CHAPTER 16 PUNITIVE DAMAGES

• Jurisdiction: United States

Punitive damages are designed to punish wrong doers whose actions are more egregious than negligence. In a tort action, if it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

(1) "Malice" means conduct which is intended by the defendant to cause injury to the plaintiff or despicable conduct which is carried on by the defendant with a willful and conscious disregard of the rights or safety of others. (2) "Oppression" means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights. (3) "Fraud" means an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury. ¹

The unintended consequence of the tort of bad faith is the effect that punitive damages have had on the insurance industry and those who purchase insurance. The cost of punitive damage awards, designed to punish insurers who act wrongfully, were spread among all insurers. Gigantic judgments were rampant. Failure to pay a $40 claim could, and did, result in $5 million judgments, a judgment with no relationship to the wrong sued upon.

Insurers worked to limit the extent of punitive damages by claiming such damages were in violation of rights protected by the U.S. Constitution and its due process clause. The U.S. Supreme Court was not pleased to hear the arguments and worked to make it difficult for the insurers.

Consider Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991), a ruling by Justice Blackmun about whether punitive damages are subject to the due process clause or are, as Justice Scalia said, so well regarded and ancient as to not require change.

In 1981, Lemmie L. Ruffin, Jr., was an Alabama-licensed agent for petitioner Pacific Mutual Life Insurance Company. He also was a licensed agent for Union Fidelity Life Insurance Company. Pacific Mutual and Union are distinct and nonaffiliated entities. Union wrote group health insurance for municipalities. Pacific Mutual did not.

Following the trial court's charge on liability, the jury was instructed that if it determined there was liability for fraud, it could award punitive damages. The jury returned general verdicts for respondents against Pacific Mutual and Ruffin in the following amounts: Haslip: $1,040,000; Calhoun: $15,290; Craig: $12,400; Hargrove: $10,288.

Judgments were entered accordingly.

On Pacific Mutual's appeal, the Supreme Court of Alabama, by a divided vote, affirmed. In addition to issues now before them, the court ruled that, while punitive damages are not recoverable in Alabama for misrepresentation made innocently or by mistake, they are recoverable for deceit or willful fraud, and that on the evidence in this case a jury could not have concluded that Ruffin's misrepresentations were made either innocently or mistakenly. The majority then specifically upheld the punitive damages award.

The parties agree that due process imposes some limits on jury awards of punitive damages, and it is not disputed that a jury award may not be upheld if it was the product of bias or passion, or if it was reached in proceedings lacking the basic elements of fundamental fairness. There is some authority in our opinions for the view that the Due Process Clause places outer limits on the size of a civil damages award made pursuant to a statutory scheme but we have never addressed the precise question presented here: whether due process acts as a check on undue jury discretion to award punitive damages in the absence of any express statutory limit. That inquiry must await another day. [ Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 276-277 (1989).]

. . . .

"Punitive damages have long been a part of traditional state tort law." Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 255 (1984). Under the traditional common-law approach, the amount of the punitive award is initially determined by a jury instructed to consider the gravity of the wrong and the need to deter similar wrongful conduct.

One must concede that unlimited jury discretion—or unlimited judicial discretion for that matter—in the fixing of punitive damages may invite extreme results that jar one's constitutional sensibilities.

[The Supreme Court was] aware that the punitive damages award in this case is more than 4 times the amount of compensatory damages, is more than 200 times the out-of-pocket expenses of respondent, and, of course, is much in excess of the fine that could be imposed for insurance fraud [in Alabama].

The late Justice Scalia noted in a concurring opinion that "[w]e have expended much ink upon the due process implications of punitive damages, and the fact-specific nature of the Court's opinion guarantees that we and other courts will expend much more in the years to come. Since jury-assessed punitive damages are a part of our living tradition that dates back prior to 1868, I would end the suspense and categorically affirm their validity."

Justice O'Connor, stating the obvious, began her dissent with the comment: "Punitive damages are a powerful weapon."

Both liberty and property are specifically protected by the Fourteenth Amendment against any state deprivation which does not meet the standards of due process, and this protection is not to be avoided by the simple label a State chooses to fasten upon its conduct or its statute. So here this state Act, whether labeled "penal" or not, must meet the challenge that it is unconstitutionally vague.

In Alabama, the jury has standardless discretion to impose punitive damages whenever and in whatever amount it wants. The Green Oil factors play a role only after the jury has rendered its verdict. The trial court and other reviewing courts may—but are not required to—take these factors into consideration in determining whether a punitive damages award is excessive.

Even if judicial review of award amounts could potentially minimize the evils of standardless discretion, Alabama's review procedure is not up to the task. For one thing, Alabama courts cannot review whether a jury properly applied permissible factors, because juries are not told which factors are permissible and which are not. Making effective review even more unlikely, the primary component of Alabama's review mechanism is deference. The State Supreme Court insists that a jury's award of punitive damages carries a "presumption of correctness" that a defendant must overcome before remittitur is appropriate.

Justice O'Connor made clear that

. . . [a] State can have no legitimate interest in deliberately making the law so arbitrary that citizens will be unable to avoid punishment based solely upon bias or whim. Due process requires only that a jury be given a measurable degree of guidance, not that it be straitjacketed into performing a particular calculus.

Due process is not a fixed notion. Procedural rules, "even ancient ones, must satisfy contemporary notions of due process." Burnham v. Superior Court of Cal., County of Marin, 495 U.S. 604, 630 (1990). Punitive damages are similarly ripe for reevaluation. In the past, such awards "merited scant attention" because they were "rarely assessed and likely to be small in amount." Ellis, Fairness and Efficiency in the Law of Punitive Damages, 56 S. Cal. L. Rev. 1, 2 (1982). When awarded, they were reserved for the most reprehensible, outrageous, or insulting acts.

The touchstone of due process is protection of the individual against arbitrary action of government. The common-law scheme yields unfair and inconsistent results.

Justice O'Connor was confident that

. . . if we announce what the Constitution requires and allow the States sufficient flexibility to respond, the constitutional problems will be resolved in time without any undue burden on the federal courts. For more than 20 years, this Court has criticized common-law punitive damages procedures but has shied away from its duty to step in, hoping that the problems would go away. It is now clear that the problems are getting worse, and that the time has come to address them squarely.

Pursuing the suggestion made by Justice O'Connor, Justice Breyer, in a concurring opinion to BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996), concluded that, matching the particular facts of this case to Alabama's "legitimate punitive damages objectives," the award was "grossly excessive." The exercise is engaging, but ultimately tells us only this: too big will be judged unfair.

In Life Ins. Co. of Georgia v. Johnson, 701 So. 2d 524 (Alabama Supreme Court 1997), the Alabama Supreme Court revised the state's regime for assessments...