New Punitives Ruling Means New Battles

Groundwork

The Court majority was not breaking new ground in the ruling, supporters and opponents said, but was elaborating on previous guidelines. In a series of rulings beginning in 1989, the Court has expressed growing concern and increased skepticism about punitive awards that are dramatically out of proportion to compensatory awards. In 1996, the Court for the first time struck down a punitive award as grossly excessive, $2 million compared with $4000 in compensatories. BMW of North America Inc. v. Gore, 517 U.S. 559 (1996). The Justices also set out three “guideposts” for weighing a punitive award. Courts must look at:

• The degree of reprehensibility of the defendant's conduct;
• The ratio between the actual or potential harm suffered by the plaintiff and the punitive damages award. The Court suggested a ratio that was exceeded by nearly one-third of the punitive damages awards in the nation's biggest jury verdicts of 2001 and 2002, according to The National Law Journal's Top 100 Verdict surveys for those years.
• The difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

The elaboration of the first two guideposts formed the basis for the reversal of the $145 million punitive award. It also laid the groundwork for future court battles.

Future Court Battles: What to Expect

“Each one of these issues, from a litigation perspective, will be hard-fought going forward,” said Arvin Maskin of New York's Weil, Gotshal & Manges, who filed an amicus brief for the Washington Legal Foundation supporting State Farm. “Every time the Court refines them, people are going to be busy construing them, and there will be extra litigation.” At the heart of the State Farm ruling, by Justice Anthony M. Kennedy, are the two R's in the first two guideposts. They are reprehensibility and ratio.

Reprehensibility

In fleshing out reprehensibility, Kennedy took on one of the biggest issues pressed by corporate defendants for years: When can a court consider a defendant's out-of-state conduct in evaluating his or her reprehensibility?

In the State Farm case, the trial court had allowed Campbell to introduce evidence that the company's decision to take his auto accident case to trial instead of settling it for the policy limits, as offered by the injured third parties, was the result of a national scheme to cap payouts on claims companywide.

The Utah Supreme Court, on appeal, noted some examples of the insurer's “most egregious and malicious behavior.” These included a 20-year-plus policy of encouraging adjusters to pay less than market value for claims, and rewarding them when they did; challenging the contents of files; and lying to customers. A State Farm official had ordered an adjuster to change the file's accident report to lessen Campbell's liability for a car accident.

State Farm argued in the high court that the lower courts improperly relied on out-of-state conduct, some of which was not similar to what happened in the Campbell case, and some of which was legal in other states. The high court majority agreed.

While saying that State Farm's handling of Campbell's case “merits no praise,” Kennedy wrote: “Lawful out-of-state conduct may be probative when it demonstrates the deliberateness and culpability of the defendant's action in the state where it is tortuous, but that conduct must have a nexus to the specific harm suffered by the plaintiff. 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.”

The lower courts, he wrote, awarded punitive damages against State Farm to punish and deter conduct that bore no relation to Campbell's harm. “A defendant's 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,” said Kennedy.

If punitive damages are not confined to the conduct of a defendant toward the plaintiff, the defendant can be punished again and again for the same thing,” said Victor E. Schwartz of the Shook, Hardy & Bacon Washington office, who filed a brief supporting State Farm on behalf of the Product Liability Advisory Council.

“Certainly, looking at what State Farm did all around the country, one could say that was reprehensible,” said Schwartz. “But the Court said that was unconstitutional because it strayed from conduct that was directed toward the plaintiff. They [the Court] drew a red line on not allowing punitive damages cases to turn into a trial of the defendant in general, as to whether it was a bad company. This has major implications for pharmaceutical companies, [and] automakers, tobacco, asbestos and insurance companies.”

Kennedy's language will be the “battleground going forward,” said Cozen O'Connor's Nugent. “I think plaintiffs will use some of the language to encourage trial courts to permit entry of evidence,” she said. “And defense counsel need to be very aggressive in reminding the court of the constitutional parameters.”

The Ratio Issue

The second key “R” in the State Farm decision and the second battlefront is the ratio between the punitive and compensatory damages. Kennedy said the Court has always refused to set a bright-line maximum ratio for punitives, and would not set one in the State Farm case. But both sides agreed that the Court approached such a line.

In The National Law Journal's Top 100 verdicts for the past 2 years, 31% of the total punitive awards had more than a single-digit ratio to compensatory awards. In 2001, 24% of the 38 punitive awards had double-digit ratios with a high of 500 to 1. In 2002, it was 39% of the 41 punitive awards, with a high of 1145 to 1. Cases included wrongful death, and sexual harassment.

Higher ratios, Kennedy wrote, may be upheld where “a particularly egregious act has resulted in only a small amount of economic damages.” But he said the converse is also true. “When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” What is a “substantial” compensatory award? That's another new battlefield.

Nugent and Schwartz predicted that with large punitive awards facing greater scrutiny, plaintiffs' lawyers will shift their focus to increasing compensatory damage awards. Schwartz believes that is already happening, because judges are far more willing to examine a punitive award than a pain-and-suffering award.

The Supreme Court's April 7 ruling on punitive damages, greeted with relief and enthusiasm by corporate defendants, opens new battlegrounds in litigation seeking those awards. The ruling significantly expanded the High Court's prior attempts to guide lower courts and lawyers on when punitive damages awards may run afoul of the Constitution. State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289.

The 6-3 decision in State Farm threw out a $145 million punitive damages award won by Curtis Campbell in a bad-faith action against the auto insurer. Compensatory damages totaled $1 million.

“This is not the end,” said Lori S. Nugent, head of the punitive damages practice in the Chicago office of Cozen O'Connor. “Justice Scalia was absolutely right when he said that there will be many decisions in the future on punitive damages. And there should be.”

Groundwork

The Court majority was not breaking new ground in the ruling, supporters and opponents said, but was elaborating on previous guidelines. In a series of rulings beginning in 1989, the Court has expressed growing concern and increased skepticism about punitive awards that are dramatically out of proportion to compensatory awards. In 1996, the Court for the first time struck down a punitive award as grossly excessive, $2 million compared with $4000 in compensatories. BMW of North America Inc. v. Gore , 517 U.S. 559 (1996). The Justices also set out three “guideposts” for weighing a punitive award. Courts must look at:

• The degree of reprehensibility of the defendant's conduct;
• The ratio between the actual or potential harm suffered by the plaintiff and the punitive damages award. The Court suggested a ratio that was exceeded by nearly one-third of the punitive damages awards in the nation's biggest jury verdicts of 2001 and 2002, according to The National Law Journal's Top 100 Verdict surveys for those years.
• The difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

The elaboration of the first two guideposts formed the basis for the reversal of the $145 million punitive award. It also laid the groundwork for future court battles.

Future Court Battles: What to Expect

“Each one of these issues, from a litigation perspective, will be hard-fought going forward,” said Arvin Maskin of New York's Weil, Gotshal & Manges, who filed an amicus brief for the Washington Legal Foundation supporting State Farm. “Every time the Court refines them, people are going to be busy construing them, and there will be extra litigation.” At the heart of the State Farm ruling, by Justice Anthony M. Kennedy, are the two R's in the first two guideposts. They are reprehensibility and ratio.

Reprehensibility

In fleshing out reprehensibility, Kennedy took on one of the biggest issues pressed by corporate defendants for years: When can a court consider a defendant's out-of-state conduct in evaluating his or her reprehensibility?

In the State Farm case, the trial court had allowed Campbell to introduce evidence that the company's decision to take his auto accident case to trial instead of settling it for the policy limits, as offered by the injured third parties, was the result of a national scheme to cap payouts on claims companywide.

The Utah Supreme Court, on appeal, noted some examples of the insurer's “most egregious and malicious behavior.” These included a 20-year-plus policy of encouraging adjusters to pay less than market value for claims, and rewarding them when they did; challenging the contents of files; and lying to customers. A State Farm official had ordered an adjuster to change the file's accident report to lessen Campbell's liability for a car accident.

State Farm argued in the high court that the lower courts improperly relied on out-of-state conduct, some of which was not similar to what happened in the Campbell case, and some of which was legal in other states. The high court majority agreed.

While saying that State Farm's handling of Campbell's case “merits no praise,” Kennedy wrote: “Lawful out-of-state conduct may be probative when it demonstrates the deliberateness and culpability of the defendant's action in the state where it is tortuous, but that conduct must have a nexus to the specific harm suffered by the plaintiff. 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.”

The lower courts, he wrote, awarded punitive damages against State Farm to punish and deter conduct that bore no relation to Campbell's harm. “A defendant's 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,” said Kennedy.

If punitive damages are not confined to the conduct of a defendant toward the plaintiff, the defendant can be punished again and again for the same thing,” said Victor E. Schwartz of the Shook, Hardy & Bacon Washington office, who filed a brief supporting State Farm on behalf of the Product Liability Advisory Council.

“Certainly, looking at what State Farm did all around the country, one could say that was reprehensible,” said Schwartz. “But the Court said that was unconstitutional because it strayed from conduct that was directed toward the plaintiff. They [the Court] drew a red line on not allowing punitive damages cases to turn into a trial of the defendant in general, as to whether it was a bad company. This has major implications for pharmaceutical companies, [and] automakers, tobacco, asbestos and insurance companies.”

Kennedy's language will be the “battleground going forward,” said Cozen O'Connor's Nugent. “I think plaintiffs will use some of the language to encourage trial courts to permit entry of evidence,” she said. “And defense counsel need to be very aggressive in reminding the court of the constitutional parameters.”

The Ratio Issue

The second key “R” in the State Farm decision and the second battlefront is the ratio between the punitive and compensatory damages. Kennedy said the Court has always refused to set a bright-line maximum ratio for punitives, and would not set one in the State Farm case. But both sides agreed that the Court approached such a line.

In The National Law Journal's Top 100 verdicts for the past 2 years, 31% of the total punitive awards had more than a single-digit ratio to compensatory awards. In 2001, 24% of the 38 punitive awards had double-digit ratios with a high of 500 to 1. In 2002, it was 39% of the 41 punitive awards, with a high of 1145 to 1. Cases included wrongful death, and sexual harassment.

Higher ratios, Kennedy wrote, may be upheld where “a particularly egregious act has resulted in only a small amount of economic damages.” But he said the converse is also true. “When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” What is a “substantial” compensatory award? That's another new battlefield.

Nugent and Schwartz predicted that with large punitive awards facing greater scrutiny, plaintiffs' lawyers will shift their focus to increasing compensatory damage awards. Schwartz believes that is already happening, because judges are far more willing to examine a punitive award than a pain-and-suffering award.