United States: Missouri Supreme Court Makes Fundamental Mistakes In Conducting Excessiveness Review Of Million-Dollar Punitive Award

Last Updated: September 26 2014
Article by Evan M. Tager and Andrew L. Frey

In a post last week, Lauren Goldman discussed the Missouri Supreme Court's decision in Lewellen v. Franklin striking down Missouri's cap on punitive damages as applied to common-law causes of action and promised that we would do a subsequent post addressing the court's further holding that the punitive damages in that case were not unconstitutionally excessive.  This is that post.

As a refresher, the jury awarded the plaintiff $25,000 in compensatory damages jointly and severally against Chad Franklin and his dealership Chad Franklin Auto Sales North LLC.  The jury also awarded punitive damages of $1 million against each defendant.

The award against the dealership was reduced under the cap to $539,050.  The plaintiff did not challenge the application of the cap to that award, presumably because the punitive damages were imposed in connection with a statutory cause of action that did not exist in 1820 when the state constitution was ratified.

The trial court reduced the punitive damages against Franklin to $500,000 under the cap, but the Missouri Supreme Court held that the cap was unconstitutional as applied to the common-law cause of action in connection with which the punitive damages were imposed.

So the question then became whether the punitive awards of $539,050 against the dealership and $1 million against Franklin were unconstitutionally excessive.  The Missouri Supreme Court held that they were not.  In so holding, the court made several fundamental analytical errors.

First, the court compared each punitive award to the full amount of compensatory damages, arriving at a ratio of 40:1 for the punitive award against Franklin and 22:1 for the punitive award against his dealership.  Whether it is appropriate to compare each defendant's punitive damages to the full amount of compensatory damages when the defendants are unrelated to each other is a complex question, the answer to which may vary depending on the circumstances.  We will address the nuances of that question in a future post.

But it is both unfair and irrational from the perspective of deterrence to double-count the compensatory damages in this way when the defendants are related corporations or, as here, an individual and his closely held business.  In that circumstance, the two punitive awards ultimately will be paid from the same pocket, so the only fair thing to do is to compare the total amount of punitive damages against both defendants to the amount of compensatory damages.  Doing so in this case would have yielded an even more indefensible 62:1 ratio.

The court's next error was in justifying the 40:1 and 22:1 ratios.  As readers are likely aware, in State Farm Mutual Automobile Insurance Co. v. Campbell the U.S. Supreme Court not only indicated that ratios of 1:1 or 4:1 will often represent the constitutional limit but strongly suggested that ratios in excess of 9:1 are presumptively unconstitutional.  The Missouri Supreme Court sought to evade that presumption by relying on the observation of the State Farm Court that the presumption does not necessarily apply when "a particularly egregious act has resulted in only a small amount of economic damages" and then characterizing Lewellen's compensatory award of $25,000 as "small."

This rationale for upholding ratios that far exceed single digits is misguided in two respects.

First, as the Supreme Court made clear in Exxon Shipping Co. v. Baker, the point of this exception is to supply adequate incentive to pursue small claims.  Needless to say, double-digit ratios are not necessary to accomplish this purpose when compensatory damages are $25,000—especially when, as here, they almost certainly exceed both the actual harm to the plaintiff and the defendant's ill-gotten gain and accordingly have a punitive and deterrent effect in their own right.  Significantly, the limit for small claims court in Missouri is $5,000—meaning that the Missouri General Assembly has determined that anything more than that amount provides sufficient incentive to file suit in courts of general jurisdiction.

Second, even when compensatory damages fairly may be characterized as "small," the U.S. Supreme Court has never suggested that the sky is the limit or that it is legitimate simply to sever any connection between the punitive damages and the harm caused or the profits reaped from the misconduct—at least without any analysis showing that the chances of escaping liability were so great that an extraordinarily outsized ratio is required for adequate deterrence.  Moreover, it is entirely irrational to say that a single-digit limit would apply to compensatory damages of, say, $50,000 or $75,000 but that a $1 million dollar punishment is permissible when less harm is caused.

In justifying its result, the Missouri Supreme Court invoked the U.S. Supreme Court's pre-State Farm/pre-BMW decision in TXO Production Corp. v. Alliance Resources Corp., in which the punitive damages were $10 million and the compensatory damages were $19,000—ignoring that the plurality in TXO treated the ratio as less than 10:1, and perhaps as low as 1.1:1, by comparing the punitive damages to the harm that could have befallen Alliance had TXO's tortious scheme succeeded.  The Missouri Supreme Court also relied on one of its own pre-State Farm decisions and a Missouri intermediate court of appeals decision—hardly compelling authority for rejecting what has become an overwhelming national consensus in the wake of State Farm.

The Missouri Supreme Court indicated that the ratios were justified in part because the defendants' "bait-and-switch practice was not limited to Ms. Lewellen's purchase but was employed repeatedly."  Yet at the same time, it maintained that, in compliance with the U.S. Supreme Court's decision in Philip Morris USA v. Williams, "the reasonableness of the punitive damages awards in this case is determined only by the harm to Ms. Lewellen and should not reflect punishment for harming others."

How to discern the difference between punishing for harm to non-parties—which is verboten—and merely considering it in gauging the degree of reprehensibility of the conduct—which is permissible under Williams—is one of the more vexing challenges in the administration of punitive damages.  But in a case like this one, a simple mathematical exercise can help illuminate whether the line has been crossed.

The plaintiff introduced evidence that 73 individuals had complained to the Missouri attorney general about the same practice (and that numerous other complaints had been filed with the Kansas attorney general).  We know with certainty that at least two other individuals have successfully sued Franklin and his dealership.  In one case, Estate of Max E. Overbey v. Chad Franklin National Auto Sales North, LLC, the Missouri Supreme Court ultimately upheld $250,000 in punitive damages against the dealership and $500,000 in punitive damages against Franklin.  In the other case, Heckadon v. CFS Enterprises, Inc., the Missouri Court of Appeals upheld punitive damages of $100,000 against the dealership and $400,000 against Franklin.  So this pattern of conduct has already generated nearly $2.8 million in punitive damages against Mr. Franklin and his dealership in only three cases.  It seems likely that many other customers of the dealership, enticed by the three cases in which customers already have hit the jackpot, have filed  or will file their own suits.  If, hypothetically, each of the 73 individuals who filed complaints with the Missouri Attorney General were to receive punitive damages of the same amount as Lewellen, the aggregate punishment would be an astronomical $112,350,650.  Even if only a few of them filed, punitive damages of the size awarded to Ms. Lewellen would swiftly swell the punishment to sky-high levels.

It should go without saying that a punishment rising into the tens of millions of dollars would be grossly excessive for the kind of conduct involved here—at worst, deliberately deceiving prospective car buyers about the cost of vehicle financing.  Because a punishment of $1.5 million per plaintiff would produce a manifestly excessive total for the full course of conduct when numerous victims may be expected to sue, it follows that a punishment of $1.5 million is excessive for any single plaintiff and must, therefore, improperly include punishment for harms to non-parties.

A third fundamental error—which is, unfortunately, hardly uncommon—involves the Missouri Supreme Court's application of the third BMW guidepost: legislatively established fines for comparable conduct.  The Missouri Supreme Court acknowledged that the most comparable penalty is the $1,000 maximum fine for a violation of the Missouri Merchandising Practice Act.  The punitive damages are more than 1500 times that maximum penalty.  But the court sloughed that off on the ground that the other two guideposts—reprehensibility and ratio—support the punitive damages.

It may be that a large disparity between the punitive damages and the legislatively established fine for comparable conduct should not be decisive when the ratio of punitive to compensatory damages is modest and the conduct is highly reprehensible.  But when the punitive/compensatory ratio is 62:1 (or 40:1 or 22:1), it is not credible to say that the third guidepost can be disregarded because the second and first support a high punishment.

The Missouri Supreme Court did get one thing right—though it made no difference to the outcome.  In calculating the punitive/compensatory ratio, the court rejected the plaintiff's exhortation to include her award of attorneys' fees in the denominator of the ratio.  That holding is right for several reasons, which we will elucidate in a future post.

Tags: ratio

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