Supreme Court Tightens Limits On Punitive Damages

By Gregory A. Bibler and Robert H. Fitzgerald

This month the U.S. Supreme Court tightened constitutional constraints on the discretion of state courts to impose punitive damages in tort cases. In State Farm Mutual Automobile Insurance Co. v. Campbell,123 S.Ct. 1513 (2003), the Court reversed the Utah Supreme Court’s holding that an award of punitive damages that was 145 times the compensatory damages award passed muster under the Due Process Clause of the Fourteenth Amendment. In so doing, the Court emphasized that due process does not permit courts to award one plaintiff punitive damages based on the merits of other parties’ hypothetical claims. Evidence of a defendant’s bad behavior toward others may not be presented unless there is a clear nexus between that behavior and a compensable injury to the plaintiff. The Court also stated that few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.

The Supreme Court has long acknowledged that punitive damages may properly be imposed to further a State’s legitimate interests in punishing unlawful conduct and deterring its repetition. Particularly in cases of great disparity between the actual harm suffered by a plaintiff and the punitive damages awarded against a defendant, however, the Court also has observed that civil suits offer none of the heightened protections generally afforded a criminal defendant, and that due process demands some constraints to prevent grossly excessive or arbitrary punishments against a tort feasor. In 1996, the Court first instituted standards for measuring the constitutional propriety of particular punitive damage awards.

In BMW of North America v. Gore, 517 U.S. 559 (1996), the Court established "three guideposts" for assessing whether a particular award exceeds the constitutional limit: (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. Applying these guideposts in Gore, the Court set aside a $2 million punitive damage award as "grossly excessive" as compared to the $4,000 of harm suffered by the plaintiff. The dissenters criticized the Gore opinion as an unjustified intrusion on State judicial systems based on vague guidelines insusceptible of principled application.

Courts gave at least the appearance of adhering to Gore's "guideposts" but reached widely disparate results. In a case vacated and remanded by the Supreme Court for reconsideration in light of Gore, for example, the Eleventh Circuit ultimately upheld a $4.35 million punitive damages award for contamination resulting from mining wastes, holding that a multiplier of 100 to each plaintiff’s compensatory award was an appropriate measure of the punitive damages award. Johansen v. Combustion Engineering, Inc., 170 F.3d 1320, 1337 (1999). In State Farm, a case involving bad faith claims settlement practices by an insurance company, the Utah Supreme Court applied Gore and found that a $145 million punitive damage award to a plaintiff who suffered $1 million in compensatory damages comported with due process limits.

In reversing the Utah Supreme Court’s decision in State Farm, the U.S. Supreme Court stated, "Under the principles outlined in BMW of North America, Inc. v. Gore, this case is neither close nor difficult." The Court did more than recapitulate its three guideposts. In an attempt to ensure greater consistency among punitive damages verdicts – and, perhaps, to respond to the dissenters’ contention that Gore is insusceptible of principled application - the Court provided practical guidance for interpreting each of the three guideposts.

The Court characterized the first guidepost, the reprehensibility of defendant’s misconduct, as the "most important indicium of the reasonableness of a punitive damages award." In State Farm, the Court evaluated this guidepost in great detail and, in so doing, provided additional insight into the kinds of evidence that should be excluded from the punitive damage analysis.

To broaden the base on which a jury may reach their punitive damages awards, plaintiffs often introduce evidence that the defendant engaged in reprehensible conduct on a national scale. In Gore, for example, the plaintiff argued that his $4,000 in compensatory damages should be multiplied by 1,000 to calculate the punitive damage award. The basis for the multiplier was evidence that BMW had sold approximately 1,000 cars around the country under a company policy of repairing incidental damage to cars without disclosing such repairs to purchasers.

In State Farm, the Court reiterated its disdain for evidence of out-of-state conduct resulting from a broad corporate policy. "As a general rule, a State [does not] have a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside the State’s jurisdiction … A basic principle of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction."

Another common misapplication of the "reprehensibility" analysis, according to the Court, is consideration of evidence of general misconduct by the defendant, regardless of its relationship to the harm alleged by the plaintiff. In State Farm, the plaintiff introduced evidence pertaining to claims unrelated to a third-party lawsuit such as the one brought by the plaintiff. Ruling this evidence irrelevant, the Court stated, "[a] defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business." Thus, evidence of a defendant’s national reputation or net wealth may not be introduced for purpose of determining punitive damage awards.

The Court again expressed its reluctance to define a precise constitutional limit on the size of punitive damages awarded in State courts. The Court’s discussion of the second Gore guidepost (in which punitive damages are compared to compensatory damages), however, resulted in an apparent cap at "singe-digit multipliers" of compensatory damages, which "are more likely to comport with due process." The ratio may be as low as 4 to 1, which the Court described as an amount "close to the line of constitutional impropriety," or even 1 to 1 "when compensatory damages are substantial." Notably, the Court considered the $1 million in compensatory damages in State Farm to be "substantial" and strongly suggested that punitive damages in a similar amount were all that were warranted on remand. Consequently, cases involving compensatory damages of $1 million or more, and not involving personal injury, may now have a constitutional cap on punitive damages equal to the amount of compensatory damages. The rigidity of these limits are likely to be tested in future cases.

The third Gore guidepost calls for a comparison of punitive damages to civil penalties authorized or imposed in comparable cases. In State Farm, the Court likened the defendant’s transgression to an act of fraud for which Utah state law imposed a $10,000 fine – "an amount dwarfed by the $145 million punitive damages award." This substantial disparity further undermined the propriety of the State court’s decision because it conflicted with what the legislature already had determined to be the appropriate scope of punishment in comparable circumstances.

State Farm provides some good news to national corporations defending against environmental tort claims. Corporate defendants often operate under several regulatory programs, in multiple states, each involving different permitting and reporting standards. State Farm clearly discredits the introduction of evidence of permit or other violations by out-of-state facilities as evidence of reprehensible conduct within a particular state. Moreover, the requirement that evidence of misconduct relate to the harm suffered by the plaintiff essentially eliminates the possibility that wholly unrelated misconduct, even in-state, may be used in the reprehensibility analysis.

State Farm also may be a shield against excessive damage awards where toxic tort cases focus exclusively on property or economic damage. State Farm is silent, however, on the applicability of the "single-multiplier" or "4 to 1 ratio" limits in cases where plaintiffs allege personal injury. Consequently, toxic tort cases involving harmful products or threats to public health may face punitive damage claims unchecked by State Farm.

What remains to be seen is how courts will reconcile the requirement to look to civil fines as a basis for the reasonableness of a punitive damage award with the emerging constitutional limitation on these awards. Many environmental statutes and regulatory programs impose civil fines on the order of $25,000 per day of violation, with each day generally constituting a separate violation. These fines may serve as a basis for punitive damage awards in tort cases involving violations of particular regulatory or permit requirements, or in toxic tort cases involving injuries arising from environmental contamination or potentially harmful products. Other penalty structures may also provide a reference point for punitive damages, such as CERCLA’s imposition of treble damages for intransigent responsible parties for whom the government undertakes a cleanup.

The tension between these civil fines and the apparent constitutional cap on punitive damages may be the subject of further litigation in the environmental context. As with many fact-based inquiries, the application of the Gore guideposts likely will result in apparently disparate verdicts based on similar circumstances. In the end, the Court may be forced to choose between formulating a bright-line rule or leaving further development of the three guideposts to the lower courts.

State Farm almost certainly is not the last word on the constitutional limits of punitive damages. While the Court’s elaboration on the Gore guideposts may be helpful assistance to wayward State courts, State Farm may actually complicate matters by suggesting a variety of potential constitutional limits on punitive awards without settling on any one as the rule. As with Gore, plaintiffs likely will test State Farm's "single-digit multiplier" limit when favorable facts present themselves, particularly in jurisdictions where courts and juries are more receptive to broad theories for punitive damages. Nonetheless, the Court has clarified the permissible scope of the factual inquiry into the defendant’s misconduct, and tightened the constitutional limit on punitive damages, especially in non-personal injury cases.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2003 Goodwin Procter LLP. All rights reserved.