United States: Supreme Court Confirms Narrow Limits For Punitive Damages Awards

Co-authored by John E Davis and Amy C Gross

On April 7, 2003, the U.S. Supreme Court ruled that a punitive damages award of $145 million was excessive and violated the Due Process Clause of the 14th Amendment to the Constitution, where compensatory damages were only $1 million. State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289, 2003 WL 1791206 (2003). Calling the case "neither close nor difficult," the Court found that such award was an "irrational and arbitrary deprivation of the property of the defendant" because it was based on out-of-state conduct that was unrelated to that injuring the plaintiff, and because the 145 to 1 ratio of punitive to compensatory damages was grossly high and arbitrary. This is the latest in a string of cases by the Supreme Court restricting the upward limits for punitive damages.

In 1981, Curtis and Inez Campbell drove on the wrong side of the road, resulting in an accident that killed one person and seriously injured another. The Campbells’ insurer, State Farm Mutual Automobile Insurance Company (State Farm), refused to settle the victims’ tort action for the policy limit of $50,000. When a jury imposed damages of $185,849 against the Campbells, State Farm initially refused to cover the verdict. Although State Farm had previously assured the Campells that they would have no personal liability, it suggested that the Campbells sell their house to pay the sum. In collaboration with the accident victims, the Campbells instituted an action against State Farm based on its bad faith handling of that claim.

The jury determined that State Farm’s decision not to settle was unreasonable given the near certainty that an excess award would ensue. The jury awarded the Campbells $2.6 million in compensatory damages and assessed $145 million in punitive damages against State Farm. The trial court reduced the awards to $1 million and $25 million respectively, but the Utah Supreme Court reinstated the $145 million punitive damages award.

The Supreme Court reviewed the appropriateness of the punitive damage award under the three factors set forth in BMW of North America, Inc. v. Gore, 517 U.S. 559, 575 (1996), namely, "(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases." The first factor is the most important. The Court set the tone early, noting that because compensatory damages are presumed to make a plaintiff whole, punitive damages should be awarded only if a defendant’s actions were so egregious as to deserve punishment. While State Farm’s behavior probably met that standard, the Court concluded that a much smaller amount would have sufficed to satisfy the legitimate interest of the State in this matter.

The Court found that the Utah Supreme Court, in reinstating the full punitive damages award, had attempted to punish misconduct in State Farm’s national operations. The state court considered a wide range of defendant’s out-of-state behavior, stretching back over 20 years, which was causally unrelated to plaintiffs’ injury. The Supreme Court, however, held that a State generally has no legitimate interest in punishing a defendant for out-of-state conduct because the state where the wrongdoing occurred has an interest in applying its own laws. Such extra-jurisdictional conduct might be a proper subject of the punitive damages inquiry if it demonstrates the "deliberateness and culpability" of a defendant’s actions. This is only so, however, if the conduct has a sufficient nexus and similarity to that which caused plaintiff’s injury. Otherwise, the Court stated, defendants could be held responsible for behavior that, while unsavory, is unrelated to the plaintiff’s injury. This could unfairly expose defendants to multiple punishment for the same actions.

The Court next addressed the second Gore factor—the disparity between plaintiff’s harm and the punitive damages award—by focusing on the 145 to 1 ratio of punitive to compensatory damages. The Court stated that while few awards that exceed a single-digit ratio will satisfy due process, there is no rigid benchmark. In cases involving reprehensible conduct that does not cause substantial economic damages, a higher ratio might be permissible. Significantly, however, the Court stated that the converse is true: where compensatory damages are substantial, a ratio as low as 1 to 1 may be the maximum permitted by the Constitution. In this case, the Campbells had not suffered physically and had already received substantial compensation for their minor economic injuries. Further, the compensatory damages award already contained redress for the Campbells’ emotional harm, which the punitive damages probably duplicated. Accordingly, the Court found the 145 to 1 ratio of punitive to compensatory damages to be disproportionately high. The Court noted that an award "at or near the amount of compensatory damages" would likely be justified.

The Court also rejected the Utah Supreme Court’s argument that the jury’s punitive damages award was justified because State Farm was likely not punished for most of its other misconduct and because it makes enough money to pay the award, as this had little to do with the actual harm sustained by the plaintiffs. Large corporations have the same entitlement as any other defendant to fair notice and the opportunity to contest claims against them. Further, a defendant’s wealth cannot justify an otherwise unconstitutional punitive damages award. Finally, the Court noted a huge disparity in the correlation between the punitive damages award and civil penalties authorized in comparable cases, which is the third Gore factor. While extreme penalties such as the revocation of State Farm’s license to do business in Utah were theoretically available, the Court noted that the basis for such penalties was State Farm’s out-of-state and dissimilar conduct, which was insufficient to justify the award. Indeed, the most relevant civil sanction for fraud under Utah law appeared to be a $10,000 fine—far less than the punitive damages imposed upon State Farm.

State Farm is an important decision for large corporations, providing greater assurance that they may do business without risking arbitrary and grossly outsized punitive damages awards based on conduct not closely related to the case being litigated. The Supreme Court has sent a clear signal that lower courts should become even more active not only in policing the size of the award, but also in limiting the sort of inflammatory evidence that has been used to goad juries into issuing excessive damages awards. A corporation’s behavior outside of the jurisdiction will generally only be relevant if it has a specific connection to that injury. Further, juries will be limited in considering a defendant’s wealth in formulating an award. Finally, the Court has strongly indicated that where there are substantial compensatory damages, the maximum constitutionally permissible punitive damages would be an amount equivalent to the compensatory damages, and no more. The Court’s decision should be helpful in preventing the possibilities of "jackpot" justice that prevail in some jurisdictions.