Supreme Court Once Again Addresses Issue of Punitive Damages

That brings us to the present day, and the Supreme Court's most recent pronouncement on punitive damages, State Farm Mutual Auto. Ins. Co. v. Campbell, ____ U.S. _____ (No. 01-1289) (April 7, 2003). In Campbell, the High Court overturned a punitive damage award that had a ratio to actual damages of 145 to 1. Even so, punitive damages are sure to continue to be a nettlesome issue, and therefore the following analysis is in order.

Campbell firstly is really about not one, but two litigations. It started with Curtis Campbell, a State Farm auto insurance policyholder, being involved in an accident that unfortunately resulted in one death and another permanent disability. Investigators and witnesses concluded Mr. Campbell was at fault. Nonetheless, State Farm refused to settle, and took the case to trial, where a Utah jury returned a verdict against the defendant three times the size of his policy coverage of $50,000.

Although the insurer paid the entire judgment, the angered policyholder sued the company for bad faith, fraud, and emotional harm. Issues were raised in that trial alleging State Farm's business practices in states other than Utah. The jury awarded the Campbells $2.6 million in compensatory damages, which was later reduced on appeal to $1 million, and a whopping $145 million in punitives. Utah's highest state court upheld the awards, and the insurer appealed to the U.S. Supreme Court, claiming the punitive damages award was excessive, and therefore violated the Due Process Clause of the federal Constitution.

By a 6-3 vote, the Justices declared that Campbell was neither 'close nor difficult,' and clearly had to be overturned, based upon the parameters articulated in Gore. Writing for the majority, Justice Anthony Kennedy first reminds that punitives and compensatory damages, although awarded at the same time, serve distinct purposes. Compensatory damages, the Court opined, 'are intended to address the concrete loss that the plaintiff has suffered' because of the defendant's wrongful acts, while punitive damages serve the broader functions of 'deterrence and retribution.' Campbell, Id. at ___ (quotations omitted). See also, Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001).

While largely left to the several States, there are nonetheless 'procedural and substantive constitutional limitations on these awards.' The Due Process Clause of the Fourteenth Amendment does not countenance 'grossly excessive or arbitrary punishments on a tortfeasor.' To be sure, punitives dispensed wisely are a powerful weapon to punish and prevent wrongdoing; yet used indiscriminately, they can be devastatingly unfair. Id. at ____.

Although utilized to punish, punitive damage awards are not subject to the same safeguards for defendants as found in criminal proceedings, noted the Court. This is a cause for concern, because the imprecise methodology used to administer such awards might result in a arbitrary deprivation of property, a result the Constitution does not condone.

Writing for the majority, Justice Kennedy explained that is why the Supreme Court articulated a three point test in Gore that requires reviewing courts to first gauge the 'reprehensibility' of the defendant's misconduct, second the disparity between the actual harm suffered by the plaintiff and the punitives granted, and last the difference between the jury's award of punitive damages and the statutory penalties authorized in similar cases. Campbell, Id. at ____, citing Gore, 517 U.S. at 575. Such '[e]xacting appellate review ensures that an award of punitive damages is based upon an application of law, rather than a decisionmaker's caprice.' Campbell, Id. at ____ (internal quotations omitted).

As stated earlier in this article, the Supreme Court found Campbell to be neither close nor difficult to decide under the Gore standard. As for the first prong, that of reprehensibility, it demands consideration of many factors, including: physical as opposed to economic harm; evidence of a reckless disregard for the safety of others; the financial vulnerability of the victim; the conduct being repetitious or isolated; and whether the harm was merely accidental or arose from trickery, deceit or malice. Significantly, the majority opined that '[t]he existence of any one of these factors'may not be sufficient to sustain a punitive damages award; and the absence of all of them renders any award suspect.' Id. at ______.

Moreover, Justice Kennedy declared there is a presumption that any compensatory damages awarded have already made the victim whole, and thus punitives 'should only be awarded if the defendant's culpability'is so reprehensibile as to warrant the imposition of further sanctions to achieve punishment or deterrence.' Id. at ____.

A high hurdle indeed for any punitive damage award to overcome, and clearly here in Campbell the Supreme Court decided it did not. To be sure, the Justices found nothing meritorious in how State Farm handled its customers' case. Yet a 'more modest punishment' would have fit the crime better, opined the majority.

Particularly vexing to the Court was the fact this case was 'used as a platform' to punish State Farm for supposed operational deficiencies throughout the country. That is clearly wrong, said the majority, for the courts of one state cannot punish a defendant for conduct that might be lawful in another. Evidence of national business practices of State Farm was germane only to the extent it had 'a nexus to the specific harm suffered' by the Campbells, and the jury should have been instructed not to rely on evidence of conduct that was perfectly legal in the jurisdictions where it occurred.

Even more fundamental, the courts below seriously erred by relying upon conduct that bore no relation to the plaintiffs' injuries. Unrelated acts, independent from the acts upon which liability was based, 'may not serve as the basis for punitive damages.' You may only punish with punitives for the conduct that hurt the relevant plaintiff, said Justice Kennedy, 'not for being an unsavory individual or business.'

In the case before it, the Supreme Court ruled that the conduct that harmed these plaintiffs should have been the only actions considered within the reprehensibility analysis. Since it clearly was not, the punitive damages awarded already failed constitutional muster. Id. at ______.

The Court then turned to the second Gore marker, admittedly with great reluctance. The majority noted it has been careful to avoid setting 'concrete constitutional limits on the ratio between harm, or potential harm, to the plaintiff and the punitive damages award.' This is so because the Justices firmly believe such weighty questions cannot be resolved with simplistic formulations. Id. at _____.

Being doggedly consistent, the Justices explicitly declined to impose a bright line rule on this question. Nonetheless, Justice Kennedy stated that a ratio of punitives to compensatory damages exceeding single digits could rarely pass a due process test. This is based in part upon historical precedents of double, treble or even quadruple damages to deter and punish. 'While these ratios are not binding, they are instructive,' said the Court, that by itself constituting a noteworthy instruction. Id. at ___.

But clearly that was not the case before it, which led the Court to declare that the 145:1 ratio herein was so far afield that there was in fact a presumption that it was violative of due process. Indeed, the plaintiffs had been awarded $1 million in compensatory damages, not an inconsiderable sum. Under the Supreme Court's yardsticks, any award of punitives had to be both reasonable and proportionate to the compensatory element, and $145 million, when contrasted to the fully compensating original $1 million, was clearly unconstitutional. Thus found lacking, the punitive damages granted in Campbell had to be overruled.

Lastly, the Supreme Court turned to the third prong of the Gore test, the comparison of the punitive award to similar criminal law sanctions, but it admittedly did not dwell long on the subject. The comparable state criminal fine was $10,000, 'an amount dwarfed by the $145 million punitive damages award.' More illustrative for the future was the majority's declaration that great care must be taken to avoid use of the civil courts to assess criminal penalties, since the latter can be imposed only after the heightened protections of a criminal trial have been observed, notably among those safeguards the higher standards of proof that regulate criminal prosecutions.

For all these reasons, the Supreme Court reversed the punitive damages award in Campbell, finding it neither reasonable nor proportionate to the wrong done. As an 'irrational and arbitrary deprivation of the property of the defendant,' it could not stand constitutional scrutiny. Although the Court closed by leaving the appropriate calculation to the state court, the Justices intimated that 'a punitive damages award at or near the amount of compensatory damages' would be less prone to failure. And thus the high Court ended this addition to the still evolving law of punitive damages.

Given the current politically charged atmosphere, one where charges of corporate intrigue and wrongdoing are easily made and sometimes just as easily believed by a jury, the issue of punitive damages continues to be an imperative. While the Gore case of only a few years ago was a crucial landmark, this latest refinement in Campbell is nonetheless most welcome and valuable.

Primarily, this latest Supreme Court ruling represents a current application of the three-pronged analysis of Gore in a realistic corporate litigation setting. Reinforcing its earlier teachings, the Justices expand the relevant precedents by demonstrating how each point of the inquiry interlock. For the first, the test of reprehensibility was not met here bec- ause the finder of fact ventured much too far afield in considering conduct that had no trace of a causal nexus to the actual harm suffered by the particular plaintiffs.

In sum, the reprehensibility analysis pioneered in Gore does not allow for punitive punishment for any misfeasance at all, only such wrongs that have a direct bearing upon the improper conduct that harmed the victims specifically at the bar. Indeed, while Gore may have created the test, Campbell sharply delimits its application.

Similarly, the instant case is most revealing about the Court's thinking on the second parameter, the so-called 'ratio' inquiry. Once again, the Supreme Court wisely refuses to impose a purely mathematical (and probably arbitrary) rule, and rightly so, as constitutional questions of this magnitude should not be decided by mere arithmetic. However, the Court does evince principle decision-making by alluding to historical norms of treble and other multiples of damages, all of which are quite noticeably in the single digits. Obviously, the 145:1 ratio in Campbell probably doomed it from the start. While the Supreme Court took the correct step in declaring an increase of that magnitude to be unconstitutional (and presumably so, to be sure), the Court simultaneously gave fairly clear indicia of what would most likely pass constitutional muster, yet without curtailing the thoughtful discretion of itself and lower courts in the future.

And while the Court gave the shortest shrift to the third prong, which requires a comparison of analogous criminal penalties to the punitive damages awar- ded, more important was its admonition that criminal penalties are decreed in a much more stringent environment of due process, and thus such comparisons must be measured cautiously.

In conclusion, plaintiffs, defendants, and even judges have a great deal to think about when contemplating punitive damages. The Supreme Court has made clear that punitive damages, when justly used, are a vital part of our system of civil justice. Nevertheless, they must be awarded with fairness, and without caprice. No doubt the Supreme Court shall continue to watch over the modern evolution of punitive damages as it had done in this case, to ensure that the proper balance is struck.

Prof. A. Michael Sabino is an Associate Professor of Law, Tobin College of Business, St. John's University, and partner, Sabino & Sabino, Mineola, NY.

Punitive damages, traditionally a form of compensation awarded to punish the wrongdoer and simultaneously deter future misconduct, have long been a divisive issue within American law and business. For the former, centuries of law recognize the efficacy of a sizeable financial punishment, deliberately outsized in order to properly punish a larger wrong, and to make the miscreant and others similarly minded think twice before doing it again. The public policy has long outweighed the possibility that the particular victim may be rewarded with a recovery usually well in excess of the actual harm suffered.

Yet business, particularly large corporations, contend that awards of punitive damages have grown monsterous, and completely out of proportion to the harm suffered. Defying rationality, such damages threaten the very existence of the business defendant, and only give windfalls to undeserving and avaricious plaintiffs and their counsel.

Little wonder then that the Supreme Court has stepped into the fray repeatedly in recent years, its previous landmark of note being the BMW v. Gore case. 517 U.S. 559 (1996). While fairly clear cut, the Gore edict apparently needed refinement.

That brings us to the present day, and the Supreme Court's most recent pronouncement on punitive damages, State Farm Mutual Auto. Ins. Co. v. Campbell, ____ U.S. _____ (No. 01-1289) (April 7, 2003). In Campbell, the High Court overturned a punitive damage award that had a ratio to actual damages of 145 to 1. Even so, punitive damages are sure to continue to be a nettlesome issue, and therefore the following analysis is in order.

Campbell firstly is really about not one, but two litigations. It started with Curtis Campbell, a State Farm auto insurance policyholder, being involved in an accident that unfortunately resulted in one death and another permanent disability. Investigators and witnesses concluded Mr. Campbell was at fault. Nonetheless, State Farm refused to settle, and took the case to trial, where a Utah jury returned a verdict against the defendant three times the size of his policy coverage of $50,000.

Although the insurer paid the entire judgment, the angered policyholder sued the company for bad faith, fraud, and emotional harm. Issues were raised in that trial alleging State Farm's business practices in states other than Utah. The jury awarded the Campbells $2.6 million in compensatory damages, which was later reduced on appeal to $1 million, and a whopping $145 million in punitives. Utah's highest state court upheld the awards, and the insurer appealed to the U.S. Supreme Court, claiming the punitive damages award was excessive, and therefore violated the Due Process Clause of the federal Constitution.

By a 6-3 vote, the Justices declared that Campbell was neither 'close nor difficult,' and clearly had to be overturned, based upon the parameters articulated in Gore. Writing for the majority, Justice Anthony Kennedy first reminds that punitives and compensatory damages, although awarded at the same time, serve distinct purposes. Compensatory damages, the Court opined, 'are intended to address the concrete loss that the plaintiff has suffered' because of the defendant's wrongful acts, while punitive damages serve the broader functions of 'deterrence and retribution.' Campbell, Id. at ___ (quotations omitted). See also , Cooper Industries, Inc. v. Leatherman Tool Group, Inc. , 532 U.S. 424 (2001).

While largely left to the several States, there are nonetheless 'procedural and substantive constitutional limitations on these awards.' The Due Process Clause of the Fourteenth Amendment does not countenance 'grossly excessive or arbitrary punishments on a tortfeasor.' To be sure, punitives dispensed wisely are a powerful weapon to punish and prevent wrongdoing; yet used indiscriminately, they can be devastatingly unfair. Id. at ____.

Although utilized to punish, punitive damage awards are not subject to the same safeguards for defendants as found in criminal proceedings, noted the Court. This is a cause for concern, because the imprecise methodology used to administer such awards might result in a arbitrary deprivation of property, a result the Constitution does not condone.

Writing for the majority, Justice Kennedy explained that is why the Supreme Court articulated a three point test in Gore that requires reviewing courts to first gauge the 'reprehensibility' of the defendant's misconduct, second the disparity between the actual harm suffered by the plaintiff and the punitives granted, and last the difference between the jury's award of punitive damages and the statutory penalties authorized in similar cases. Campbell, Id. at ____, citing Gore, 517 U.S. at 575. Such '[e]xacting appellate review ensures that an award of punitive damages is based upon an application of law, rather than a decisionmaker's caprice.' Campbell, Id. at ____ (internal quotations omitted).

As stated earlier in this article, the Supreme Court found Campbell to be neither close nor difficult to decide under the Gore standard. As for the first prong, that of reprehensibility, it demands consideration of many factors, including: physical as opposed to economic harm; evidence of a reckless disregard for the safety of others; the financial vulnerability of the victim; the conduct being repetitious or isolated; and whether the harm was merely accidental or arose from trickery, deceit or malice. Significantly, the majority opined that '[t]he existence of any one of these factors'may not be sufficient to sustain a punitive damages award; and the absence of all of them renders any award suspect.' Id. at ______.

Moreover, Justice Kennedy declared there is a presumption that any compensatory damages awarded have already made the victim whole, and thus punitives 'should only be awarded if the defendant's culpability'is so reprehensibile as to warrant the imposition of further sanctions to achieve punishment or deterrence.' Id. at ____.

A high hurdle indeed for any punitive damage award to overcome, and clearly here in Campbell the Supreme Court decided it did not. To be sure, the Justices found nothing meritorious in how State Farm handled its customers' case. Yet a 'more modest punishment' would have fit the crime better, opined the majority.

Particularly vexing to the Court was the fact this case was 'used as a platform' to punish State Farm for supposed operational deficiencies throughout the country. That is clearly wrong, said the majority, for the courts of one state cannot punish a defendant for conduct that might be lawful in another. Evidence of national business practices of State Farm was germane only to the extent it had 'a nexus to the specific harm suffered' by the Campbells, and the jury should have been instructed not to rely on evidence of conduct that was perfectly legal in the jurisdictions where it occurred.

Even more fundamental, the courts below seriously erred by relying upon conduct that bore no relation to the plaintiffs' injuries. Unrelated acts, independent from the acts upon which liability was based, 'may not serve as the basis for punitive damages.' You may only punish with punitives for the conduct that hurt the relevant plaintiff, said Justice Kennedy, 'not for being an unsavory individual or business.'

In the case before it, the Supreme Court ruled that the conduct that harmed these plaintiffs should have been the only actions considered within the reprehensibility analysis. Since it clearly was not, the punitive damages awarded already failed constitutional muster. Id. at ______.

The Court then turned to the second Gore marker, admittedly with great reluctance. The majority noted it has been careful to avoid setting 'concrete constitutional limits on the ratio between harm, or potential harm, to the plaintiff and the punitive damages award.' This is so because the Justices firmly believe such weighty questions cannot be resolved with simplistic formulations. Id. at _____.

Being doggedly consistent, the Justices explicitly declined to impose a bright line rule on this question. Nonetheless, Justice Kennedy stated that a ratio of punitives to compensatory damages exceeding single digits could rarely pass a due process test. This is based in part upon historical precedents of double, treble or even quadruple damages to deter and punish. 'While these ratios are not binding, they are instructive,' said the Court, that by itself constituting a noteworthy instruction. Id. at ___.

But clearly that was not the case before it, which led the Court to declare that the 145:1 ratio herein was so far afield that there was in fact a presumption that it was violative of due process. Indeed, the plaintiffs had been awarded $1 million in compensatory damages, not an inconsiderable sum. Under the Supreme Court's yardsticks, any award of punitives had to be both reasonable and proportionate to the compensatory element, and $145 million, when contrasted to the fully compensating original $1 million, was clearly unconstitutional. Thus found lacking, the punitive damages granted in Campbell had to be overruled.

Lastly, the Supreme Court turned to the third prong of the Gore test, the comparison of the punitive award to similar criminal law sanctions, but it admittedly did not dwell long on the subject. The comparable state criminal fine was $10,000, 'an amount dwarfed by the $145 million punitive damages award.' More illustrative for the future was the majority's declaration that great care must be taken to avoid use of the civil courts to assess criminal penalties, since the latter can be imposed only after the heightened protections of a criminal trial have been observed, notably among those safeguards the higher standards of proof that regulate criminal prosecutions.

For all these reasons, the Supreme Court reversed the punitive damages award in Campbell, finding it neither reasonable nor proportionate to the wrong done. As an 'irrational and arbitrary deprivation of the property of the defendant,' it could not stand constitutional scrutiny. Although the Court closed by leaving the appropriate calculation to the state court, the Justices intimated that 'a punitive damages award at or near the amount of compensatory damages' would be less prone to failure. And thus the high Court ended this addition to the still evolving law of punitive damages.

Given the current politically charged atmosphere, one where charges of corporate intrigue and wrongdoing are easily made and sometimes just as easily believed by a jury, the issue of punitive damages continues to be an imperative. While the Gore case of only a few years ago was a crucial landmark, this latest refinement in Campbell is nonetheless most welcome and valuable.

Primarily, this latest Supreme Court ruling represents a current application of the three-pronged analysis of Gore in a realistic corporate litigation setting. Reinforcing its earlier teachings, the Justices expand the relevant precedents by demonstrating how each point of the inquiry interlock. For the first, the test of reprehensibility was not met here bec- ause the finder of fact ventured much too far afield in considering conduct that had no trace of a causal nexus to the actual harm suffered by the particular plaintiffs.

In sum, the reprehensibility analysis pioneered in Gore does not allow for punitive punishment for any misfeasance at all, only such wrongs that have a direct bearing upon the improper conduct that harmed the victims specifically at the bar. Indeed, while Gore may have created the test, Campbell sharply delimits its application.

Similarly, the instant case is most revealing about the Court's thinking on the second parameter, the so-called 'ratio' inquiry. Once again, the Supreme Court wisely refuses to impose a purely mathematical (and probably arbitrary) rule, and rightly so, as constitutional questions of this magnitude should not be decided by mere arithmetic. However, the Court does evince principle decision-making by alluding to historical norms of treble and other multiples of damages, all of which are quite noticeably in the single digits. Obviously, the 145:1 ratio in Campbell probably doomed it from the start. While the Supreme Court took the correct step in declaring an increase of that magnitude to be unconstitutional (and presumably so, to be sure), the Court simultaneously gave fairly clear indicia of what would most likely pass constitutional muster, yet without curtailing the thoughtful discretion of itself and lower courts in the future.

And while the Court gave the shortest shrift to the third prong, which requires a comparison of analogous criminal penalties to the punitive damages awar- ded, more important was its admonition that criminal penalties are decreed in a much more stringent environment of due process, and thus such comparisons must be measured cautiously.

In conclusion, plaintiffs, defendants, and even judges have a great deal to think about when contemplating punitive damages. The Supreme Court has made clear that punitive damages, when justly used, are a vital part of our system of civil justice. Nevertheless, they must be awarded with fairness, and without caprice. No doubt the Supreme Court shall continue to watch over the modern evolution of punitive damages as it had done in this case, to ensure that the proper balance is struck.

Prof. A. Michael Sabino is an Associate Professor of Law, Tobin College of Business, St. John's University, and partner, Sabino & Sabino, Mineola, NY.