What punitive damages message is the U.S. Supreme Court Sending? Gore's three factors are in place, but they are only guideposts along the way to determining whether a punitive award is constitutionally infirm.

• Author: Gross, Jonathan

WHEN is civil punishment too much? When has a jury, swept up in the fervor of the proceedings, let its passion control in awarding punitive damages? How can an appellate court gauge from the cold print of the transcript when furor and prejudice have overtaken sound judgment?

For years, the U.S. Supreme Court has straggled with developing an analysis for reviewing punitive damage awards. While searching for standards, the Court has run the gamut from flirting with a bright-line test to issuing vague criteria that established a. framework for argument without meaningful standards. After all of this experimentation, the Court has now settled into a clarified analysis for the appellate review of punitive damages awards.

SEARCHING FOR STANDARDS

In 1996, in BMW of North America v. Gore, the Court announced three considerations for determining whether the size of a punitive award violates the federal Constitution: (1) the degree of reprehensibility of the defendant's conduct; (2) the disparity between the harm or potential harm suffered by the plaintiff and the amount of the punitive damage award; and (3) the difference between the punitive damage award and the civil penalties authorized or imposed in comparable cases. (1)

In 2001, in Cooper Industries Inc. v. Leatherman Tool Group Inc., (2) the Court adjusted this analysis in important ways without changing the factors. First, it gave appellate courts expanded authority by granting them de novo review of punitive damages awards, so they now have much greater discretion in deciding whether to overturn large verdicts. Second, it decided, after previously holding otherwise, that the constitutional basis for challenging a punitive award is the excessive fines clause of the Eighth Amendment. (3) By doing so, the Court emphasized that appellate courts should pay particular attention to the third Gore factor, which compares the punitive damage award with civil penalties authorized by statute. Since statutory penalties usually range in the thousands of dollars, this can be a critical factor in challenging an award of punitive damages in the millions of dollars.

The Gore/Leatherman analysis provides punitive damage defendants with the clearest framework for challenging a punitive damage award they have had. Nevertheless, this analysis does not draw any "bright lines," nor does it provide minimum requirements for upholding an award. Rather, the Court only has provided three factors that are to be considered in determining the constitutionality of a punitive award.

DEVELOPMENT OF GORE/ LEATFIERMAN ANALYSIS

The U.S. Supreme Court began its modern journey toward establishing a constitutional test for punitive damages in 1991 in Pacific Mutual Life Insurance Co. v. Haslip. (4) In that case, an insurance agent misappropriated health insurance premiums and did not notify the insureds that their coverage had been canceled. As a result, Pacific Mutual Life Insurance Co. refused coverage for an insured who incurred hospital and other medical expenses.

The Court initially rejected the contention that the common law method for assessing punitive damages is unconstitutional per se. On the other hand, it stated, a punitive damage verdict is not immune from constitutional review either. The Court went on to examine and approve Alabama's criteria for reviewing punitive damages:

* whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct, as well as the harm that actually has occurred;

* the degree of reprehensibility of the defendant's conduct, the duration of that conduct, the defendant's awareness, any concealment, and the existence and frequency of similar past conduct;

* the profitability to the defendant of the wrongful conduct and the desirability of removing the profit and of having the defendant also sustain a loss;

* the "financial position" of the defendant;

* all the costs of litigation;

* the imposition of criminal sanctions on the defendant for its conduct, these to be taken in mitigation; and

* the existence of other civil awards against the defendant for the same conduct, these also to be taken in mitigation.

In Haslip, a case tried to a jury in an Alabama state court, there was a punitive damages award of somewhat more than $1 million, based on respondeat superior. The award was more than four times the amount of compensatory damages, more than 200 times the out-of-pocket expenses incurred by the insured and greatly in excess of the fine that could be imposed for insurance fraud under Alabama law. The Court held that the award was not unconstitutionally excessive and did not violate the insurer's due process rights.

Haslip did not establish constitutional requirements for determining the constitutionality of punitive awards. The Court acknowledged this issue in TXO Production Corp. v. Alliance Resources Corp., in which it noted, "The parties" desire to formulate a `test' for determining whether a particular punitive award is `grossly excessive' is understandable." (5) TXO arose from negotiations over the sale of oil and gas rights. As part of the negotiations, TXO filed a meritless quiet title action to gain a negotiating advantage. Alliance cross-complained for slander of title. The trial in a West Virginia state court resulted in a victory for Alliance and $19,000 in compensatory damages (attorneys' fees) and $10 million in punitive damages. The disparity between compensatory and punitive damages appeared to make the case a good candidate for asking the U.S. Supreme Court to set limits on punitive damages.

In TXO, the defendant advocated for a bright-line test under which a punitive award would be unconstitutional if it exceeded the award of compensatory damages by a specific multiplier to be established by the Court. In contrast, the plaintiff advocated application of the rational basis test--that is, asking whether the award served a "legitimate state interest in deterring or punishing wrongful conduct."

The Court refused to adopt the standards proposed by either side. It also greatly disappointed the defense bar by not setting forth a legal test for evaluating the constitutionality of punitive damages. Instead, it upheld the punitive damages, basing its decision on the amount of money at stake and the defendant's actions, wealth and conduct in other cases.

Finally, in 1996 in Gore, the Supreme Court established a test for determining the constitutionality of a punitive award. Gore alleged that BMW of North America fraudulently failed to disclose pre-delivery damage to new cars, but the cost of repair amounted to less than 3 percent of the car's suggested retail price. An Alabama state court jury found BMW liable for compensatory damages of $4,000 and also assessed $4 million in punitive damages. The Alabama Supreme Court rejected arguments that the award exceeded the constitutionally...