Supreme Court Speaks Again on Punitive Damages

The correct question to ask is whether the Court's exposition about common law limits on punitive damages in a maritime case will be embraced by state courts. A subsidiary question is, how quickly? The “stealth bomber” question is what will be the effect upon state statutes now permitting ratios higher than 1:1?

State courts, for the most part and over time, will likely adapt to the notion of a 1:1 punitive-to-compensatory damages ratio, if not embrace it lovingly. The reality that constitutional due process further constrains runaway punitive awards that are disproportionate to the underlying compensatory damages is a potent one-two punch. Moreover, when the Supreme Court speaks regarding broad policies of common law, albeit in admiralty or maritime contexts, the pronouncement nevertheless often proves influential regarding state tort or contract law. See, e.g., East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858 (1986), where the Court, in admiralty, held that a cause of action is not stated in tort when a defective product purchased in a commercial transaction malfunctions, injuring only the product itself and causing purely economic loss. Contract law, and the law of warranty in particular, is thus the suitable rule to resolve such economic losses. The Court's ruling that no product liability claim lies in admiralty when the only injury claimed is economic loss was adopted by many courts and became popularly known as “the economic loss” rule. It is likely that Exxon, along with the Court's constitutionally based predecessor decisions limiting punitive damages, will similarly influence state law.

Alaska Spill

Exxon stemmed from the famous 1989 oil spill in Alaska's Prince William Sound when a supertanker carrying more than a million barrels of crude oil ran aground on a reef. Evidence showed that the captain, an alcoholic who underwent some treatment but relapsed, must have had a blood-alcohol level of around 0.241, three times the legal limit for driving in most states. Evidence also showed that Exxon management knew of the relapse. At the time of the tanker's crucial maneuvers, the captain left the bridge and a third mate remained to move the vessel into the shipping lane.

In the disaster's aftermath, Exxon spent some $2.1 billion in cleanup efforts, paid some $125 million in fines and restitution, paid $900 million toward restoring natural resources, and paid another $303 million in voluntary settlements with fishermen, property owners, and others. The remaining civil cases were consolidated into this one comprised of three classes: commercial fishermen, Native Alaskans, and landowners. The class of all plaintiffs seeking punitive damages numbered more than 32,000. Exxon stipulated to its negligence and liability for compensatory damages.

Accordingly, the trial was structured into three phases: 1) the defendants' recklessness and potential for punitive liability; 2) the compensatory damages for plaintiffs; and 3) the amount of punitive damages for which Exxon and the defendant captain were each liable. The jury found both defendants to have been reckless. It awarded compensatory awards to the class plaintiffs. Then, after hearing evidence about Exxon management's acts and omissions, the jury awarded $5,000 punitive damages against the captain and $5 billion against Exxon. The Ninth U.S. Circuit Court of Appeals later reduced the punitive award to $2.5 billion. The stage was set for Supreme Court review. The Court granted certiorari to consider whether maritime law allows corporate liability for punitive damages on the basis of the acts of managerial agents, whether the Clean Water Act pre-empts punitive damages, and whether the amount of the damages was excessive under maritime common law.

On the issue of managerial agents' acts as a basis for punitive damages, the Court was evenly divided (with Justice Alito not participating). Accordingly, the Ninth Circuit's decision on such derivative liability was left undisturbed. However, the Court did declare that “the disposition here is not precedential ' .” On the question whether the Clean Water Act's penalties pre-empted recovery of punitive damages, the Court held “no.” Then, in 'IV of Justice David Souter's opinion for the Court, the discussion turned toward the size of the $2.5 billion punitive damages award. This issue, the Court said, “goes to our understanding of the place of punishment in modern civil law and reasonable standards of process in administering punitive law.” Accordingly, the Court traced the history of the doctrine back to at least 1763, when John Wilkes' papers were searched unlawfully and a spectacular '4,000 “exemplary” award was issued against the Secretary of State. The punitive doctrine crossed the Atlantic and became widely accepted in American courts by the middle of the 19th century. Over time, a consensus developed that punitive damages are aimed principally at “retribution and deterring harmful conduct.” Exxon, Slip Op, at p. 19.

The Court reviewed the various degrees of blameworthiness involved. These include “reckless conduct” that is not intentional or malicious but where the actor knows or has reason to know of facts which create a high degree of harmful risk to another. “Action taken or omitted to augment profit represents an enhanced degree of punishable culpability, as of course does willful or malicious action, taken with a purpose to injure.” Exxon, Slip Op, at p. 20.

The Court noted its own decision in BMW v. Gore, 517 U.S. 559, 582 (1996). It surveyed state regulation of punitive damages, which varies. It also observed that such damages “overall are higher and more frequent in the United States than they are anywhere else.” Exxon, Slip Op, at pp. 22-23.

Unpredictability Factor

The Court observed from a variety of sources and studies that “the median ratio of punitive to compensatory awards has remained less than 1:1,” showing thereby “an overall restraint” and suggesting that “in many instances a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter.” Exxon, Slip Op, at pp. 25-26. This fact led the Court to the “real problem ' the stark unpredictability of punitive awards.” Courts are as concerned with fairness as consistency. The statistics showed that the “spread”of punitive awards is “great,” and the extreme, i.e., outlier, cases subject defendants to punitive damages that dwarf the corresponding compensatories. The “spread” was notable even in punitive damages assessed by judges. These ranges of variation betrayed a lack of consistency in reaching a generally accepted optimal level of penalty and deterrence in cases involving a wide range of circumstances.

The Court's earlier response to “outlier” punitive awards had thus far been confined to the constitutional due process standard that every award must pass. In the State Farm case, the Court determined that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” However, 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.” Exxon, Slip Op, at p. 28 (quoting from State Farm Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003)).

In Exxon, the Court was not looking at the outer limit of due process but, rather, examining the verdict under federal maritime common law authority, “which precedes and should obviate any application of the constitutional standard.” The due process cases have involved awards subject in the first instance to state law. Therefore, the Court had no occasion to consider a “common law standard of excessiveness.” In Exxon, however, the Court could probe its reaches. The Court's review did not consider the intersection of punitives with the Constitution. Rather, the question was the desirability of regulating such awards as a common law remedy under judge-made law in the absence of statute.

The unpredictability of high punitive awards has constitutional significance. However, such awards also are “in tension with the function of awards as punitive” because of the “implication of unfairness that an eccentrically high punitive verdict carries” in a system that rests “on a sense of fairness in dealing with one another.” A penalty, thus, “should be reasonably predictable in its severity,” so that even a “bad man” has some ability “to know what the stakes are in choosing one course of action over another.”

In seeking a technique on how to limit excessiveness, the Court rejected the so-called “verbal” approach, namely, providing verbal standards either in the form of judicial review criteria or in the form of jury instructions. The Court was “skeptical” that verbal formulas, superimposed on general jury instructions, are the best insurance against “unpredictable outliers.” Instructions can go only so far in promoting systemic consistency. The Court's experience in aiming for consistency in criminal sentencing explained its skepticism. More rigorous standards than the constitutional limit would be needed to eliminate unpredictable outlying punitive awards.

A second approach, that of setting hard-dollar caps on punitive awards, as some states have done, was also rejected by the Court. Since there is no “standard” tort or contract injury, it is difficult to settle on a particular dollar figure as appropriate across the board. Plus, the judicial selection of a dollar cap has drawbacks. A legislature can pick a figure and revisit its provision when needed. However, a court “cannot say when an issue will show up on the docket again.” Thus, the more “promising alternative,” said the Court, was the “ratio” or “maximum multiple” approach which pegs punitive to compensatory damages.

1:1 Ratio

The potential relevance of the ratio between compensatory and punitive damages is indisputable, said the Court, “being a central feature in our due process analysis.” As a common law court of last resort and faced with a perceived defect in a common law remedy, the Court observed that the problem of outlier punitive awards ought to be solved by the Court and not the legislature, as contended by the dissenting justices. “[I]t is hard to see how the judiciary can wash its hands of a problem it created, simply by calling quantified standards legislative.” Exxon, Slip Op, at p. 34.

The problem with certain multiple ratios adopted by some state statutes, such as a 3:1 or 2:1 ratio, is that they can apply not only to really bad behavior or the most egregious conduct (e.g., willful and malicious, or dangerous activity carried on for the purpose of increasing the tortfeasor's gain) but also to tortious acts that were worse than negligent but less than malicious, such as in Exxon where the recklessness was profitless to the tortfeasors. Federal treble damages statutes also were not a persuasive precedent here.

The more reasonable civil penalty is reflected in what juries and judges have done across many hundreds of punitive awards. Studies show the median ratio for the entire gamut of circumstances as being less than 1:1. In other words, the compensatory award exceeds the punitive in most cases and the less-than-one ratio roughly expresses the broad spectrum of blameworthiness. Thus, concluded the Court: “given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution, we consider that a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases.” Such a ratio is not too low, as confirmed by the Court's explanation in State Farm of the constitutional upper limit in all but the most exceptional cases. Exxon, Slip Op, at pp. 39-42.

Chief Justice John G. Roberts and Justices Antonin Scalia, Anthony Kennedy and Clarence Thomas joined Justice David Souter's opinion for the Court. Justice John Paul Stevens dissented from the section on excessiveness saying that such empirical judgments in maritime cases were for Congress to make. Dissenting Justice Ruth Bader Ginsburg shared Justice Stevens' view, though she recognized the issue was “close.” She also questioned the wisdom of a 1:1 ratio in the case of highly blameworthy tortfeasors. Finally, she asked, “In the end, is the Court holding that 1:1 is the maritime-law ceiling, or is it also signaling that any ratio higher than 1:1 will be held to exceed 'the constitutional outer limit'? On the next opportunity, will the Court rule, definitively, that 1:1 is the ceiling due process requires of all the States, and for all federal claims?” Justice Stephen Breyer, also dissenting, argued that “a limited exception to the Court's 1:1 ratio is warranted here” because this was “no mine-run case of reckless behavior.”

Conclusion

Given the High Court's decisions in State Farm, BMW v. Gore and now, Exxon, the Court has woven a rich tapestry of constitutional and common law considerations aimed at shooting down runaway and high outlier punitive awards. By articulating common law principles which point to a limit on the size of punitive awards, a limit that for the most part is also reflected in constitutional due process standards reiterated in Exxon, the Court's expression of a 1:1 ratio limit has given judges, lawyers and legislatures helpful guidelines on reeling in the problem of unpredictable punitive awards.

Michael Hoenig, a member of this newsletter's Board of Editors, is a member of Herzfeld & Rubin.

This article originally appeared in the New York Law Journal, a sister publication of this newsletter.

On June 25, the U.S. Supreme Court decided Exxon Shipping Co. v. Baker, No. 07-219 (U.S. Sup. Ct. June 25, 2008), a ruling likely to fortify the view that an award of punitive damages should not exceed the amount of the compensatory award.

To be sure, some will argue that there are, may be, or ought to be, exceptions; some will argue that the Court was only deciding federal common law in a maritime case and not the limits of state common law; and some may say there is still support for accepting punitive awards that exceed a 1:1 ratio.

Although such ruminations certainly are arguable and we can expect a swell of scholarly debate in the law reviews, for the most part, for now, the nation's high court has sent a strong signal, by a vote of 5-3 (Justice Samuel Alito Jr. did not participate), that punitive damages should not exceed the compensatory damages in a given case. This particular decision is framed within a common law motif but the Court's opinion also hints strongly that, for the most part, due process considerations should usually lead to the same result.

The correct question to ask is whether the Court's exposition about common law limits on punitive damages in a maritime case will be embraced by state courts. A subsidiary question is, how quickly? The “stealth bomber” question is what will be the effect upon state statutes now permitting ratios higher than 1:1?

State courts, for the most part and over time, will likely adapt to the notion of a 1:1 punitive-to-compensatory damages ratio, if not embrace it lovingly. The reality that constitutional due process further constrains runaway punitive awards that are disproportionate to the underlying compensatory damages is a potent one-two punch. Moreover, when the Supreme Court speaks regarding broad policies of common law, albeit in admiralty or maritime contexts, the pronouncement nevertheless often proves influential regarding state tort or contract law. See, e.g., East River Steamship Corp. v. Transamerica Delaval Inc. , 476 U.S. 858 (1986), where the Court, in admiralty, held that a cause of action is not stated in tort when a defective product purchased in a commercial transaction malfunctions, injuring only the product itself and causing purely economic loss. Contract law, and the law of warranty in particular, is thus the suitable rule to resolve such economic losses. The Court's ruling that no product liability claim lies in admiralty when the only injury claimed is economic loss was adopted by many courts and became popularly known as “the economic loss” rule. It is likely that Exxon, along with the Court's constitutionally based predecessor decisions limiting punitive damages, will similarly influence state law.

Alaska Spill

Exxon stemmed from the famous 1989 oil spill in Alaska's Prince William Sound when a supertanker carrying more than a million barrels of crude oil ran aground on a reef. Evidence showed that the captain, an alcoholic who underwent some treatment but relapsed, must have had a blood-alcohol level of around 0.241, three times the legal limit for driving in most states. Evidence also showed that Exxon management knew of the relapse. At the time of the tanker's crucial maneuvers, the captain left the bridge and a third mate remained to move the vessel into the shipping lane.

In the disaster's aftermath, Exxon spent some $2.1 billion in cleanup efforts, paid some $125 million in fines and restitution, paid $900 million toward restoring natural resources, and paid another $303 million in voluntary settlements with fishermen, property owners, and others. The remaining civil cases were consolidated into this one comprised of three classes: commercial fishermen, Native Alaskans, and landowners. The class of all plaintiffs seeking punitive damages numbered more than 32,000. Exxon stipulated to its negligence and liability for compensatory damages.

Accordingly, the trial was structured into three phases: 1) the defendants' recklessness and potential for punitive liability; 2) the compensatory damages for plaintiffs; and 3) the amount of punitive damages for which Exxon and the defendant captain were each liable. The jury found both defendants to have been reckless. It awarded compensatory awards to the class plaintiffs. Then, after hearing evidence about Exxon management's acts and omissions, the jury awarded $5,000 punitive damages against the captain and $5 billion against Exxon. The Ninth U.S. Circuit Court of Appeals later reduced the punitive award to $2.5 billion. The stage was set for Supreme Court review. The Court granted certiorari to consider whether maritime law allows corporate liability for punitive damages on the basis of the acts of managerial agents, whether the Clean Water Act pre-empts punitive damages, and whether the amount of the damages was excessive under maritime common law.

On the issue of managerial agents' acts as a basis for punitive damages, the Court was evenly divided (with Justice Alito not participating). Accordingly, the Ninth Circuit's decision on such derivative liability was left undisturbed. However, the Court did declare that “the disposition here is not precedential ' .” On the question whether the Clean Water Act's penalties pre-empted recovery of punitive damages, the Court held “no.” Then, in 'IV of Justice David Souter's opinion for the Court, the discussion turned toward the size of the $2.5 billion punitive damages award. This issue, the Court said, “goes to our understanding of the place of punishment in modern civil law and reasonable standards of process in administering punitive law.” Accordingly, the Court traced the history of the doctrine back to at least 1763, when John Wilkes' papers were searched unlawfully and a spectacular '4,000 “exemplary” award was issued against the Secretary of State. The punitive doctrine crossed the Atlantic and became widely accepted in American courts by the middle of the 19th century. Over time, a consensus developed that punitive damages are aimed principally at “retribution and deterring harmful conduct.” Exxon, Slip Op, at p. 19.

The Court reviewed the various degrees of blameworthiness involved. These include “reckless conduct” that is not intentional or malicious but where the actor knows or has reason to know of facts which create a high degree of harmful risk to another. “Action taken or omitted to augment profit represents an enhanced degree of punishable culpability, as of course does willful or malicious action, taken with a purpose to injure.” Exxon, Slip Op, at p. 20.

The Court noted its own decision in BMW v. Gore , 517 U.S. 559, 582 (1996). It surveyed state regulation of punitive damages, which varies. It also observed that such damages “overall are higher and more frequent in the United States than they are anywhere else.” Exxon, Slip Op, at pp. 22-23.

Unpredictability Factor

The Court observed from a variety of sources and studies that “the median ratio of punitive to compensatory awards has remained less than 1:1,” showing thereby “an overall restraint” and suggesting that “in many instances a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter.” Exxon, Slip Op, at pp. 25-26. This fact led the Court to the “real problem ' the stark unpredictability of punitive awards.” Courts are as concerned with fairness as consistency. The statistics showed that the “spread”of punitive awards is “great,” and the extreme, i.e., outlier, cases subject defendants to punitive damages that dwarf the corresponding compensatories. The “spread” was notable even in punitive damages assessed by judges. These ranges of variation betrayed a lack of consistency in reaching a generally accepted optimal level of penalty and deterrence in cases involving a wide range of circumstances.

The Court's earlier response to “outlier” punitive awards had thus far been confined to the constitutional due process standard that every award must pass. In the State Farm case, the Court determined that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” However, 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.” Exxon , Slip Op, at p. 28 (quoting from State Farm Mutual Automobile Ins. Co. v. Campbell , 538 U.S. 408, 425 (2003)).

In Exxon, the Court was not looking at the outer limit of due process but, rather, examining the verdict under federal maritime common law authority, “which precedes and should obviate any application of the constitutional standard.” The due process cases have involved awards subject in the first instance to state law. Therefore, the Court had no occasion to consider a “common law standard of excessiveness.” In Exxon, however, the Court could probe its reaches. The Court's review did not consider the intersection of punitives with the Constitution. Rather, the question was the desirability of regulating such awards as a common law remedy under judge-made law in the absence of statute.

The unpredictability of high punitive awards has constitutional significance. However, such awards also are “in tension with the function of awards as punitive” because of the “implication of unfairness that an eccentrically high punitive verdict carries” in a system that rests “on a sense of fairness in dealing with one another.” A penalty, thus, “should be reasonably predictable in its severity,” so that even a “bad man” has some ability “to know what the stakes are in choosing one course of action over another.”

In seeking a technique on how to limit excessiveness, the Court rejected the so-called “verbal” approach, namely, providing verbal standards either in the form of judicial review criteria or in the form of jury instructions. The Court was “skeptical” that verbal formulas, superimposed on general jury instructions, are the best insurance against “unpredictable outliers.” Instructions can go only so far in promoting systemic consistency. The Court's experience in aiming for consistency in criminal sentencing explained its skepticism. More rigorous standards than the constitutional limit would be needed to eliminate unpredictable outlying punitive awards.

A second approach, that of setting hard-dollar caps on punitive awards, as some states have done, was also rejected by the Court. Since there is no “standard” tort or contract injury, it is difficult to settle on a particular dollar figure as appropriate across the board. Plus, the judicial selection of a dollar cap has drawbacks. A legislature can pick a figure and revisit its provision when needed. However, a court “cannot say when an issue will show up on the docket again.” Thus, the more “promising alternative,” said the Court, was the “ratio” or “maximum multiple” approach which pegs punitive to compensatory damages.

1:1 Ratio

The potential relevance of the ratio between compensatory and punitive damages is indisputable, said the Court, “being a central feature in our due process analysis.” As a common law court of last resort and faced with a perceived defect in a common law remedy, the Court observed that the problem of outlier punitive awards ought to be solved by the Court and not the legislature, as contended by the dissenting justices. “[I]t is hard to see how the judiciary can wash its hands of a problem it created, simply by calling quantified standards legislative.” Exxon, Slip Op, at p. 34.

The problem with certain multiple ratios adopted by some state statutes, such as a 3:1 or 2:1 ratio, is that they can apply not only to really bad behavior or the most egregious conduct (e.g., willful and malicious, or dangerous activity carried on for the purpose of increasing the tortfeasor's gain) but also to tortious acts that were worse than negligent but less than malicious, such as in Exxon where the recklessness was profitless to the tortfeasors. Federal treble damages statutes also were not a persuasive precedent here.

The more reasonable civil penalty is reflected in what juries and judges have done across many hundreds of punitive awards. Studies show the median ratio for the entire gamut of circumstances as being less than 1:1. In other words, the compensatory award exceeds the punitive in most cases and the less-than-one ratio roughly expresses the broad spectrum of blameworthiness. Thus, concluded the Court: “given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution, we consider that a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases.” Such a ratio is not too low, as confirmed by the Court's explanation in State Farm of the constitutional upper limit in all but the most exceptional cases. Exxon, Slip Op, at pp. 39-42.

Chief Justice John G. Roberts and Justices Antonin Scalia, Anthony Kennedy and Clarence Thomas joined Justice David Souter's opinion for the Court. Justice John Paul Stevens dissented from the section on excessiveness saying that such empirical judgments in maritime cases were for Congress to make. Dissenting Justice Ruth Bader Ginsburg shared Justice Stevens' view, though she recognized the issue was “close.” She also questioned the wisdom of a 1:1 ratio in the case of highly blameworthy tortfeasors. Finally, she asked, “In the end, is the Court holding that 1:1 is the maritime-law ceiling, or is it also signaling that any ratio higher than 1:1 will be held to exceed 'the constitutional outer limit'? On the next opportunity, will the Court rule, definitively, that 1:1 is the ceiling due process requires of all the States, and for all federal claims?” Justice Stephen Breyer, also dissenting, argued that “a limited exception to the Court's 1:1 ratio is warranted here” because this was “no mine-run case of reckless behavior.”

Conclusion

Given the High Court's decisions in State Farm, BMW v. Gore and now, Exxon, the Court has woven a rich tapestry of constitutional and common law considerations aimed at shooting down runaway and high outlier punitive awards. By articulating common law principles which point to a limit on the size of punitive awards, a limit that for the most part is also reflected in constitutional due process standards reiterated in Exxon, the Court's expression of a 1:1 ratio limit has given judges, lawyers and legislatures helpful guidelines on reeling in the problem of unpredictable punitive awards.

Michael Hoenig, a member of this newsletter's Board of Editors, is a member of Herzfeld & Rubin.

This article originally appeared in the New York Law Journal, a sister publication of this newsletter.