By Brian C. Dalrymple Nixon Peabody LLP Two Embarcadero Center, 26th Floor San Francisco, CA 94111 Telephone: (415) 984-8275 Facsimile: (415) 984-8300 bdalrymple@nixonpeabody.com 38th Annual SMU Air Law Symposium February 26 27, 2004 Dallas, Texas
An Update On Punitive Damages Law Introduction Punitive damages and compensatory damages serve distinct purposes. Compensatory damages are intended to redress a specific loss that the plaintiff has suffered as a result of defendant s wrongful conduct. Punitive damages, however, operate as private fines and are intended to punish the defendant and deter future wrongdoing. 1 A jury s determination regarding the extent of plaintiff s injury is essentially a factual determination, whereas its imposition of punitive damages is an expression of its moral condemnation. 2 On April 17, 2003, the Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Campbell, 3 an insurance bad faith case which set concrete constitutional limits on punitive damage awards by way of the Due Process Clause of the Fourteenth Amendment. The Court s decision in Campbell was a culminating moment in a decade of high court jurisprudence reigning in multi-million dollar runaway awards. The lower courts have been quick to respond to the Supreme Court s mandate: remanding cases with a great disparity between punitive and compensatory awards, excluding evidence of a defendant s out-of-state, unrelated conduct and generally exercising more vigilance when reviewing punitive damage awards. This Article will discuss where punitive damages jurisprudence came from and where it is going after the Campbell decision. Part I examines the Campbell case and its major holdings. Part II provides a brief history of the seminal United States Supreme Court cases which have addressed the constitutional limits on punitive damages. Part III looks at some punitive damages cases which have come down since Campbell in different jurisdictions.. Part IV synthesizes the Campbell decision and the subsequent cases which have relied on State Farm as a means of postulating where punitive damages jurisprudence is going and how Campbell has changed the civil litigation landscape. The Case: State Farm Mutual Automobile Insurance Co. v. Campbell In what some are calling the most significant punitive damage decision the Supreme Court has ever issued 4 the Supreme Court recently refined its punitive damages-constitutional analysis in State-Farm Automobile Insurance v. Campbell. Campbell was a bad-faith insurance case. In the underlying action, plaintiff Campbell was involved in an automobile accident after he tried to pass six vehicles on a two-lane highway. The driver of an oncoming vehicle, Ospital, was killed and the driver of another vehicle, Slusher, was badly injured. 5 In the ensuing wrongful death action, Campbell insisted that he was not at fault. Although early investigations supported differing conclusions as to who caused the accident, a consensus was reached early on that Campbell s unsafe pass had caused the crash. Despite the advice from its own investigators, Campbell s insurance company, State-Farm Mutual Automobile Insurance Company, contested liability and refused to settle with the injured
parties for the policy limit of $50,000 ($25,000 per claimant). 6 State Farm took the case to trial and assured the Campbells that their assets were safe. 7 To the contrary, the jury determined Campbell was one hundred percent at fault and returned a judgment against him for $185,849. 8 At first, State Farm refused to cover the $135,849 in excess liability, refused to post the supersedeas bond to allow Campbell to appeal the judgment against him, and told Campbell that he may want to put for sale signs on his property to pay off the debt. 9 Campbell obtained his own counsel to appeal the verdict. During the pendency of the appeal, Campbell reached an agreement whereby Slusher and Ospital agreed not to seek satisfaction of their claims against the Campbells and in exchange the Campbells would seek a bad faith action against State Farm. 10 In 1989 the Utah Supreme Court denied Campbell s appeal in the wrongful death and tort action and State Farm then paid the entire judgment. Nevertheless, Campbell filed a complaint against State Farm alleging bad faith, fraud, and intentional infliction of emotional distress. 11 During the first phase of the trial the jury determined that State Farm s decision not to settle was unreasonable because there was a substantial likelihood of an excess award. During the second phase, in determining State Farm s liability for fraud and intentional infliction of emotional distress, Campbell successfully introduced evidence that State Farm s decision to take the case to trial was a result of a national scheme to meet corporate fiscal goals by capping payments on claims company wide. 12 Most of the actions referenced bore no relation to third party automobile claims, the type of claim underlying the Campbell s complaint. 13 The jury awarded the Campbells $2.6 million in compensatory damages and $145 million in punitive damages, which the trial court reduced to $1 million and $25 million respectively. 14 The Utah Supreme Court applied the three guideposts outlined in BMW of North America v. Gore the reprehensibility of the defendant s conduct, the ratio of compensatory damages to punitive damages, and a comparison of comparable civil or criminal sanctions and reinstated the $145 million punitive damages award, in large part relying on the defendant s massive wealth and the extrinsic evidence concerning State Farm s nation-wide policies. 15 The Supreme Court granted certiorari to determine whether the punitive damage award was unconstitutional. The Court held that under the principles outlined in BMW, the punitive damages award was so grossly excessive as to violate the Due Process Clause of the Fourteenth Amendment. 16 In deciding that the punitive damage award assessed against State Farm was constitutionally excessive, the court revisited each guidepost in some detail and provided further direction as to what courts should consider when analyzing a punitive damage award. 17 First, the Supreme Court re-examined the reprehensibility guidepost. The Court reiterated the principle that the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendants conduct. 18 The Court re-affirmed the Gore criteria of evaluating the harm (physical as opposed to economic, whether the harm was the result of malice, whether the harm was intended, etc.) 19 The Court held that although State Farm s conduct merits no praise a more modest punishment for this reprehensible conduct could have satisfied the State s legitimate objectives. 20 In evaluating State Farm s reprehensibility, the Supreme Court paid particular attention to the evidence used by the jury to judge State Farm. The Court admonished the Utah Supreme Court for their opinion which made it explicit that State Farm was being condemned for its nationwide policies rather than for the conduct directed toward the Campbells. 21 The Court was clear that evidence of State Farm s unrelated national policies should 3
have been excluded, reasoning that dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. 22 The Court cautioned against using a single case as a platform to expose, and punish, the perceived deficiencies of a defendant s operations throughout the country and reiterated that a state cannot punish a defendant for conduct that may have been lawful where it occurred. 23 Turning to the other criteria, the Court reasoned that the harm arose from a transaction in the economic realm, not from some physical assault or trauma (there were no physical injuries), and since State Farm paid the excess verdict before the complaint was filed, the economic injury was minor. 24 As to the second guidepost, the ratio between the actual or potential harm suffered by plaintiff and the punitive damages award, the Supreme Court held that in practice few awards exceeding a single-digit ratios between punitive and compensatory damages, to a significant degree, will satisfy due process. 25 The Court explained that awards within this single-digit ratio range were more likely to comport with due process, while still achieving the State s goals of deterrence and retribution, than awards with ratios in range of 500 to 1. 26 The Court reinforced that it was not providing a rigid benchmark and that ratios that we have previously upheld may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages. 27 In applying the standard to the facts of the case, the Court held that there is no doubt that there is a presumption against an award that has a 145-1 ratio. The Court concluded that in light of the reprehensibility criteria outlined above, and when excluding the evidence of State Farm s nation-wide practice, the award was constitutionally infirm. 28 Finally, when examining the disparity between the punitive damages award and the civil penalties authorized and imposed in comparable cases, the Court cautioned that 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. 29 Applying this guidepost, the court noted that the most relevant civil sanction under Utah law for the wrong done to the Campbells was a $10,000 fine for fraud, an amount dwarfed by the $145 million punitive damages award. 30 The Supreme Court reversed the Utah Supreme Court and remanded the case to be reconsidered in light of its decision. 4 A Brief History of supreme court jurisprudence regarding punitive damages Campbell has been over a decade in the making. Since 1991 the Supreme Court has expressed concern over punitive damage awards that run wild. 31 Prompted by a trend toward multimillion dollar awards, the Court began in the early 1990 s to set constitutional limits on these skyrocketing awards. 32 The constitutional check on punitive damages arises out of the basic unfairness of depriving citizen of life, liberty, or property, through the application, not of law and legal processes, but of arbitrary coercion and out of concern for providing the defendant with notice of the conduct that will subject him to punishment as well as the severity of the penalty that may be imposed. 33 Because of these constitutional concerns, the Court began to limit these awards through the Due Process Clause of the Fourteenth Amendment. After recognizing that a constitutional check existed, the Court confronted two main issues: what procedures are necessary to ensure that an award does not violate the Due Process Clause of the Fourteenth Amendment, and
when is an award is so grossly excessive as to violate the Due Process Clause of the Fourteenth amendment? As a corollary to the second issue, the court has struggled with formulating a workable, predictable standard for determining when a punitive damage award was so grossly excessive as to violate the Due Process Clause of the Fourteenth Amendment. As to the procedural due process challenge, the Court has suggested that common-law procedures, which provide meaningful review by both the trial court and the appellate court, are constitutional but the Court has provided little more guidance. As to the substantive due process challenge to the amount of the award itself, the Court in BMW developed a highly refined bright-line test with three channeling guideposts. This evolution to a bright-line test has been a gradual one. In the past ten years, the Court evolved from emphatically stating in 1991 that we need not, and indeed we cannot, draw a mathematical bright line between the constitutionally acceptable and the constitutionally unacceptable that would fit every case 34 to determining in 2003 that in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process. 35 5 The Early Decisions: The Supreme Court Struggles With Setting Constitutional Limits Early Concerns About Runaway Awards In Browning-Ferris Industries Inc. v Kelco Disposal, 36 all nine members of the court noted concern about the constitutionality of a $6 million punitive damage award when the compensatory damages were merely $51,146. 37 Browning-Ferris involved a suit for a violation of the Sherman Act and interference with contractual relations in violation of state tort law. Despite its concern with the amount of the punitive damages awarded, the Court rejected the argument that the Excessive Fines Clause of the Eighth Amendment applied to a punitive damages award in a civil case between private parties. 38 In dicta, the court did allude to the possibility of a challenge to an excessive award under the Due Process Clause of the Fourteenth Amendment. However, since the parties had not raised the Due Process challenge in the lower courts, the inquiry had to await another day. 39 Two years later in Pacific Mutual Life Insurance v. Haslip, the court confronted the question head-on. 40 In Haslip, various insured s filed suit against their insurer and its agent for fraud. The insureds alleged that the insurer s agent had collected premiums but had failed to remit them to the insurers so that the insured s respective health insurance policies lapsed without their knowledge. The jury returned general verdicts against the insurer and its agent and awarded insured Haslip $200,000 in compensatory damages and $840,000 in punitive damages (an approximately 1 to 4 ratio). The Supreme Court granted certiorari to review the punitive damages procedures and award in the light of the long-enduring debate about their propriety. 41 Although the court again noted its concern with punitive damage awards that run wild the Court concluded that the punitive damages award assessed against Pacific Mutual did not violate the Due Process Clause of the Fourteenth Amendment because the procedures were constitutionally sound. 42 The Court approved Alabama s review process, following the common-law, which limited jury discretion and provided meaningful appellate review. In this regard, the Court approved the Alabama Supreme Court s reviewing criteria, drawn from Green Oil v. Hornsby 43 Specifically, the Alabama court took the following into consideration when reviewing a punitive damage award:
1. Whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant s conduct as well as the harm that actually has occurred; 2. The degree of reprehensibility of the defendant s conduct, the duration of that conduct, the defendant s awareness, any concealment and the existence and frequency of similar past conduct; 3. The profitability to the defendant of the wrongful conduct and the desirability of removing that profit and of having the defendant also sustain a loss; 4. The financial position of the defendant; 5. All the costs of litigation; 6. The imposition of criminal sanctions on the defendant for its conduct, these to be taken into mitigation; and, 7. The existence of other civil awards against the defendant for the same conduct, these also to be taken in mitigation. 44 Eventually, this test would evolve into the condensed three BMW guideposts and be even further refined in Campbell. Justice Scalia concurred only in the judgment, rejecting the possibility that a substantive due process claim could ever be made into an excessive punitive damage claim. Justice Scalia argued that as long as the process by which juries awarded punitive damages was fair, then the award would never violate Due Process. 45 Justice Kennedy also concurred in the judgment, arguing that the court does not have the authority to alter the rules of the common law respecting the proper standard for awarding punitive damages and the respective roles of the jury and the court in making that determination. 46 Justice Kennedy argued that it was wiser to stand back and allow the state legislatures and state judges to be the ones to enact punitive damage reform. Justice O Connor dissented, arguing that the post-hoc review by the Alabama Supreme Court was not enough and that jury discretion was virtually unlimited. Justice O Connor argued that the common-law procedures were so lacking in fundamental fairness that the propriety of any specific award is irrelevant. Any award of punitive damages rendered under these procedures, no matter how small the amount is constitutionally infirm. 47 O Connor argued that with their virtually unfettered discretion under the common-law, juries are allowed to target unpopular defendants, penalize unorthodox or controversial views, and redistribute wealth. 48 Instead, O Connor believed that the post-hoc review factors employed by the Alabama Supreme Court should be submitted to the jury before they decide if punitive damages are warranted and if so, how much, in order to channel its discretion. O Connor further argued that after applying the Mathews v. Eldridge test to Alabama s common-law punitive damages scheme, it was clear that the state procedures deprived the defendants without due process of law. 49 Only two years later in TXO Production Co. v. Alliance Resources Co., 50 the Court again confronted the constitutional limits on punitive damages but ended up sharply divided. TXO was a common-law action for slander of title. The plaintiff was awarded $19,000 in actual damages and $10 million in punitive damages (the punitive damages award was 526 times as large as the actual damages award). 51 The Court granted certiorari to decide whether the punitive 6
damages award violated the Due Process Clause either because its amount was excessive or because it was the product of an unfair procedure. 52 The Court rejected defendant s substantive due process argument that the award was so grossly excessive as to violate the Due Process Clause but was split in its reasoning. Justice Stevens, writing for the plurality, held that although the punitive damage award was certainly large, he thought that given the amount of money potentially at stake, the defendant s bad faith, the fact that the scheme employed in this case was part of a larger pattern of fraud, trickery and deceit, and given the defendant s enormous wealth the award was not unconstitutional. 53 The plurality did not address whether the procedure was constitutional because it was not properly presented to the state supreme court. 54 Justice Kennedy concurred in part and concurred in the judgment. Justice Kennedy argued that a more manageable constitutional inquiry focuses not on the amount of money a jury awards in a particular case but on its reasons for doing so. 55 Justice Kennedy emphasized that it was crucial to look at whether the award reflects bias, passion, or prejudice rather than the absolute or relative size of the award. 56 Justices Scalia and Thomas concurred in the judgment, echoing Justice Scalia s concurrence in Haslip. 57 Justice O Connor, along with Justices White and Souter concurred in part and dissented in part. Justice O Connor vigorously argued for judicial intervention when punitive awards were monstrous. 58 Justice O Connor argued both that the procedure was flawed and the award was so excessive as to violate Due Process. Furthermore, she criticized the plurality for not erecting a single guidepost to help other courts find their way through this area and insisted that the court provide guidance, not necessarily by way of a mathematical formula, to courts that review jury verdicts. 59 O Connor suggested that when determining whether an award was excessive, the court must make a searching review of various objective indicators including the relationship between the punitive damages award and compensatory damages, awards of punitive damages upheld against other defendants in the same jurisdiction, awards upheld for similar torts in other jurisdictions, and legislatively designed penalties for similar misconduct. 60 Justice O Connor believed that in light of these factors, the award was excessive. The Supreme Court Confronts What Procedures Are Necessary To Comport With Due Process In Honda Motor Co. v. Oberg, 61 the Court revisited the question of what procedures were necessary when awarding punitive damages in order to comply with the Due Process Clause. At issue was an amendment to the Oregon constitution which prohibited judicial review of a punitive damages award unless the court can affirmatively say there is no evidence to support the verdict. 62 The Supreme Court held that the prohibition was inconsistent with the Due Process Clause of the Fourteenth Amendment. 63 Honda was a products liability case. The plaintiff was awarded $919,390.39 in compensatory damages and $735,512.31 in punitive damages (reduced from $5 million because of plaintiff s contributory negligence). 64 The defendant argued that the punitive damages award violated the Due Process Clause because the award was excessive and because the procedure was inadequate; the Oregon courts lacked the power on appeal to correct excessive verdicts. 65 The Court unambiguously recognized that the constitution imposes a substantive limit on the size of punitive damages awards but noted that today we are not directly concerned with the character of the standard that will identify unconstitutionally excessive awards. 66 The Court left this task for later. Instead, the Court confronted the question of what procedures are necessary to ensure that punitive damages are not 7
imposed in an arbitrary manner. More specifically, the question is whether the Due Process Clause requires judicial review of the amount of punitive damages awards. 67 In holding that the Oregon procedure violated Due Process the court emphasized the importance of the procedural component of the Due Process Clause and that judicial review of the size of punitive damages awards have been a safeguard against excessive verdicts for as long as punitive damages have been awarded. 68 The court held that Oregon had removed that safeguard without providing any substitute procedure and without any indication that the danger of arbitrary awards has in any way subsided over time. 69 Although it did not provide a bright-line test, the court held that Oregon s departure from the common-law raised a presumption that its procedures violated Due Process. 70 The court left open for another day the more difficult question of what standard of review is constitutionally required. 71 Justice Scalia concurred stating the Court s opinion establishes that the right of review eliminated by the amendment was a procedure traditionally accorded at common law. The deprivation of property without observing (or providing a reasonable substitute for) an important traditional procedure for enforcing stateprescribed limits upon such deprivation violates the Due Process Clause. 72 Justice Ginsberg, along with Chief Justice Renquist, dissented. Justice Ginsberg argued that Oregon s procedure, which guided the fact-finder s discretion in awarding punitive damages and required the plaintiff to establish entitlement to punitive damages under specific criteria, satisfied the Due Process Clause. She argued that Oregon s comprehensive pre-verdict procedures but markedly limited post-verdict review sufficiently satisfied Due Process. 73 Finally, Ginsberg criticized the majority for striking Oregon s procedure without providing any specific procedures or substantive criteria essential to satisfy due process. 74 8 Recent Developments: Three Guideposts For Determining When An Award is Unconstitutional and De Novo Review In BMW v. Gore 75 the Supreme Court unambiguously recognized that the Due Process Clause of the 14 th Amendment prohibits a state from imposing a grossly excessive punishment on a tortfeasor, 76 and for the first time the Court recognized that the punitive damage award at issue was grossly excessive. 77 In BMW, the plaintiff purchased a BMW sports car that he later found out had been repainted prior to sale due to damage caused by exposure to acid rain during transit between the manufacturing plant and the preparation center. 78 Upon discovering that the car had been repainted and that the defendant had not disclosed the defect before selling the car, the plaintiff alleged that the non-disclosure constituted a suppression of a material fact. 79 The plaintiff was awarded $4,000 in compensatory damages and $4 million in punitive damages, based on a determination that BMW s nation-wide nondisclosure policy constituted gross, oppressive or malicious fraud. 80 The Alabama Supreme Court reduced the punitive damage award to $2 million. 81 The Supreme Court granted certiorari because it believed that a review of this case would help to illuminate the character of the standard that will identify unconstitutionally excessive awards of punitive damages. 82 The Court then proceeded to erect three guideposts to help guide appellate discretion when evaluating whether a punitive damages award was so grossly excessive as to be unconstitutional.
The first guidepost is the degree of reprehensibility of the defendant s conduct. This principle, the Court noted, reflects the accepted view that some wrongs are more blameworthy than others. 83 The Court further elaborated on what a court should consider when evaluating a defendant s reprehensibility by directing the lower courts to consider whether the harm caused was physical as opposed to economic, whether the conduct evinced a reckless disregard for safety, whether the target of the conduct was financially vulnerable, whether the conduct involved repeated actions or was an isolated incident and whether the harm was the result of intentional malice, trickery, or deceit or mere accident. 84 The court also addressed briefly what kind of evidence could be relied upon in determining the reprehensibility of the defendant s conduct. 85 The court cautioned that in determining punitive damages the court must not rely on a defendant s out-of-state conduct but rather, the award must be analyzed in the light of the same conduct, with consideration given only to the interests of Alabama consumers, rather than those of the entire Nation. 86 The second guidepost is the ratio between the actual harm suffered by plaintiff and the punitive damages award. The Court derived this guidepost from the principle that punitive damages must bear a reasonable relationship to compensatory damages. 87 The Court set no absolute benchmark and reiterated that it had consistently rejected the notion that the constitutional line is marked by a simple mathematical formula. 88 The third guidepost is the difference between the punitive damages award imposed and the civil or criminal penalties authorized or imposed in comparable cases. 89 The Court explained that this guidepost was important so that substantial deference was given to legislative judgments concerning appropriate sanctions. 90 The Supreme Court concluded that BMW s action were not very reprehensible as the harm was economic and had no impact on the safety of the vehicle. The Court also held that the ratio between compensatory and punitive damages was exorbitant. Finally, when comparing the civil sanctions for similar conduct, the Court believed that the punitive award was excessive. Thus, the Court deemed the award unconstitutional and remanded the case to state court. Justice Breyer concurred, along with Justice O Connor and Justice Souter, and painstakingly delineated the difference between the procedural and substantive Due Process challenges. The concurring justices believed that awards following fair procedures were entitled to a strong presumption of validity but in this instance, that presumption had been overcome. Justice Breyer argued that the standards employed by the Alabama courts (drawing from the Green Oil factors) did not channel jury discretion. According to Justice Breyer, that meant that the award in this case was both (a) the product of a system of standards that did not significantly constrain a court s, and hence a jury s discretion in making that award; and (b) grossly excessive in light of the State s legitimate punitive damages objectives. 91 Justices Scalia and Thomas dissented. Justice Scalia argued that the court was overstepping its judicial bounds, and that the state legislature was the proper branch of government to address punitive damage awards that run wild. 92 He reiterated his view that the only inquiry should be into the procedure and not into the amount of the award, and that prior punitive damages jurisprudence should not be given stare decisis effect. 93 Finally, he criticized the majority s guidepost analysis as providing no real guidance at all. In a separate opinion, Justice Ginsberg and Chief Justice Rhenquist also dissented. 94 Justice Ginsberg argued that the Court unnecessarily and unwisely ventured into territory traditionally within the States domain. 95 9
Ginsberg believed the state court had properly followed the procedures set forth in Haslip and TXO and therefore, the award should stand. 96 In 2001, in Cooper Industries v. Leatherman, 97 the Supreme Court held that the proper standard of appellate review when considering the constitutionality of a punitive damages award was a de novo standard. 98 Leatherman Tool Group brought an unfair businesses practices action against competitor Cooper Industries. The jury awarded Leatherman $50,000 in compensatory damages and $4.5 million in punitive damages. 99 The Court of Appeals concluded that the district court did not abuse it discretion in declining to reduce the amount of punitive damages. 100 Cooper argued that the Court of Appeals applied the wrong standard of review in considering the constitutionality of the punitive damages award. 101 The Supreme Court s holding that the standard of review was de novo was in keeping with its trend of doing its judicial best to curb outrageous awards because de novo review gave the reviewing court more opportunity to reduce or reject large punitive damage awards on appeal. Justice Thomas concurred although he expressed his belief that the Constitution does not constrain the size of punitive damage awards and he would overrule BMW if given the opportunity. 102 Justice Scalia also concurred, echoing Justice Thomas argument that excessive punitive damages do not violate the Due Process Clause, but agreeing that according to precedent, de novo was the correct form of review. 103 Thus, the Supreme Court s movement over the past decade has been towards a more bright-line approach which culminated in its series of holdings in Campbell. 10 The Aftermath: Decisions Since Campbell Immediately following the Campbell decision, there was a flurry of activity by the Supreme Court itself, and in many lower courts to remand, conform, and examine current cases in light of the Supreme Court s new directive. This section summarizes, by jurisdiction, some of the key cases that have come down since Campbell. United States Supreme Court Since its decision in Campbell, the United States Supreme Court denied certiorari in Time Warner Entertainment v. Six Flags Over Georgia. 104 Six Flags brought suit alleging that its general partner, Time Warner, had damaged Six Flags by preferring its own financial interest over that of the partnership in violation of various securities and partnership provisions. The jury awarded Six Flags $197 million in compensatory damages and $257 million in punitive damages. 105 The Georgia Court of Appeals evaluated the award before Campbell was decided using the BMW guideposts. The Georgia court concluded that the award was warranted despite the fact that the punitive award was the largest awarded in Georgia history. 106 The Georgia court cautioned an award of punitive damages should not be viewed in the abstract or compared with awards from other cases. The punitive damages award must be viewed in its unique context, in light of the facts of the case and with reference to the actual damages awarded. 107 In upholding the award the court noted the 1 to 1.3 ratio and saw no shocking disparity inherent in this figure. 108 In denying certiorari, the Supreme Court seems to agree with the Georgia court s reasoning: it is not the sheer value of the award that implicates the Due Process Clause, but rather the award s relation to the actual damages which makes the award constitutionally suspect.
In Ford Motor Co. v. Romo, 109 the Supreme Court granted Ford s petition for certiorari, vacated the verdict, and remanded the decision to the California court for further consideration in light of Campbell. Romo was a wrongful death action, arising out of an automobile accident in which three people were killed and three others were injured after a Ford Bronco rolled over several times causing the steel roof to collapse. Juan Romo sued Ford on theories of products liability and negligence. 110 The jury awarded $6.23 million in compensatory damages and $290 million in punitive damages. 111 The California Court of Appeal reduced the compensatory damages to $4.9 million based on comparative fault but upheld the punitive damages award. 112 In upholding the award despite the disparity between compensatory damages and punitive damages, the court reasoned that although the disparity was great, Ford s conduct had been grossly reprehensible and that wrongful death compensatory damages do not fully reflect the harm to the victims. 113 On remand, the California court determined that the State Farm decision narrowed California s broad view of punitive damages so that only the conduct that has resulted in outrage and humiliation to the plaintiff before the court may be punished. 114 It is not a permissible goal, after State Farm, the court wrote, to punish a defendant for everything else it may have done wrong. 115 The Supreme Court had stated in State Farm that [a] defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. 116 The California court went on to state that [d]eterrence, under this view, arises from imposing damages over an above traditional compensatory damages, not from the imposing of sanctions in an individual case that are actually disabling to the defendant. 117 Accordingly, there must be a reasonable relationship between the compensatory and punitive damages. 118 The California court noted the Supreme Court s presumption that most punitive damage awards should be limited to single-digit multiplier of compensatory damage awards. 119 However, leaving open the possibility of higher ratios in some cases, the court concluded that the proportionality factor carries less weight in wrongful death cases where the Plaintiff could not be awarded damages for the decedent s pain and suffering. 120 In such cases, the court observed, the proportionality inquiry must focus... on the relationship of the punitive damages to the harm to the deceased victim, not merely to compensatory damages awarded. 121 The California court ordered the $290 million punitive damage award reduced to about $23.7 million, about five times the compensatory damage award, and instructed that if the Plaintiffs did not to accept the reduction, a new trial on the amount of punitive damages was to be held. 122 The Supreme Court has also granted certiorari in Ford Motor v. Estate of Smith 123 and remanded the case to the Supreme Court of Kentucky for further consideration in light of Campbell. Estate of Smith was a wrongful death action brought by Smith s estate after he was crushed by his Ford pick-up truck. The truck was on an incline and the transmission migrated from park to reverse, moving backwards and crushing Smith against a storage shed. 124 The jury awarded $3 million in compensatory damages and $20 million in punitive damages. 125 The Supreme Court of Kentucky subsequently reduced the punitive award to $15 million after evaluating it under the three BMW guideposts. 126 The court believed that a substantial penalty was warranted and reasoned that Ford s conduct was particularly reprehensible because for at least seven years after Ford knew of the dangerous propensities of the C-6 transmission, it continued producing and installing it in its vehicles. 127 The court recognized the disparity between the compensatory damages and punitive damages awards, but nevertheless noted that in Leatherman and Gore, the amount of punitive damages awarded was a far greater multiplier of compensatory damages than appears here and that those cases involved economic loss. 128 In response to Ford s 11
contention that it had no warning that it could be subjected to such a large award, the Kentucky Supreme Court stated: Ford is a multi-national corporation that is frequently involved in litigation throughout the United States in state and federal courts. It possesses a wealth of information as to settlements, verdicts, and trial and appellate court decisions. Ford knew or should have known of the potential for such a substantial verdict when its defectively designed vehicle caused the death of a Kentucky consumer. Its national experience and the experience of other automobile manufacturers were sufficient to acquaint it with the reality. 129 Because the ultimate damage ratio here was a single-digit multiple ($3 million compensatory and $15 million punitive), the Supreme Court probably granted certiorari because of the Kentucky Supreme Court s emphasis in its opinion on Ford s status as a large multi-national company. Finally, the Supreme Court also granted certiorari to Cass v. Stephens 130 and remanded the case to the Court of Appeals of Texas for further consideration in light of Campbell. Cass v. Stephens involved a dispute over gas and oil wells. After a partnership dissolved, one of the partners widows sued for breach of contract, fraud and conversion. The Texas jury awarded her $2.19 in compensatory damages and $40 million in punitive damages. 131 That punitive amount was reduced on remitter to $32.5 million. It seems likely that the Supreme Court remanded this case because of the disparity between the compensatory and punitive awards. 12 Second Circuit Court of Appeals In Parker v. Time Warner Entertainment Co., 132 the implications of the Campbell decision were surprising and potentially far-reaching. In Parker, the plaintiffs sued on behalf of a class, alleging that the defendant, Time Warner, violated various provisions of the Cable Communications Policy Act and several state consumer protection laws by selling and disclosing its subscribers personal information to third parties and by failing to inform the subscribers of such disclosure. 133 The district court had denied class certification because, among other reasons, a class action was not the superior means of litigation. Due to the large numbers of people in the class, a seemingly minor infraction meant potential liability for the defendant in the amount of $12 billion. The court of appeals noted that Due Process concerns may arise when the prospect of a stunningly large damages award looms as the result of technical violations of the Cable Act that affect potentially millions of subscribers. 134 In dicta, the court relied on Campbell for the proposition that the Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor 135 and BMW for the proposition that in a sufficiently serious case the due process clause might be invoked, not to prevent certification, but to nullify that affect and reduce the aggregate damage award. In his concurrence, Justice Newman echoed those concerns, noting that a judgment of $12 billion for technical violations of the Cable Act might well encounter due process objections, somewhat analogous to those that the Supreme Court recently identified in setting constitutional limits on punitive damages. 136 Thus, the Second Circuit raised the possibility of using Campbell s principles as a potentially limiting constitutional device for actual damages, not merely punitive damages.
13 Second Circuit U.S. District Court In TVT Records v. Island of Def Jam Music Group, 137 the district court decided, in anticipation of the damages phase of the trial, whether certain pieces of evidence were admissible against the defendant. The defendant argued that first, plaintiff should be precluded from offering any evidence of allegedly unrelated bad conduct of the defendant or its affiliates. 138 The court examined the evidence in light of Campbell and refused to categorically rule. Instead, the court cautioned the plaintiffs that it should be prepared in due course to explain fully the link between any proposed item of evidence and the harm or harms at issue in this case. 139 Second, the court held that evidence of the defendant s net worth was admissible. The court reasoned that although the Supreme Court in Campbell had noted that a defendant s wealth provided an open-ended basis for inflating awards, it did not read the high court s opinion to completely preclude such evidence. Instead, the district court felt that a defendant s wealth is properly considered given the goals of punishment and deterrence served by punitive damages. 140 Third Circuit Court of Appeals and District Court Willow Inn v. Public Service Mutual Insurance Co., 141 was a breach of contract and bad faith action brought by Willow Inn, a restaurant, bar, and residence in Willow Grove, Pennsylvania against their insurer, Public Service Mutual Insurance Company, following a claim arising from a windstorm. Originally, the district court awarded Willow Inn $2,000 in compensatory damages and $150,000 in punitive damages (1 to 75 ratio). The insurer filed an appeal raising various issues, including a constitutional challenge to the amount of the punitive damage award (Willow Inn I). 142 Days before oral argument was to be held, the Supreme Court decided Campbell. The court of appeals vacated the award and remanded the case to the district court because the district court did not have the benefit of the Campbell decision when it imposed upon PSM a punitive damaged award. 143 The district court reconsidered the award in light of Campbell and upheld the punitive award ten days later (Willow II) despite the Supreme Court s strong language regarding the ratio between punitive damages and compensatory damages. 144 The district court examined the award and the circumstances of the insurer s bad faith in light of the three guideposts reaffirmed in Campbell. In examining reprehensibility, the court emphasized that Willow Inn was financially vulnerable because it was a modest family-run business. It also focused on the insurer s 2-year delay in making payment, the fact that the delay was the result of a series of instances in which PSM failed or refused to act on Willow Inn s claim and the fact that the delay was not a mere accident. 145 Due to the fact that PSM s actions were more than negligent the court felt that the degree of reprehensibility was sufficient to justify a significant sanction. 146 In order to reconcile the ratio of the awards (1 to 75) with Campbell s mandate that few awards exceeding a singledigit ratio between compensatory and punitive damages will satisfy due process, the district court steered away from using those particular numbers at all. Instead, the court determined that the punitive damages award of $150,000 is approximately equal to the value of the Willow Inn s claim under the policy and the payment that it belatedly received. 147 Thus, in order to get a ratio of 1 to 1, the district court used the value of the potential harm to Willow Inn rather than what was actually granted in compensatory damages ($2000) and compared that figure to the punitive award. The court justified its mathematics by reasoning that because the amount of punitive damages awarded is based on the value placed on the amount of the Willow Inn s potential harm, the ratio at issue is approximately one to one a ratio that does not raise a suspicious judicial eyebrow. 148
As to the third guidepost, the court looked at Pennsylvania s bad faith statute which authorized awards of attorney s fees, costs, and interest in addition to any award of punitive damages. The court reasoned that because attorney s fees are authorized and have been granted in amounts roughly equal to the punitive damages award in this case an award of $150,000 in punitive damages was warranted. Id. at 10. Thus, the court upheld the punitive award despite the fact that it appeared for all intensive purposes to be unconstitutional. In DeNofio v. Soto, 149 the District Court upheld a punitive damage award that was twice the compensatory award in an action for negligence, negligent misrepresentation, and breach of contract. 150 The controversy arose after the defendants failed to construct a home for plaintiffs. 151 The court used Campbell as its guide in determining whether the award was constitutionally void. The court reviewed the guideposts and noted that the Supreme Court had cautioned that few awards exceeding a single digit ratio between punitive damages and compensatory damages will satisfy due process. 152 In examining the guideposts, the court noted that although the harm was economic, physical harm could have occurred due to the water-filled state the defendants left the property in. 153 The court felt that this was reprehensible behavior and considering the actual harm and distress suffered by the plaintiffs in this case, an award of punitive damages of twice the amount of compensatory damages is reasonable. 154 14 Fourth Circuit Court of Appeals In Igen International, Inc. v. Roche Diagnostics GMBH, 155 the Fourth Circuit examined the issue of what kind of evidence the jury could consider when determining a punitive damage award. Plaintiff Igen alleged that defendant Roche incorrectly calculated and paid royalties under a biotechnology contract, failed to use its best efforts in developing products, and breached its duty of good faith and fair dealing. 156 The jury awarded Igen $105.4 million in compensatory damages and $400 million in punitive damages (a ratio of 1 to 4). 157 The Court of Appeals reversed, holding that it was error for the district court to even submit the issue of punitive damages to the jury because Roche s actions were inconsistent with the level of reprehensibility needed to submit a punitive damages claim in Maryland. 158 The court reasoned that the jury had improperly extended its focus beyond the conduct at issue in this particular lawsuit. 159 Without the evidence of the other culpable conduct, there was insufficient evidence to identify the requisite malice. The Court relied on Campbell for the proposition that a defendant s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. 160 Fourth Circuit U.S. District Court In McHugh v. Check Investors, 161 the plaintiff was awarded $10,163 in actual damages and $15,000 in punitive damages (a 1 to 1.5 ratio) for intentional infliction of emotional distress. 162 The claim arose after the defendant, a debt-collection agency, had harassed and threatened the plaintiff regarding a $163 grocery debt she allegedly owed. 163 In upholding the punitive damage award of plaintiff s emotional distress claim, the court noted that it was mindful of the Supreme Court s directive that few awards exceeding a single-digit ratio will satisfy due process when assessing the award. 164 The court did not elaborate on the decision beyond recognizing the importance of sticking to the ratio.
15 Fifth Circuit U.S. District Court In Librado v. M.S. Carriers, Inc., 165 the District Court rejected the defendant s argument that Campbell barred the discoverability of evidence pertaining to defendant s unrelated national activities. 166 The action arose after the plaintiff served interrogatories on the defendant requesting information identifying all lawsuits filed against M.S. Carriers in the preceding 5 years involving claims of personal injury resulting from motor vehicle accidents. The defendant refused to produce the information, arguing that the Campbell decision unequivocally resolved confusion as to the scope of system-wide evidence by holding that a party may not be condemned for nationwide policies rather than for conduct made directly against the relevant plaintiffs. 167 The court, however, held that Campbell addressed the scope of admissible evidence, not discoverable evidence and that the two are separate issues. 168 Therefore, a plaintiff could request such information even though, after Campbell, it was inadmissible at trial. Furthermore, the court found that the evidence requested was reasonably calculated to lead to the discovery of admissible evidence (the threshold under Federal Rule of Civil Procedure 26) and that the evidence was admissible. Finally, the court noted that this ruling was not inconsistent with the requirement that the evidence have a substantial similarity in order to be admissible at trial. 169 Sixth Circuit Court of Appeals In Smoot v. United Transportation Union, 170 the Sixth Circuit upheld a $100,000 punitive damage award when the statutory damages were $20,000. 171 The action arose when Smoot surreptitiously tape recoded an executive session of a Public Law Board arbitration hearing during which that council decided that Smoot was not entitled to distribution of stock under a labor agreement. Defendants filed counterclaims against Smoot alleging violations of the Federal Wiretap Act after Smoot initiated a civil action in which he sought to set aside the decision. The trial court found for defendants and awarded $250,000 in statutory damages and $100,000 in punitive damages (a ratio of 1 to 4). 172 On appeal, the court reduced the amount of statutory damages to $20,000. 173 In response, Smoot claimed that the amount of punitive damages should be reduced to mirror the court s reduction of the compensatory damages. Although the court held that it would not address any constitutional challenge in the first instance on appeal, it noted in dicta that we nonetheless note that the award in this case appears to pass constitutional muster. 174 The court elaborated no further, but appears to have based its decision on the fact that the ratio between the awards was still a single-digit ratio. Sixth Circuit U.S. Bankruptcy Court In In Re John Richards Homes Building Co., 175 the court found that creditor Adell had filed an involuntary bankruptcy petition in bad faith and John Richards Homes Building Company, the alleged debtor, was entitled to $4.1 million in compensatory damages and $2 million in punitive damages. 176 The court examined the award in light of State Farm and concluded that the punitive damages were necessary and appropriate in this case, were only one half of the compensatory damages and were approximately one twentieth of the maximum limit that the Supreme Court suggests for due process purposes, here $41 million. 177 Again, the court focused on the Supreme Court s mandate as to the ratio between compensatory and punitive damages when scrutinizing the award. Seventh Circuit U.S. District Courts