The Supreme Court has just issued what is perhaps its most pointed critique yet of the punitive damage system in this country. Noting that "punitive damages overall are higher and more frequent in the United States than they are anywhere else," and that in many instances the size of the punitive award "is substantially greater than necessary to punish or deter," the Court concluded that the "real problem" "is the stark unpredictability of punitive awards." Although arising in the context of federal maritime law, the Court concluded that for reckless (but not intentionally malicious) conduct, a punitive damage award may not exceed a 1:1 ratio with actual damages. On that basis, it reduced the $2.5 billion punitive damage award against Exxon concerning the Valdez supertanker spill to $507 million. Exxon Shipping Co. v. Baker, No. 07-219 (US June 25, 2008). This is a dramatic reduction from the punitive damage ratio that the Court has allowed for state law claims in prior cases.
Those earlier rulings – State Farm Mut. Auto. Ins. Co. v. Campbell, BMW of North America, Inc. v. Gore, and Honda Motor Co. v. Oberg – set a presumptive cap of a 4:1 ratio for punitive damages on state law claims. These prior holdings remain unaffected by the Exxon decision, since those earlier cases focused on when state law awards are constitutionally excessive, whereas Exxon arises under federal common law (the body of law created by the federal courts in the absence of Congressional action). But what the Court had to say about the principles that should guide the award of punitive damages will likely be cited for years to come as principles that should guide any award of punitive damages in other contexts.
First, the Court noted that the unpredictable nature of punitive damage awards, which permits "eccentrically high" verdicts, is inconsistent with a legal system that is supposed to be predicated on fairness and consistency. The inability to predict "with a fair probability" from case to case the magnitude of a punitive damages award based on similar conduct makes the result too much of a lottery rather than a measured judgment about the optimal level of penalty and deterrence, the Court held.
Second, the Court found that the typical vague jury instructions regarding punitive damages (for example, "an amount that will deter the defendant," "proportionate to the wrongfulness of defendant's conduct," "but not designed to bankrupt or financially destroy the defendant"), coupled with appellate review under "traditional 'shock the conscience' and 'passion and prejudice tests,'" have proven to be unreliable "insurance against unpredictable outlier[]" verdicts. Thus, the Court concluded that a more "quantified approach" is required. This also departs from the Court's prior stance in reviewing state court awards for constitutional excessiveness, where the Court has "consistently rejected the notion that the constitutional line is marked by a simple mathematical formula."
Third, while many states have adopted by statute a 3:1 maximum ratio, the Court rejected a one-size-fits-all approach to punitive damages, noting that cases involving merely reckless conduct (as opposed to intentional acts of malice) and cases involving behavior not driven primarily by a desire for economic gain should result in lower punitive damage ratios than cases involving more reprehensible conduct, which might be more deserving of a 3:1 ratio. Similarly, where the actual damages are high (and thus there is little risk that the behavior will escape punishment merely because the costs of litigation outweigh the likely recovery), the ratio of punitive to actual damages should be reduced to reflect the lesser need for additional deterrence.
Notably, the Court carved out of its critique those areas where Congress has specifically defined the permissible damages, such as treble damages in antitrust and RICO cases, as well as other enhanced recovery under intellectual property and consumer protection statutes. But what the decision suggests is that the Court is going to continue to scrutinize punitive damage awards carefully, and beyond the new rules it just prescribed for the maritime context, may look for ways to bring greater consistency and predictability to punitive damage awards in other contexts, as well.
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