A financial economic theory of punitive damages.

• Author: Rhee, Robert J.
• Position: I. The Central Problem of Punitive Damages through C. The Problem of Low Frequency, High Severity Awards, p.40-51

1. THE CENTRAL PROBLEM OF PUNITIVE DAMAGES

1. From Constitutional Reformation to Legal Uncertainty

   Although punitive damages are well established in American tort law, (38) the Supreme Court has undertaken a major reformation of punitive damages jurisprudence over the past twenty years, which has resulted in significant constitutional restrictions on punitive damages awards. I provide a brief review of the case law to focus specifically on the multipliers in the cases and to provide a sense of the positions of individual Justices.

   In Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc., the Court addressed the issue of whether the Eighth Amendment applies to punitive damages. (39) The case arose out of the defendant's attempt to drive the plaintiff out of a local disposal business through illegal price-fixing and tortious interference with contracts. (40) The jury awarded compensatory damages of $51,146 and punitive damages of $6 million. (41) The Court, per Justice Blackmun, held that the Eighth Amendment does not apply to civil actions when the government is not a party. (42)

   Justice O'Connor, concurring in part and dissenting in part, argued that corporations should be given Eighth Amendment protection against the threat of "overbearing and oppressive monetary sanctions." (43) She introduced the germ of the idea of a quantitative standard. The multiple of punitive to compensatory damages was 117x, far exceeding the highest reported award of punitive damages in the state, and she implied that a multiple of 30x should be considered suspect. (44) She also suggested that the imposition of punitive damages could violate due process, a position that three other Justices shared. (45)

   In Pacific Mutual Life Insurance Co. v. Haslip, the Court, per Justice Blackmun, considered whether the Fourteenth Amendment applies to punitive damages. (46) The defendant insurance company was held liable for punitive damages under the theory of respondeat superior when its employee-agent embezzled the plaintiff's premium money and allowed the policy to lapse. The plaintiff was awarded $1,040,000, of which $200,000 was apparently compensatory, including $4,000 in out-of-pocket expenses. (47) The Court approved the punitive damages award, a multiple of 4x. (48) It declined to "draw a mathematical bright line" and instead suggested that the appropriate constitutional calculus is one of "general concerns of reasonableness." (49)

   Justice Scalia concurred to reject the idea of substantive due process review for punitive damages. (50) Justice Kennedy concurred to opine that a lack of uniformity in punitive damages cannot be equated to constitutional infirmity since variance in outcomes is the nature of civil litigation in general, and that the usual protections given by states must suffice until common law judges or legislatures initiate systemic changes. (51) Justice O'Connor was the sole dissenter. Describing punitive damages as a "powerful weapon," (52) she argued for a reevaluation of punitive damages, contending that there had been an explosion in the frequency and size of punitive awards and that juries were not constrained in their discretion. (53)

   In TXO Production Corp. v. Alliance Resources Corp., the Court addressed whether a punitive damages award of $10 million on top of compensatory damages of $19,000, a multiple of 526x, violated due process. (54) The Court upheld the judgment but was split as to reasoning. Relying on Haslip, the plurality Court, per Justice Stevens, declined to draw mathematical bright lines. (55) The high multiple was not controlling in this case in light of the large amount of money at stake, the defendant's bad faith, a larger pattern of fraud and deceit, and the defendant's wealth). (56) The Court also noted that the "shock dissipates when one considers the potential loss" to the plaintiff of $1 million, a punitive damages multiple of only 10x. (57) Justices Scalia concurred to opine that the Court should "shut the door" on the idea of a substantive due process right to be free of excessive punitive damages. (58) He predicted the following: "The plurality's decision is valuable, then, in that the great majority of due process challenges to punitive damages awards can henceforth be disposed of simply with the observation that 'this is no worse than TXO.'" (59) This prophecy was ultimately proven wrong as the Court continued to delve into the jurisprudence of punitive damages.

   In the next case, the landmark decision of BMW of North America, Inc. v. Gore, the Court for the first time invalidated a punitive damages award under the Due Process Clause. (60) The facts are well known. A national car dealership sold a car as new when it had been repaired; at trial, the actual damages were $4,000 and the jury awarded punitive damages of $4 million (later reduced on appeal to $2 million). (61) The issue was whether the 500x multiple comported with due process. The Court, per Justice Stevens, set forth a legal standard composing of three guideposts: (1) the degree of reprehensibility, (2) the disparity between the harm and the punitive damages, and (3) the difference between the punitive damages...