E. Constitutional Issues

• Library: South Carolina Damages Supplement (SCBar) (2017 Ed.)

E. Constitutional Issues

Since 1991, the United States Supreme Court has imposed restrictions on punitive damages that require procedural and substantive limits.¹⁰⁷ With respect to punitive damages, substantive due process is quantity based, and protects against excessive awards.¹⁰⁸ By contrast, procedural due process deals with the mechanics used to determine this award.¹⁰⁹ The invention of such standards has served as a deviation from the traditional functions of jury.

The United States Supreme Court espouses three factors to be considered in determining the constitutionality of punitive damage awards: (1) the degree of reprehensibility of the defendant's conduct; (2) the disparity between the actual harm suffered and the amount of the punitive award; and (3) the difference between the award and the civil penalties imposed in similar cases.¹¹⁰

1. Reprehensibility

When the Court revisited the constitutionality of punitive awards and applied the Gore guideposts in State Farm Mutual Automobile Insurance Company v. Campbell,¹¹¹it added five more factors to be considered when determining reprehensibility: (1) whether the harm caused was physical as opposed to economic; (2) whether the tortious conduct evinced an indifference to, or a reckless disregard of, the health or safety of others; (3) whether the target of the conduct had financial vulnerability; (4) whether the conduct involved repeated actions or was an isolated incident; and (5) whether the harm was the result of intentional malice, trickery, deceit, or a mere accident.¹¹²

The Court's foray into punitive damages since 1991 has continually referred to the original dual purpose of deterrence and retribution in awarding punitive damages.¹¹³ However, the Court's analysis has focused on the size of the award as undue punishment for a defendant. This shifts the emphasis of punitive damages from its original goals of deterrence and retribution toward a focus on the potential economic damage to a defendant which may be caused by a large punitive damage award. For State Farm, the potential economic harm could, at best, be classified as minimal. The Utah Supreme Court's decision was issued in October 2001.¹¹⁴ State Farm's total assets for the year ending December 31, 2001, were over $ 71 billion.¹¹⁵ The punitive damages award of $145 million¹¹⁶ only represented 0.203% of the total assets of State Farm at that time. In 2001, the total revenue for State Farm was $46.7 billion,¹¹⁷ the punitive award represents only 0.31% of the total revenue for State Farm for that one calendar year. Even using State Farm's net income for the year ending December 31, 2001, of $2.6 billion,¹¹⁸ the punitive award only represents 5.4% of State Farm's net income for that one calendar year. Certainly, these small percentages could not have caused even minor economic harm to State Farm. Thus, the protection of State Farm seems to undercut the deterrent value of punitive damages.

The Court also noted that a recidivist should be subject to increased punishment, but that punishment may only be imposed for conduct that occurred in that state.¹¹⁹Therefore, a jury must be instructed that it cannot use out-of-state conduct that may be lawful in the jurisdiction where it occurred.¹²⁰ The Court also made clear that the reprehensibility guidepost is not expansive enough to allow a court to punish a defendant for simple malfeasance.¹²¹

The policy used by State Farm in this case was a nationwide policy designed to favor corporate fiscal policy over the legitimate claims of its own policyholders. State Farm admitted to inserting false information into the Campbells' file in order to lessen the appearance of the culpability of the Campbells.¹²² The Court noted that lawful out-of-state conduct may be probative when it demonstrates the deliberateness and culpability of the defendant's action in the state where it is tortious, but that conduct must have a nexus to the specific harm suffered by the plaintiff.¹²³ State Farm's pattern was repeated nationwide and orchestrated from the highest levels of corporate management.¹²⁴ Even John Grisham could not have conjured up a better scheme.¹²⁵ The Campbells alleged this nationwide policy was the reason State Farm did not settle their case, thereby subjecting the Campbells to a large excess judgment against them. The Court failed to point to any jurisdiction where such fraudulent business practices were lawful and neglected to discuss whether State Farm's conduct in Utah was lawful.¹²⁶ Instead, the Court ironically discussed how federalism permits states to determine lawful conduct and punishment within their own borders.¹²⁷

In Philip Morris USA v. Williams, the Supreme Court further defined the procedural due process parameters for an award of punitive damages.¹²⁸ In Philip Morris II, the Supreme Court held that punitive damages could not be used to punish a defendant for harm caused to non-party defendants.¹²⁹ The Court's decision was based on three of the recurring themes in punitive damages/due process analysis- fairness, consistency, and history.¹³⁰ First, the Court opined that allowing damages for parties not before the Court would infringe on the defendant's due process rights by preventing them from presenting every available defense.¹³¹ In other words, because the "stranger to the litigation" was not before the Court, the defendant had no way of defending against their claim. Second, the Court expressed significant concern over allowing damages to the non-party victim because it effectually "would add a near standardless dimension to the punitive damages equation."¹³² The Court expressed concern that if the interests of non-party victims were too speculative it would require juries to guess at even the most basic factual issues.¹³³ Finally, the Court was unable to find "authority supporting the use of punitive damages awards for the purpose of punishing a defendant for harming others."¹³⁴ However, the Court was careful to note that though it had not (and would not) recognize a punitive damage award for harm to non-parties, such evidence was permissible to determine the reprehensibility of the defendant's conduct.¹³⁵

The subtle differences in these two uses are extremely important in a punitive damages due process analysis if evidence of harm to third parties is used to show "that the conduct that harmed the plaintiff also posed a substantial risk of harm to the general public, and so was particularly reprehensible."¹³⁶ However, the Court will not allow the jury to actually award damages for these non-party injuries.¹³⁷In dissent, numerous other justices criticized this highly technical and "confusing implementation of the substantive due process regime."¹³⁸ In his dissent, Justice Stevens commented that:

This nuance eludes me. When a jury increases a punitive damages award because injuries to third parties enhanced the reprehensibility of the defendant's conduct, the jury is by definition punishing the defendant directly for third-party harm. A murderer who kills his victim by throwing a bomb that injures dozens of bystanders should be punished more severely than one who harms no one other than his intended victim. Similarly, there is no reason why the measure of the appropriate punishment for engaging in a campaign of deceit in distributing a poisonous and addictive substance to thousands of cigarette smokers statewide should not include consideration of the harm to those "bystanders" as well as the harm to the individual plaintiff. The Court endorses a contrary conclusion without providing us with any reasoned justification.¹³⁹

Such a concern is particularly salient considering the Supreme Court's justifications for addressing the Due Process concerns implicated in Philip Morris, namely the procedural concerns. The majority recognized the potential for confusion in presenting such a technical distinction to a jury.¹⁴⁰ However, the Court failed to provide any concrete guidance on how to actually impose procedural standards, instead holding that "[a]lthough the States have some flexibility to determine what kind of procedures they will implement, federal constitutional law obligates them to provide some form of protection in appropriate cases."¹⁴¹ Thus, the great irony to the Philip Morris decision is the Court's intrusion into the traditional state sphere in order to protect procedural due process which ultimately gave little guidance with respect to what that procedure actually needed to be.¹⁴²

2. Ratio between Actual Harm and Punitive Award

In considering the second Gore guidepost, the United States Supreme Court still declined to establish a "mathematical bright line" to determine the constitutionality of awards.¹⁴³ However, they did clearly state that "few awards exceeding a single-digit ratio between punitive and compensatory damages . . . will satisfy due process."¹⁴⁴ This has been characterized by one United States Supreme Court Justice as "marching orders" for the lower courts.¹⁴⁵

Previously, attorneys have been cautioned against relying solely on the ratio of punitive to compensatory damages to argue the constitutionality of awards.¹⁴⁶At the time, this was reasonable advice considering the fact that although ratio is a factor universally argued, there is no consistent pattern in its application.¹⁴⁷

The dramatic shift away from states' oversight of punitive damages, which began in 1991,¹⁴⁸ suggests that any punitive damage award from here forward over a single-digit ratio may be presumed suspect.¹⁴⁹ Even in situations which result in an outcome with a single-digit ratio, lower courts still will be required to re-evaluate the case in consideration of the factors set forth in State Farm.¹⁵⁰

Effectively, the constitutionality of punitive damage awards now hinges on a series of delicate determinations. Judges have an obligation to ensure that the punitive damages are reasonable and proportional to the amount of actual harm to the plaintiff.¹⁵¹...