Constitutional requirements for punitive damages.

Author:Stewart, Larry S.

In the November 2003 article "Gore, Cooper Industries, and State Farm v. Campbell--Game, Set, and Match for Exorbitant Punitive Damage Awards, author John Kolinski spins the Supreme Court's decision in State Farm v. Campbell, 123 S. Ct. 1513 (2003), into one of the most significant "decisions of the past quarter century" that revolutionized the law of punitive damages. Under his interpretation, Campbell becomes the "most powerful tool ever given" to limit discovery, requires "throughout the opinion that the jury must be specifically and meaningfully charged" and orders "lower courts to change dramatically the manner in which punitive damages are litigated." There is, however, a flaw in Kolinski's analysis. He has failed to follow his own admonishment about not confusing "zealous advocacy with misstating [the] law," because his claims find no support in the opinion. (1)

Contrary to the author's claims, Campbell is not a watershed decision but rather a fact-bound application of existing precedent that did not fundamentally change the standards the Supreme Court had established seven years earlier in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996). Indeed, as the Court noted in Campbell, it was deciding the case "under the principles outlined in BMW." 123 S. Ct. at 1521. In Gore, the Court held that BMW could not be held liable for punitive damages in Alabama for conduct that was lawful in other states. The Court articulated three "guideposts" for judicial review of punitive damage awards: 1) the degree or "reprehensibility" of the defendant's conduct; 2) the ratio of punitive damages to compensatory damages; and 3) how punitive damages compare to civil or criminal penalties for comparable misconduct.

Gore was the culmination of a quarter-century-long public relations campaign by defendant interests to "rein in" punitive damage awards. While not initially successful in the legislative arena, in large part because empirical scholarly studies demonstrated that there was no truth to the claims of an explosion of cases with skyrocketing awards, (2) by the late 1980s the Supreme Court began to grant relief. Beginning in 1988, the Court issued a string of rulings, on first procedural and later substantive due process grounds, holding that punitive damage awards must be scrutinized for excessiveness against safeguards designed to protect defendant rights. (3) Campbell is the latest of those decisions.

State Farm v. Campbell

Campbell was a bad faith insurance claim based on State Farm's refusal to settle an accident claim that invoked the Gore elements of extra-state conduct and large punitive damages, both in terms of the gross amount and in relation to the compensatory damages. The Campbells contended that State Farm not only wrongly handled their case but also that State Farm had been "doing business [that way] for the last 20 years" and they introduced evidence of its nationwide claims practices. The jury awarded, and the Utah Supreme Court approved, punitive damages of $145 million that were 145 times the compensatory damages.

In reversing, the Supreme Court acknowledged that State Farm's conduct warranted punitive damages but found the Utah court's analysis flawed because it was based on State Farm's nationwide activities rather than conduct toward the Campbells or other similar conduct. The Court reiterated its holding in Gore that a state may not punish a party for conduct that may be lawful where it occurred, but did not bar all evidence of extra-state conduct. Similar or the same unlawful conduct may be relevant, regardless of where it occurs. (4) The Court specifically noted that even "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 tortuous," so long as "that conduct [has] a nexus to the specific harm suffered by the plaintiff." Campbell, 123 S. Ct. at 1522.

If the Court had stopped there or concluded that State Farm's conduct toward the Campbells was simply not egregious enough to warrant a significant punitive award, the opinion would not have been remarkable. The Court, however, delved into the second Gore "guidepost"--the ratio between compensatory and punitive damages. While declining to impose a bright-line limit on punitive damages, the Court noted that few awards over a single-digit ratio will satisfy due process and suggested an inverse linkage between actual damages and punitive damages so that, as actual damages increase, punitive damages would decrease. Id. at 1524.

The Court also considered the third Gore "guidepost"--the comparison to civil or criminal penalties--and looked to Utah state law, which would impose a $10,000 fine for an act of fraud. The Court did not, however, order the punitive damages reduced to that sum. Rather, it somewhat retreated from Gore on this guidepost and discounted the usefulness of considering comparable criminal penalties.

In the end, the Court found that Utah was punishing State Farm for out-of-state conduct that was, for the most part, "lawful where it occurred" and which "bore no relation to the Campbells' harm." Id. at 1523, 1524. Finding that the Campbells' actual damages were "substantial" and likely duplicative of the punitive damages, id. at 1525,it concluded that the punitive damage award of $145 million was "an irrational and arbitrary deprivation of the property of the defendant." Id. at 1526.

Ratio caps on punitive damages...

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