Gore, Cooper Industries, and State Farm v. Campbell: game, set, and match for exorbitant punitive damage awards.

• Author: Kolinski, John T.

Few decisions of the past quarter century are as likely to alter the way in which civil litigation is conducted as much as State Farm Mutual Automobile Insurance Company v. Inez Preece Campbell, 123 S. Ct. 1513 (April 7, 2003). In Campbell, the U.S. Supreme Court, for the third time in the past seven years, reined in the use of punitive damages as an all-too-often arbitrary and capricious substitute for criminal penalties. The Court reiterated that defendants--even those who behave very badly--have a constitutionally protected right to have a civil law "punishment" assessed according to clearly defined guidelines and meaningful limitations. (1)

The New Trilogy--Gore, Cooper Industries, and Campbell

The Court expanded its decisions in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), and Cooper Industries v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001), both of which had affixed constitutional limitations on the award of punitive damages as well as providing "guideposts" for implementing these substantive due process limitations. Unfortunately, both decisions left "wiggle room" for lower courts to avoid the Supreme Court's holdings. Campbell endeavored mightily to erase any doubt about the meaning of these previous decisions. Just as Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Anderson v. Liberty Lobby, Inc. 477 U.S. 242 (1986); and Celotex Corp. v. Catrett, 477 U.S. 317 (1986), dramatically enhanced the role of summary judgment in federal jurisprudence almost two decades ago, so too, the new trilogy of Gore, Cooper Industries, and Campbell is certain to have at least as great an impact on the restriction of the use of punitive damages at the outset of the 21st century.

In Gore, the Supreme Court reversed a $2 million punitive damage award predicated on a compensatory damage award of $4,000. In that case, plaintiff, an automobile purchaser, sued several defendants for the automobile distributor's failure to disclose that the automobile had been repainted after being damaged prior to delivery. The Supreme Court held the punitive damage award violated BMW's right to substantive due process because it was arbitrarily disproportionate to the actual damages caused and attempted to punish BMW for conduct unrelated to the specific wrongful conduct involved in the pending lawsuit. The Court set forth "three guideposts," discussed at length below, to be used by subsequent trial and appellate courts in assessing punitive damages.

Cooper Industries held that the constitutionality of a punitive damage award decided pursuant to the Gore guideposts was to be reviewed by the trial and appellate courts de novo. (2) That is, the question of the award's compliance with substantive due process was purely a legal one, not factual, so that no deference to the jury's verdict on this issue was required either by the trial court or on appeal. (3)

In Campbell, the Utah Supreme Court acknowledged its obligation to review the $145 million punitive damage award in light of Cooper Industries' de novo standard of review. (4) However, the Utah high court did not understand Cooper Industries to require de novo review of the trial court rulings regarding the admission and exclusion of evidence in support of the punitive damage claim. It used an "abuse of discretion" standard to review the trial court's rulings on evidence. It held that the trial court had not abused its discretion by allowing into evidence State Farm's nationwide practices to avoid paying legitimate claims to increase profits. (5) The Utah Supreme Court diluted the de novo review mandated by Cooper Industries by implementing a less intrusive standard of review--abuse of discretion--to evaluate the evidentiary basis on which the punitive damage award would then be reviewed de novo. Although the U.S. Supreme Court did not expressly address the Utah Supreme Court's use of two distinct standards of review, Campbell certainly appeared to hold that Cooper Industries' de hove review applied to all aspects of the review, including evidentiary rulings. "We reiterated the importance of these three guideposts in Cooper Industries and mandated appellate courts to conduct de novo review era trial court's application of them to the jury's award. 532 U. S. at 424." (6)

In light of the Utah Supreme Court's expressed acknowledgment of and purported adherence to Cooper Industries' de hove standard of review, this reiteration of the de novo standard of review in Campbell can only mean that the Utah Court did not understand and fully comply with Cooper Industries, despite paying it lip service. Because one of the constitutional guideposts to be reviewed by the appellate court involved the "similarity" of the other "bad acts" to the conduct at issue in the case before the trial court, Gore, Cooper Industries, and Campbell required de novo review to include the evidentiary rulings of the trial court pertaining to punitive damages. The entire tenor of Campbell is that the Utah trial court violated the defendant's right to substantive due process in significant part by allowing the admission and consideration of irrelevant and highly prejudicial evidence which should have been excluded in the first instance by the trial court as the initial "gatekeeper" and which should have been rejected as reversible error by the Utah appellate courts. It is difficult to reconcile Campbell with an abuse of discretion standard of review versus a de novo standard of review applicable to evidentiary rulings of the trial court, at least as they relate to the issue of punitive damages. At a minimum, Campbell holds that the trial court's "discretion" in the admission and exclusion of evidence pertaining to an award of punitive damages is narrow and limited, which appears to be another way of saying it is essentially subject to de novo review.

Can "Bad" State Farm + Gore = $145 Million?

Based on Gore, which was announced after State Farm had been found liable for "bad faith" but prior to the damage assessment phase of the trial, State Farm argued that evidence of its out-of-state and other conduct that bore little or no relationship to the harm alleged by the Campbells should be excluded from the trial phase determining the amount of actual and punitive damages. Campbell was a garden variety third party bad faith case involving State Farm's refusal to settle a claim on behalf of its insureds, the Campbells, within their policy limits. The original negligence lawsuit arose from a serious automobile collision in 1981. Mr. Campbell, driving with his wife, decided to pass six vans on a two-lane road. A car driving in the opposite direction swerved onto the shoulder to avoid a head-on collision with Campbell, but lost control of his vehicle and struck another vehicle, killing himself and permanently disabling the driver of the vehicle he struck. State Farm declined offers to settle the ensuing claims for the policy limits of $50,000 ($25,000 per claimant) and the jury returned an excess judgment of $185,849, finding Campbell 100 percent at fault. State Farm, having assured the Campbells prior to trial that they had no potential exposure, initially refused to satisfy the excess judgment, telling the Campbells to "put for-sale signs on your property" and refusing to post a supersedeas bond to allow the Campbells to appeal. (7)

Although State Farm ultimately paid the entire excess judgment rendered against the Campbells, the Campbells, as part of an agreement reached with the plaintiffs who had sued them initially, pursued a suit against State Farm for violation of common law insurer bad faith, common law fraud, and intentional infliction of emotional distress which resulted in the punitive damage award. (8) The Supreme Court's discussion of the agreement between the Campbells and their erstwhile adversaries, with the former adversaries getting control of the Campbell's bad faith lawsuit as well as 90 percent of any recovery there-from, suggests the Court was troubled by this arrangement. (9)

Although the evidence of State Farm's improper handling of the actual claim in suit was substantial, plaintiff sought to admit additional extraneous evidence of State Farm's nationwide policy to underpay claims regardless of merit to enhance profits. The trial court admitted such evidence over objection. "The jury awarded the Campbells $2.6 million in compensatory damages and $145 million in punitive damages, which the trial court reduced to $1 million and $25 million respectively." (10) The Utah Supreme Court reversed the trial court and reinstated the full amount of the punitive damage award based on its analysis of the "three guideposts" identified in Gore. As reiterated in Campbell:

In light of these concerns, in Gore, supra, we instructed courts reviewing punitive damages to consider three guideposts: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. (11)

Despite the egregious conduct found by the jury in Campbell, as acknowledged by the Supreme Court in...