White v. Ford Motor Co.: Using Federalism to Rein in Punitive Damages Awards

It is often the case that juries are only too eager to award punitive damages that are excessively large when compared to the potential damages or actual damage done. In 1996, the Supreme Court made an effort in BMW of North America, Inc. v. Gore, 517 U.S. 559, to curb the effects of this behavior by imposing territorial limitations on the conduct that juries may consider when calculating the size of punitive damages. Specifically, the Court held that states could not consider out-of-state conduct in punitive damages calculations when such conduct was legal in other states. The BMW decision was based on principles of state sovereignty, comity, federalism, and the Due Process Clause of the 14th Amendment.

Recently, a potentially landmark opinion, White v. Ford Motor Co., 2 Cal. Daily Op. Serv. 11 (9th Cir. 2002), came down from the Ninth Circuit Court of Appeals. White applies the policies underlying the BMW decision to extend the territorial limitation on punitive damages. The White court held that, in addition to being barred from considering out-of-state conduct when such conduct is legal in other states, a state is barred from considering extraterritorial conduct even when such conduct is illegal in other states. A petition for rehearing the White case is currently pending in the Ninth Circuit. Depending upon whether rehearing is granted and, if so, how the rehearing is decided, the decision in White to mandate jury instructions on extraterritorial limitations could become settled Ninth Circuit law.

The Standard of Unconstitutional Punitive Damages Under BMW

The BMW court expressly set out 'to illuminate 'the character of the standard that will identify constitutionally excessive awards' of punitive damages.' BMW, 517 U.S. at 568. In BMW, the jury found that, pursuant to Alabama law, BMW was guilty of fraud for failing to disclose to a buyer that a car that it sold as new was, in fact, damaged in transit and had to be repainted. The jury awarded $4,000 in compensatory damages and $4 million in punitive damages, taking into account the effects of BMW's policy of non-disclosure on consumers nationwide. In spite of post-trial evidence establishing that BMW's policy was consistent with the laws of 25 other states, the Alabama Supreme Court refused to set aside the punitive damages award and instead reduced it to $2 million, acknowledging that the original verdict was tainted by out-of-state concerns.

After certiorari was granted, the Supreme Court held that the $2 million verdict was 'grossly excessive' and, thus, unconstitutional. Before coming to this conclusion, the Court created a structure of analysis for determining whether a punitive award was constitutional. The Court first began its analysis with the well-established doctrine that a punitive damages award is in violation of the 14th Amendment Due Process Clause 'only when [it] can fairly be categorized as 'grossly excessive' in relation to [the State's] interests.' Legitimate state interests include punishing unlawful conduct and deterring its repetition. Because of this, a reviewing court must analyze the punitive award in terms of conduct occurring within the state and any economic penalties that the state inflicts 'must be supported by the state's interest in protecting its own consumers and its own economy.' Id. at 572.

In keeping with the principle of due process, the BMW court recognized that a person must receive fair notice 'not only of the conduct that will subject him to punishment but also of the severity of the penalty that a State may impose.' Id. at 574. The Court then provided three 'guideposts' for determining whether a defendant had adequate notice of the size of the State's penalty. The first and '[p]erhaps the most important' guidepost is 'the degree of reprehensibility of the defendant's conduct.' Id. at 575. 'The second and perhaps most commonly cited indicium of an unreasonable or excessive punitive damages award is its ratio to the actual harm inflicted on the plaintiff.' Id. at 580. The third guidepost is a comparison of the punitive damages award with 'the civil or criminal penalties that could be imposed for comparable misconduct.' Id. at 583.

Perhaps most relevant to the discussion at hand is the underlying policy of federalism in the BMW court's decision. In focusing on the scope of Alabama's legitimate interests in imposing punitive damages, the Court noted that each of the 50 states had different disclosure rules that were based on different but legitimate policies. Such diversity is permissible under the principle of state sovereignty, where each state has the right to make its own policy choices that form the basis of its own disclosure rules. These rules and policies are subordinate only to federal laws and pre-emptive federal doctrines, such as the federal power to regulate interstate commerce. Additionally, under the principle of comity, each state is 'constrained by the need to respect the interests of other States.' Id. at 571.

With these basic principles in mind, the Court opined that Alabama was imposing economic sanctions on violators of Alabama regulations with the intent of changing BMW's conduct in other states, and that 'by attempting to alter BMW's nationwide policy, Alabama would be infringing on the policy choices of other States.' Id. at 572. Thus, it follows from 'these principles of state sovereignty and comity that ' Alabama may insist that BMW adhere to a particular disclosure policy in that State. Alabama does not have the power, however, to punish BMW for conduct that was lawful where it occurred and that had no impact on Alabama or its residents.' Id. at 572-73.

In other words, the Court held that punitive damages that take into account extraterritorial conduct that is otherwise lawful in other states violates federalism. Permitting such damages would, in effect, impose one State's regulation on all States. A large punitive sanction against a defendant might even have an adverse impact upon a state that purposely enacted less stringent standards in order to promote other state interests.

White: Expanding BMW's Territorial Limitation

While the BMW opinion makes clear that juries may not consider extraterritorial conduct that is otherwise lawful in other states, BMW leaves open the question of whether a state can impose punitive damages sufficient to punish unlawful conduct in other states. Although this question was briefly answered with a 'No,' by the 10th Circuit in dictum, Continental Trend Resources, Inc. v. Oxy USA Inc., 101 F.3d 634, 636-38, and by several district and state courts, White is the first circuit court decision to hold decisively that 'a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasor's ' conduct in other States,' BMW, 517 U.S. at 572, regardless of whether the extraterritorial conduct is lawful.

White was a Nevada product liability case in which Ford failed to warn a buyer about a known defect in a Ford truck's parking brake. The truck then rolled, driverless, downhill, crushing the buyer's three-year-old son. Prior to jury deliberations, Ford requested that the court deliver an instruction on extraterritoriality, based on BMW, that would bar the jury from punishing Ford for the out-of-state impact of its decisions concerning its parking brakes. The district court denied Ford's request, and the jury awarded $2 million in compensatory damages and $151 million in punitive damages. In a subsequent motion for a remittitur based on excessiveness and the BMW extraterritoriality rule, the district court denied the motion on extraterritoriality, saying that Ford had failed to show that its conduct would be legal in other jurisdictions. The verdict was reduced to $69 million on excessiveness grounds.

On appeal, the Ninth Circuit held that the federalism arguments of BMW operate to bar juries from considering the out-of-state impact of a defendant's conduct ' whether that conduct is legal or illegal in other states should not be relevant to the punitive damages calculation. Employing a line of reasoning similar to BMW, the Ninth Circuit argued that, though a defendant may be engaged in 'core conduct' that would be considered illegal in all states, states may still be diverse in the level of sanctions awarded to the same illegal act. Such diversity is a reflection of different states' policies ' policies that might be overrun if one state were to impose its own sanctions on the defendant's conduct in other states.

For example, unlike Nevada, Alaska places a cap on punitive damages in product liability cases. This ceiling is meant to encourage safety without discouraging new and innovative designs. The $69 million in punitive damages that was awarded against Ford in this case may have caused Ford to decrease the distribution of other Ford products that were innovative but untried.

In this way, Nevada's damages award would impose Nevada policy choices on Alaska, and Alaska residents would have to settle for a decreased number of innovative products in spite of Alaska's policy decision. This goes against the model of federalism, where each state should be free to choose more stringent standards in favor of one interest over less stringent standards in favor of a different interest, and vice versa. In the words of the Ninth Circuit, 'Nevada is free, in the absence of federal legislation to the contrary, to choose a policy that may sacrifice some innovation in favor of safety, and Alaska is free to choose a policy that may sacrifice some safety in favor of innovation.' White, 2 Cal. Daily Op. Serv. 11. Thus, in keeping with federalism principles, states must refrain from incorporating the out-of-state impact of a defendant's behavior in their punitive damages calculation.

In addition, a failure to instruct the jury properly on the territorial limitation may result in improper extraterritorial penalties. According to White, such a failure permits the jury 'to engage in 'a due process violation of the most basic sort.” Id. (quoting from BMW, 517 U.S. at 573 n.19). Therefore, on federalism and due process grounds, the Ninth Circuit reversed the district court's denial of Ford's motion for a new trial on punitive damages, and required the jury 'to decide the punitive damages award within the territorial restraints established by BMW.' White, 2 Cal. Daily Op. Serv. 11.

Federalism to Limit Punitive Damages in the Future?

Although the White case currently has a petition for rehearing pending, depending upon the resolution of the petition and possible rehearing, it may very well become settled Ninth Circuit law. If this were the case, White will be the first circuit decision to require jury instructions on extraterritoriality that will bar the jury from punishing defendants for out-of-state impacts when calculating punitive awards.

Further, if White becomes settled law, it will result in patching up the BMW loophole wherein a state would otherwise be able to impose its policies upon the rest of the nation: a state would no longer be able punish a defendant for out-of-state impacts even if the defendant's conduct is illegal in each of the 50 states. The effect of such a decision may operate to lessen the defendant's burden, since a defendant would no longer be required to present evidence that the conduct in question is legal in other states in order to obtain BMW's extraterritorial limitation on punitive damages. This might, in turn, facilitate an easier application of the extraterritorial limitation in various instances, some of which include arguing the relevance of evidence before a jury, ie, statistics illustrating the national impact of a defendant's behavior should be irrelevant in determining punitive damages even if 'relevant to the determination of the degree of reprehensibility of the defendant's conduct'; formulating jury instructions; arguing against the propriety of a plaintiff's closing arguments; arguing for a new trial on punitive damages based on the trial court's failure to instruct the jury properly on the extraterritoriality limitation; or seeking a remittitur of punitive damages.

Gregg A. Farley is an attorney in Los Angeles, specializing in product liability and complex litigation. Ria C. Momblanco also is a Los Angeles attorney.

It is often the case that juries are only too eager to award punitive damages that are excessively large when compared to the potential damages or actual damage done. In 1996, the Supreme Court made an effort in BMW of North America, Inc. v. Gore , 517 U.S. 559, to curb the effects of this behavior by imposing territorial limitations on the conduct that juries may consider when calculating the size of punitive damages. Specifically, the Court held that states could not consider out-of-state conduct in punitive damages calculations when such conduct was legal in other states. The BMW decision was based on principles of state sovereignty, comity, federalism, and the Due Process Clause of the 14th Amendment.

Recently, a potentially landmark opinion, White v. Ford Motor Co., 2 Cal. Daily Op. Serv. 11 (9th Cir. 2002), came down from the Ninth Circuit Court of Appeals. White applies the policies underlying the BMW decision to extend the territorial limitation on punitive damages. The White court held that, in addition to being barred from considering out-of-state conduct when such conduct is legal in other states, a state is barred from considering extraterritorial conduct even when such conduct is illegal in other states. A petition for rehearing the White case is currently pending in the Ninth Circuit. Depending upon whether rehearing is granted and, if so, how the rehearing is decided, the decision in White to mandate jury instructions on extraterritorial limitations could become settled Ninth Circuit law.

The Standard of Unconstitutional Punitive Damages Under BMW

The BMW court expressly set out 'to illuminate 'the character of the standard that will identify constitutionally excessive awards' of punitive damages.' BMW, 517 U.S. at 568. In BMW, the jury found that, pursuant to Alabama law, BMW was guilty of fraud for failing to disclose to a buyer that a car that it sold as new was, in fact, damaged in transit and had to be repainted. The jury awarded $4,000 in compensatory damages and $4 million in punitive damages, taking into account the effects of BMW's policy of non-disclosure on consumers nationwide. In spite of post-trial evidence establishing that BMW's policy was consistent with the laws of 25 other states, the Alabama Supreme Court refused to set aside the punitive damages award and instead reduced it to $2 million, acknowledging that the original verdict was tainted by out-of-state concerns.

After certiorari was granted, the Supreme Court held that the $2 million verdict was 'grossly excessive' and, thus, unconstitutional. Before coming to this conclusion, the Court created a structure of analysis for determining whether a punitive award was constitutional. The Court first began its analysis with the well-established doctrine that a punitive damages award is in violation of the 14th Amendment Due Process Clause 'only when [it] can fairly be categorized as 'grossly excessive' in relation to [the State's] interests.' Legitimate state interests include punishing unlawful conduct and deterring its repetition. Because of this, a reviewing court must analyze the punitive award in terms of conduct occurring within the state and any economic penalties that the state inflicts 'must be supported by the state's interest in protecting its own consumers and its own economy.' Id. at 572.

In keeping with the principle of due process, the BMW court recognized that a person must receive fair notice 'not only of the conduct that will subject him to punishment but also of the severity of the penalty that a State may impose.' Id. at 574. The Court then provided three 'guideposts' for determining whether a defendant had adequate notice of the size of the State's penalty. The first and '[p]erhaps the most important' guidepost is 'the degree of reprehensibility of the defendant's conduct.' Id. at 575. 'The second and perhaps most commonly cited indicium of an unreasonable or excessive punitive damages award is its ratio to the actual harm inflicted on the plaintiff.' Id. at 580. The third guidepost is a comparison of the punitive damages award with 'the civil or criminal penalties that could be imposed for comparable misconduct.' Id. at 583.

Perhaps most relevant to the discussion at hand is the underlying policy of federalism in the BMW court's decision. In focusing on the scope of Alabama's legitimate interests in imposing punitive damages, the Court noted that each of the 50 states had different disclosure rules that were based on different but legitimate policies. Such diversity is permissible under the principle of state sovereignty, where each state has the right to make its own policy choices that form the basis of its own disclosure rules. These rules and policies are subordinate only to federal laws and pre-emptive federal doctrines, such as the federal power to regulate interstate commerce. Additionally, under the principle of comity, each state is 'constrained by the need to respect the interests of other States.' Id. at 571.

With these basic principles in mind, the Court opined that Alabama was imposing economic sanctions on violators of Alabama regulations with the intent of changing BMW's conduct in other states, and that 'by attempting to alter BMW's nationwide policy, Alabama would be infringing on the policy choices of other States.' Id. at 572. Thus, it follows from 'these principles of state sovereignty and comity that ' Alabama may insist that BMW adhere to a particular disclosure policy in that State. Alabama does not have the power, however, to punish BMW for conduct that was lawful where it occurred and that had no impact on Alabama or its residents.' Id. at 572-73.

In other words, the Court held that punitive damages that take into account extraterritorial conduct that is otherwise lawful in other states violates federalism. Permitting such damages would, in effect, impose one State's regulation on all States. A large punitive sanction against a defendant might even have an adverse impact upon a state that purposely enacted less stringent standards in order to promote other state interests.

White: Expanding BMW's Territorial Limitation

While the BMW opinion makes clear that juries may not consider extraterritorial conduct that is otherwise lawful in other states, BMW leaves open the question of whether a state can impose punitive damages sufficient to punish unlawful conduct in other states. Although this question was briefly answered with a 'No,' by the 10th Circuit in dictum, Continental Trend Resources, Inc. v. Oxy USA Inc., 101 F.3d 634, 636-38, and by several district and state courts, White is the first circuit court decision to hold decisively that 'a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasor's ' conduct in other States,' BMW , 517 U.S. at 572, regardless of whether the extraterritorial conduct is lawful.

White was a Nevada product liability case in which Ford failed to warn a buyer about a known defect in a Ford truck's parking brake. The truck then rolled, driverless, downhill, crushing the buyer's three-year-old son. Prior to jury deliberations, Ford requested that the court deliver an instruction on extraterritoriality, based on BMW, that would bar the jury from punishing Ford for the out-of-state impact of its decisions concerning its parking brakes. The district court denied Ford's request, and the jury awarded $2 million in compensatory damages and $151 million in punitive damages. In a subsequent motion for a remittitur based on excessiveness and the BMW extraterritoriality rule, the district court denied the motion on extraterritoriality, saying that Ford had failed to show that its conduct would be legal in other jurisdictions. The verdict was reduced to $69 million on excessiveness grounds.

On appeal, the Ninth Circuit held that the federalism arguments of BMW operate to bar juries from considering the out-of-state impact of a defendant's conduct ' whether that conduct is legal or illegal in other states should not be relevant to the punitive damages calculation. Employing a line of reasoning similar to BMW, the Ninth Circuit argued that, though a defendant may be engaged in 'core conduct' that would be considered illegal in all states, states may still be diverse in the level of sanctions awarded to the same illegal act. Such diversity is a reflection of different states' policies ' policies that might be overrun if one state were to impose its own sanctions on the defendant's conduct in other states.

For example, unlike Nevada, Alaska places a cap on punitive damages in product liability cases. This ceiling is meant to encourage safety without discouraging new and innovative designs. The $69 million in punitive damages that was awarded against Ford in this case may have caused Ford to decrease the distribution of other Ford products that were innovative but untried.

In this way, Nevada's damages award would impose Nevada policy choices on Alaska, and Alaska residents would have to settle for a decreased number of innovative products in spite of Alaska's policy decision. This goes against the model of federalism, where each state should be free to choose more stringent standards in favor of one interest over less stringent standards in favor of a different interest, and vice versa. In the words of the Ninth Circuit, 'Nevada is free, in the absence of federal legislation to the contrary, to choose a policy that may sacrifice some innovation in favor of safety, and Alaska is free to choose a policy that may sacrifice some safety in favor of innovation.' White, 2 Cal. Daily Op. Serv. 11. Thus, in keeping with federalism principles, states must refrain from incorporating the out-of-state impact of a defendant's behavior in their punitive damages calculation.

In addition, a failure to instruct the jury properly on the territorial limitation may result in improper extraterritorial penalties. According to White, such a failure permits the jury 'to engage in 'a due process violation of the most basic sort.” Id. (quoting from BMW, 517 U.S. at 573 n.19). Therefore, on federalism and due process grounds, the Ninth Circuit reversed the district court's denial of Ford's motion for a new trial on punitive damages, and required the jury 'to decide the punitive damages award within the territorial restraints established by BMW.' White, 2 Cal. Daily Op. Serv. 11.

Federalism to Limit Punitive Damages in the Future?

Although the White case currently has a petition for rehearing pending, depending upon the resolution of the petition and possible rehearing, it may very well become settled Ninth Circuit law. If this were the case, White will be the first circuit decision to require jury instructions on extraterritoriality that will bar the jury from punishing defendants for out-of-state impacts when calculating punitive awards.

Further, if White becomes settled law, it will result in patching up the BMW loophole wherein a state would otherwise be able to impose its policies upon the rest of the nation: a state would no longer be able punish a defendant for out-of-state impacts even if the defendant's conduct is illegal in each of the 50 states. The effect of such a decision may operate to lessen the defendant's burden, since a defendant would no longer be required to present evidence that the conduct in question is legal in other states in order to obtain BMW's extraterritorial limitation on punitive damages. This might, in turn, facilitate an easier application of the extraterritorial limitation in various instances, some of which include arguing the relevance of evidence before a jury, ie, statistics illustrating the national impact of a defendant's behavior should be irrelevant in determining punitive damages even if 'relevant to the determination of the degree of reprehensibility of the defendant's conduct'; formulating jury instructions; arguing against the propriety of a plaintiff's closing arguments; arguing for a new trial on punitive damages based on the trial court's failure to instruct the jury properly on the extraterritoriality limitation; or seeking a remittitur of punitive damages.

Gregg A. Farley is an attorney in Los Angeles, specializing in product liability and complex litigation. Ria C. Momblanco also is a Los Angeles attorney.