Necessary protection: an examination of the State Farm V. Campbell standards test and why economically efficient rules do not work at the intersection between due process and punitive damages.

• Author: Thomas, Daniel F.

1. INTRODUCTION

   In 1994, a District Court of New Mexico awarded a woman $160,000 in compensatory damages and $2.7 million in punitive damages because of the burns caused after the woman spilled a cup of McDonald's coffee on herself. (1) In 1996, the Alabama Supreme Court awarded $4 million dollars in punitive damages in light of $4,000 worth of cosmetic damage to a doctor's BMW. (2) And in 2000, a Florida Circuit Court awarded $145 billion in punitive damages, the largest such award in American history, against cigarette companies in a class action suit after hearing evidence from only three claimants without any information as to who the other members of the class were, how many there were, or the extent of their injuries. (3) As the disparity between punitive damages awards and the related compensatory awards increased and the grounds upon which they were rewarded became increasingly vague, questions began to stir. When are punitive damages awards too high? At what point does the punishment fail to fit the crime and instead operate as a windfall to the plaintiff while unlawfully depriving defendants of their property without due process of law? How are courts to ascertain the propriety of the punitive damages awards granted by juries?

   In response to these and similar cases, the United States Supreme Court began to use the Due Process Clause of the Fourteenth Amendment as a means to test the appropriateness of punitive damages awards imposed by state courts. (4) In 1996, and in light of ever increasing punitive awards, the Court set forth a test composed of three factors by which an award of punitive damages becomes excessive and violates due process. (5) In 2003, that test was further clarified giving lower courts more and more direction as to how the Due Process Clause places substantive limits on punitive damages awards. (6) These judicial decisions, however, have not gone uncontested.

   This Note will examine the Supreme Court's 2003 application of the Due Process Clause to place substantive limitations on punitive damages awards in civil cases. It will consist of nine parts. Part II very briefly examines the elements and purpose of both the Due Process Clause and punitive damages awards. Part III tracks the Supreme Court cases leading up to BMW of North America Inc., v. Gore, the case in which the Supreme Court laid down its guidelines for examining punitive damages awards. (7) Part IV discusses the BMW factors and shows how the BMW Court used those factors to overrule a $4 million punitive damages award as excessive. (8) Part V provides a detailed analysis of the next major judicial excursion into the punitive damages and due process intersection, the Court's decision in State Farm. (9) This Part also discusses how the Court further clarified application of the BMW factors in a case that overturned a $145 million punitive damages award as violating due process. (10) Part VI discusses the need for BMW and State Farm, emphasizing the general trend towards higher awards and the many problems caused by excessive punitive damages awards. Part VII assesses some of the strengths of the BMW/State Farm test while arguing against those that believe that State Farm was wrongly decided. It is my position that State Farm (a) adequately protects a defendant's due process rights in providing him with the requisite notice regarding wrongful conduct and the potential sanctions that flow from such conduct; (b) has not abrogated state control over punitive awards; (c) has not eviscerated the power of punitive damages by couching such awards in terms of the harm to the individual plaintiff, but rather allows punitive damages to remain a powerful jurisprudential tool; and (d) does not mandate a single-digit ratio between punitive and compensatory awards. Part VIII refutes the argument that State Farm ignores the economic reality of litigation through its use of a balancing test rather than some bright-line mathematical formula. It is my contention that a mathematical approach to punitive awards is infeasible given the circumstantial analyses that both due process and the imposition of punitive damages awards require. This argument leads to my final point, Part IX, which examines the BMW/State Farm test in light of the long-running rules versus standards debate. Here, I posit that bright-line rules would affect arbitrary and capricious punitive awards thereby further violating the defendant's due process. Moreover, standards like the BMW/State Farm guideposts are more apt to protect all of the parties' interests and indeed such standards are the only means of adequately balancing the many contending forces where due process and punitive awards intersect.

2. THE CROSSROADS BETWEEN DUE PROCESS AND PUNITIVE DAMAGES

   1. Elements and Purpose of Due Process

      The Due Process Clause of the Fourteenth Amendment to the United States Constitution provides that no state shall "deprive any person of life, liberty, or property, without due process of law." (11) As the Supreme Court noted more than a century ago, "[i]t would be difficult and perhaps impossible to give [the terms used in the Clause] a definition, at once accurate, and broad enough to cover every case." (12) Some parameters, however, are well-established. "[T]he point of due process--of the law in general--is to allow citizens to order their behavior" (13) and to protect individuals from arbitrary state action. (14) Thus, due process requires adequate notice of the conduct that is to be punished as well as notice of the severity of any resultant punishments. (15) A determination of what due process requires in each instance is a heavily fact-laden enterprise turning on the circumstances of each case. (16) And, as will be shown, due process "prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor" (17) because such punishments constitute an arbitrary deprivation of property when they are not logically tied to the severity of the crime as evinced by the harm suffered on that individual plaintiff. (18)

   2. The Purpose of Punitive Damages

      The use of punitive damages has a long heritage and a dual purpose. (19) Punitive damages and compensatory damages serve different functions; that is, punitive damages "are aimed at deterrence and retribution" while compensatory damages "'are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant's wrongful conduct.'" (20) Because punitive awards are based on the conduct of the defendant, "every assessment of punitive damages is circumstantial." (21) Punitive damages are imposed as a tool to punish "outrageous, malicious, and wanton conduct" and to deter "similar conduct in the future." (22) As such, punitive damages should only be awarded in the case where, after compensating the plaintiff, the defendant's actions are so egregious as to require "further sanctions." (23) Such sanctions are said to arise from a state's interest in protecting its citizens from harmful or deceitful trade practices or other similar deceitful and egregious conduct. (24) Historically, then, the states have had considerable control over punitive damages. (25) But recently, the Supreme Court has begun to express concern in the size and imposition of some punitive awards. (26)

      Such concern arises when these awards are so large and so excessive that they bear no relation to the harm committed. (27) In those instances, the state fails to inform the defendant, first, of the specific conduct that is to be punished, and second, the extent that such conduct will be punished. (28) In this manner, the state's action loses all legitimacy and is said to violate the defendant's due process. (29) Two questions, then, must be answered. First, to what extent may awards grow without violating due process and rendering illegitimate the state's action? And second, how are courts to discern such a limitation in light of the fact that both the use of punitive awards and a proper due process analysis are heavily predicated upon circumstance? The Supreme Court began its journey to tackle these questions in 1989 and reached its destination with the BMW/State Farm test.

3. EARLY APPLICATION OF THE DUE PROCESS CLAUSE TO PUNITIVE DAMAGES AWARDS

   The Supreme Court began its relatively short march towards BMW/State Farm when in the 1989 case of Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc., (30) the Court, after rejecting the claim that the Eighth Amendment's Excessive Fines Clause (31) applied to punitive damages awards, expressly reserved for a later date a discussion of the application of the Due Process Clause to punitive damages. (32) The Court further opened the door in 1991 when it took a procedural approach to due process analysis of punitive damages in Pacific Mutual Life Insurance Co. v. Haslip. (33) Here, noting that a punitive award of more than four times the compensatory award may come "close to the line" of constitutionality, the Court upheld the award on procedural grounds because Alabama's procedures safeguarded against the imposition of excessive damages. (34) Ostensibly using its procedural analysis, the Court, in its 1993 TXO Production Corp. v. Alliance Resources Corp. decision, upheld a punitive damages award 526 times greater than the compensation granted because of the potential harm that could have resulted had the defendant succeeded in its wrongful plans, which were laden with "fraud, trickery and deceit." (35) The Court again emphasized that as long as the procedures implementing the punitive award were fair, the "product of that process is entitled to a strong presumption of validity." (36) Three years later, the Court began its substantive analysis of punitive damages, setting forth its punitive damages/due process test in BMW v. Gore. (37)

4. THE BMW GUIDEPOSTS

   In BMW, the Supreme Court, for the first time, struck down a punitive damages award as grossly excessive...