Bmw of North America, Inc. v. Gore: the Supreme Court Rejects a Punitive Damage Award on Due Process Grounds - Rob S. Register

• Citation: Vol. 48 No. 3
• Publication year: 1997

BMW of North America, Inc. v. Gore: The Supreme Court Rejects a Punitive Damage Award on Due Process Grounds

The Supreme Court of the United States has addressed the validity of punitive damages awards many times over the years, but until now has never overturned one based on a claim of excessiveness under the Due Process Clause of the Fourteenth Amendment. BMW of North America, Inc. v. Gore¹ is the first case in which the Court reversed and remanded a large punitive damage amount based on those grounds.

I. Facts and Procedural History

In BMW of North America, Inc. v. Gore, the United States Supreme Court applied a three-part test to identify a punitive damage award that violated the Due Process Clause² of the Fourteenth Amendment.³ The controversy in Gore began when Dr. Ira Gore purchased a new sedan from the local authorized BMW dealer in Birmingham, Alabama.⁴ Nine months after the purchase, an independent car dealer informed Dr. Gore that the car had been repainted prior to his purchase.⁵ Gore brought suit against BMW of North America ("BMW") and the American distributor of BMW automobiles, claiming that the failure to disclose the car's condition constituted suppression of a material fact.⁶

Dr. Gore's allegation was based on an Alabama statute⁷ that codified Alabama's common-law cause of action for fraud.⁸ At trial, BMW acknowledged its policy of not disclosing to dealers any predelivery damages that were less than three percent of the suggested retail price.⁹ Apparently, the car had come into contact with acid rain on its trans-Atlantic trip from Germany.¹⁰ The cost of repainting Dr. Gore's car was only one and one-half percent of its value.¹¹ Dr. Gore's complaint prayed for five hundred thousand dollars in compensatory damages, punitive damages, and costs.¹² BMW argued that it was not obligated to report the repairs because they did not materially affect the car.¹³ BMW maintained that transactions in jurisdictions other than Alabama should not be used by the jury to assess the amount of damages to award.¹⁴

The jury found actual costs of four thousand dollars and then multiplied this by the approximate number of damaged cars sold in the United States¹⁵ to arrive at the four million dollar punitive damage award.¹⁶ In a post trial motion to deny the punitive award, BMW produced evidence that its nondisclosure policy was consistent with the laws of twenty-five states.¹⁷ None of those states required disclosure of repairs costing less than three percent of the suggested retail price.¹⁸ The motion also indicated that BMW's policy had never been found unlawful before this action was filed.¹⁹ The trial judge held that the award was not excessive and denied the motion.²⁰

On appeal, the Alabama Supreme Court affirmed the lower court's decision.²¹ The court applied a combination of factors it had developed in prior cases and rejected BMW's claim that the award transcended constitutional limits.²² However, the court found that the jury's verdict was wrongly calculated because it was based in part on incidents from other jurisdictions.²³ The court held that "a reasonable punitive damages award in this case" was two million dollars.²⁴ The Supreme Court of the United States granted certiorari and reversed the Alabama Supreme Court, holding that the two million dollar punitive damages award was grossly excessive, and therefore exceeded the constitutional limit.²⁵

II. Legal Background

The decision in Gore was the first one in which the United States Supreme Court expressly held a punitive damage award unconstitutional under the "grossly excessive" language in the Due Process Clause. Prior to BMW, the Supreme Court, as well as the individual Justices, had expressed concern over the constitutionality of large punitive damage awards.²⁶ The court had mentioned the due process analysis in recent opinions, but the Court always stopped short of reversing on "grossly excessive" grounds.²⁷

For example, in Browning Ferris Industries of Vermont, Inc. u. Kelco Disposal, Inc.,²⁸ petitioner sought due process protection based on the amount of the damages awarded. However, the claim of excessiveness under the Due Process Clause had not been raised in either the district court or the court of appeals; therefore, the Court put the inquiry off until another day.²⁹

In Pacific Mutual Life Insurance Co. v. Haslip,³⁰ the Court finally considered a Fourteenth Amendment Due Process challenge to a punitive damage award. In that case, the Court conceded that a jury with unlimited discretion in the fixing of punitive damages "may invite extreme results that jar one's constitutional sensibilities."³¹ The Court also stated that it need not, and could not, draw a mathematical line between the constitutionally acceptable and the constitutionally unacceptable awards that would fit every case.³² The Court held that the punitive damages in question did not violate the Due Process Clause of the Fourteenth Amendment.³³ In reaching its conclusion, the Court analyzed the factors used in Green Oil Co. v. Hornsby,³⁴ a case from the Supreme Court of Alabama. The objective application of the Green Oil factors to the facts in Haslip allowed the Court to find "a sufficiently definite and meaningful constraint on the discretion of the fact finders in awarding punitive damages."³⁵ The Court reasoned that the Alabama Supreme Court's post-verdict review ensured that punitive damage awards were not grossly out of proportion to the severity of the offense and that the awards had some understandable relationship to compensatory damages.³⁶

In a later case, TXO Production Corp. v. Alliance Resources Corp.,³⁷ the Supreme Court again recognized that the Constitution imposes a substantive limit on the size of punitive awards. The Court decided whether a particular punitive award was so "grossly excessive" as to violate the Due Process Clause.³⁸ The Court upheld the award under its analysis of the objective factors announced in Haslip.³⁹

The first case in which the Supreme Court actually reversed a punitive damage award was in Honda Motor Co. v. Oberg.⁴⁰ In that case, the Court was "not directly concerned with the character of a standard that will identify unconstitutionally excessive awards; rather [the court] was confronted with the question of what procedures are necessary to ensure that punitive damages are not imposed in an arbitrary manner."⁴¹ In particular, the Court addressed the Due Process Clause as it related to the requirement of judicial review of punitive awards.⁴²

III. The Supreme Court's Analysis

The Supreme Court of the United States found the punitive damage award in Gore to be unconstitutional for two reasons.⁴³ First, the award violated the Commerce Clause by restricting defendant's action in other states through the imposition of penalties in one state based on out-of-state actions.⁴⁴ Second, the award was "grossly excessive" under the Due Process Clause of the Fourteenth Amendment.⁴⁵

The Court reversed the decision of the Alabama Supreme Court because it found the punitive damage award to be "grossly excessive" in relation to the State's legitimate interest in punishing unlawful conduct and deterring repetition.⁴⁶ The Court stated, "[o]nly when an award can fairly be categorized as 'grossly excessive' in relation to these interests does it enter the zone of arbitrariness that violates the Due Process Clause of the Fourteenth Amendment."⁴⁷ The Court identified Alabama's legitimate interests in punishing BMW,⁴⁸ and then referred to Healy v. Beer Institute,⁴⁹ where it had previously held that "[pjrinci-ples of state sovereignty and comity forbid a state to enact policies for the entire Nation, or impose its own policy choice on neighboring States."⁵⁰ The Court expressly stated that this type of imposition was a violation of the federal power over interstate commerce.⁵¹ The Court required Alabama to support its economic penalties by focusing on the interests of protecting its citizens and economy, not those of the Nation.⁵² The opinion centered on the notion of fairness that requires notice not only of the conduct that will subject a person to sanctions, but also of the severity of the punishment that a state may impose.⁵³

The Court accepted the Alabama Supreme Court's interpretation of the jury...