, successfully. So we will adjust the rank. We will push the site back just to make sure that it’s not working anymore.” Gary Illyes – Search Engine Land