Limiting Punitive Damages

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18Jun2012

Limiting Punitive Damages

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Over the past dozen years, the Supreme Court has issued several decisions regarding what constitutes a proper award of punitive damages. (See p.4) On April 7, the Court issued the latest in this series of rulings, State Farm Mutual Automobile Insurance Co. v. Campbell, et al., holding that: “A punitive damages award of $145 million, where full compensatory damages are $1 million, is excessive and violates the Due Process Clause of the Fourteenth Amendment.”

Associate Justice Anthony M. Kennedy wrote the majority opinion,  addressing several key points regarding the three guideposts laid out in BMW of North America, Inc. v. Gore (517U.S.559) for determining whether a punitive damages award is excessive.

“Although these awards serve the same purposes as criminal penalties, defendants subjected to punitive damages in civil cases have not been accorded the protections applicable in a criminal proceeding. This increases our concerns over the imprecise manner in which punitive damages systems are administered. …Our concerns are heightened when the decision-maker is presented, as we shall discuss, with evidence that has little bearing as to the amount of punitive damages that should be awarded. Vague instructions, or those that merely inform the jury to avoid ‘passion or prejudice,’ …do little to aid the decision-maker in its task of assigning appropriate weight to evidence that is relevant and evidence that is tangential or only inflammatory.”

In this article we take a look at the case and the majority opinion, and all quotes are from that opinion. On page 4 we cover some of the points raised by those opposing the ruling, including the Justices Ginsburg, Scalia and Thomas, as well as in amicus briefs filed by the Association of Trial Lawyers of America and a group of twelve state attorneys general.

Overview The incident from which this case proceeds predates Gore or any of the other recent punitives rulings. Here is a very brief description of the case. In 1981, Campbell was involved in an accident in which one person died and another was permanently disabled. The plaintiffs (Ospital and Slusher) offered to settle with Campbell for the $50,000 limit on his State Farm policy. State Farm rejected the settlement, opting to take it to trial. The jury issued a $185,849 judgment, and State Farm refused to pay anything over the policy limit or to post a bond for the appeal. Campbell then reached an agreement with the plaintiffs in which Campbell was to pursue a bad faith action against State Farm, with Slusher and Ospital  receiving 90% of any verdict. In return, Slusher and Osptital would not seek to collect their judgment against Campbell. The judgment in the original matter was upheld upon appeal, at which point State Farm paid the full amount. The bad faith case continued, however, winding up in a $2.6 million compensatory award, later reduced to $1 million, and $145 million in punitives. The Supreme Court then took up the case to determine whether this punitive damages award was excessive.

Applying Gore

The Court adjudicated the matter by applying the three guideposts it enumerated in Gore: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.”

In addressing the first point, the Court found that the lower courts were not incorrect in awarding punitive damages, but that they had gone too far in basing the damages on actions that were not directly related to the Campbells.

“While we do not suggest there was error in awarding punitive damages based on State Farm’s conduct toward the Campbells, a more modest punishment for this reprehensible conduct could have satisfied the State’s legitimate objectives, and the Utah courts should have gone no further.

“This case, instead, was used as a platform to expose, and punish, the perceived deficiencies of State Farm’s operations throughout the country.”

The court further held that a state has limited authority to punish for actions committed outside the state, particularly where those actions were not illegal in the states in which they took place.

“A jury must be instructed, furthermore, that it may not use evidence of out-of-state conduct to punish a defendant for action that was lawful in the jurisdiction where it occurred. … A basic principal of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction.”

Finally, the Court determined that much of the evidence used to justify punitive damages was based on activities by the defendant that did not directly harm the plaintiffs and were not even similar to this particular case. Consequently, these could not serve as a basis for awarding damages.

“A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis, but we have no doubt the Utah Supreme Court did that here.”

Single Digit Solutions

The Court then addressed the issue of the ratio between the actual and punitive damage awards. Although, as in the past, it did not set any hard rule as to what is acceptable, it did offer further guidance on the matter.

“We decline again to impose a bright-line ratio which a punitive damages award cannot exceed. Our jurisprudence and the principles it has now established demonstrate, however, that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.”

“Single digit multipliers are more likely to comport with due process, while still achieving the State’s goals of deterrence and retribution..”

It did, however, acknowledge that there were cases where higher awards would be justified.

“…[R]atios greater than those we have previously upheld may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages. …The precise award in any case, of course, must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff.”

Civil v. Criminal

The court spent little time addressing the third prong of the Gore analysis, but it did find that the most relevant civil penalty State Farm would have been assessed under Utah State law would have been a $10,000 fine for fraud.

“Great care must be taken to avoid use of the civil process to assess criminal penalties that can be imposed only after the heightened protections of a criminal trial have been observed, including, of course, its higher standards of proof. Punitive damages are not a substitute for the criminal process and the remote possibility of a criminal sanction does not automatically sustain a punitive damages award.”

The Court sent the case back to the Utah courts for a reconsideration of the punitives in accord with its opinion.

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