Punitive damages: achieving fairness and consistency after State Farm v. Campbell: despite its best efforts, the U.S. Supreme Court's opinion leaves many blank spaces and holes with which appellate courts have had to cope.

• Author: Sud, Nitin

PUNITIVE damages have been a part of the American jurisprudence and have been recognized by the U.S. Supreme Court for more than 150 years. (1) But that Court began to suggest the possibility of limiting such damages in 1988. (2) As businesses became more financially vulnerable to excessive punitive damages awards, several states enacted statutes limiting them. Although the U.S. Supreme Court consistently had upheld the constitutionality of punitive damages as determined by lower courts, in 1996 it created limitations and set a standard in BMW of North America v. Gore, (3) a test re-emphasized and clarified in 2003 in State Farm Mutual Automobile Insurance Co. v. Campbell. (4)

Section 908(1) of the Restatement (Second) of Torts states that punitive damages are designed to "punish [the defendant] for his outrageous conduct and to deter him and others like him from similar conduct in the future." Unfortunately, the focus of punitive damages has shifted from deterring defendants to rewarding plaintiffs with windfalls. Some argue that plaintiffs should not receive punitive awards because they are made whole by compensatory damages. (5) The dilemma is who should receive punitive damages. To address this problem, some states, including Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon, and Utah, have enacted split-recovery statutes, which allocate a portion of the punitive damages to either the state or a special fund.

A problem of excessive punitive damages is the severe financial impact they have on defendants, many of whom have gone bankrupt as a result of adverse judgments resulting in large compensatory and punitive damages. As the purpose of punitive damages is primarily to deter and punish, it is difficult for juries and judges to determine an appropriate award under such an arbitrary goal in a consistent manner. Historically, punitive damages were intended to punish a private harm done to a specific plaintiff, (6) not to compensate the plaintiff. (7)

Over time, courts and lawmakers have used punitive damages to address the harm done to society. (8) Despite the inherent problems that policy imposes, another basic issue arises. Under the historical approach, it is more acceptable for plaintiffs to receive the punitive damages because the harm suffered by plaintiffs is paramount. The harm to society is now taken into account, however, adding an additional dilemma of whether plaintiffs or society should be entitled to punitive damages.

Another effect of assessing punitive damages occurs when defendants face multiple punitive damages for conduct for which they were previously punished. (9) Under Section 908(1) of Restatement (Second), once a company pays punitive damages for "outrageous conduct," hypothetically, it has been deterred and punished. Therefore, similar to the law against double jeopardy in criminal cases, why should a defendant be penalized again for the same conduct?

States and courts have directed their efforts in reducing extreme payments of punitive damages in two general ways: limiting the actual amount of punitive damages awarded and trying to prevent multiple punitive damages.

STATE STATUTES

1. Monetary Limits

   Many states have enacted legislation limiting punitive damage awards. These statutes implement a variety of means to impose limits, like using a multiple of compensatory damages (Idaho, Indiana, New Jersey), basing damages on the net worth or annual income of the defendant (Alabama, Kansas, Mississippi), limiting damages for certain types of claims or conduct (Florida, Georgia, Oklahoma) or setting a specific dollar amount (Virginia). Table 1 shows these statutes and the limitations.

2. Split Recovery

   Eight states (Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah) also have split-recovery statutes, by which the state obtains a portion of the punitive damages awarded. Although the constitutionality of these statutes has been challenged, (10) only a couple of states found them unconstitutional. (11) But, some states oppose split recovery by statute. (12)

   There is a debate whether split recovery is good policy. (13) While there are legitimate concerns regarding the possibility of the state promoting pro-punitive damage policies, appropriately allocating funds obtained from punitive damage awards eliminates this concern. Rather than depositing the state's portion of the award directly into the general state treasury, some states have allocated the awards to a special fund to compensate victims. (14)

   STATE FARM AND ITS IMPACT

   Although only about half the states have specific statutes limiting punitive damages, case law provides some guidance. In the 1996 BMW v. Gore decision, the U.S. Supreme Court created a standard to determine the constitutionality of punitive damages. It developed a three-part test to gauge whether they were "grossly excessive." The test consisted of evaluating (1) "the degree of reprehensibility," (2) "the disparity between the harm or potential harm suffered ... and [the] punitive damages award," and (3) "the difference between this remedy and the civil penalties authorized or imposed in comparable cases." In State Farm, the Court re-emphasized this test and focused primarily on the type of evidence that can be produced to show the degree of reprehensibility and acceptable punitive to compensatory damages ratios.

   But in trying to limit punitive damages even further, the Court seems to have opened a flood of uncertainty that still could allow for excessive or multiple punitive damages, thus doing little to alleviate the problem.

1. Overview of State Farm

   In State Farm, Curtis Campbell, who was insured by State Farm, was involved in a car accident resulting in the death of one driver and the permanent disability of another. Although it was fairly clear that Campbell was at fault, State Farm decided to contest liability and declined offers to settle for the policy limit of $50,000. After losing in a jury trial that found Campbell 100 percent at fault, State Farm refused to pay the excess $135,849 in liability. Although State Farm eventually agreed to pay the entire judgment, Campbell filed a complaint in Utah state court alleging bad faith, fraud and intentional infliction of emotional distress.

   In the first part of a bifurcated trial, the jury found the decision not to settle was unreasonable because there was a substantial likelihood of an excess verdict. The second phase, which came after the U.S. Supreme Court decided BMW, addressed State Farm's fraud and intentional infliction of emotional distress liability and compensatory and punitive damages. The jury awarded the Campbells $2.6 million in compensatory and $145 in punitive damages. The trial court reduced this award to $1 million and $25 million, respectively, but on appeal, the Utah Supreme Court, in an attempt to apply BMW, reinstated the $145 million punitive damages award.

   The U.S. Supreme Court also used the BMW guidelines but held that the decision to reinstate the $145 million in punitive damages was incorrect. It concluded that under the reprehensibility guidepost of BMW, the Utah Supreme Court erred by allowing evidence that enabled the jury to punish State Farm for actions not directed toward the Campbells. The trial court had allowed State Farm to be punished for mishandling of insurance claims that "bore no relation to the Campbells' harm," Justice Kennedy wrote for the Court.

   Next, addressing the ratio guidepost of BMW and stating that "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process," the Court found that the 145-to-1 ratio was clearly excessive. It also reiterated that a 4-to-1 ratio borders on constitutional impropriety.

   Using the third guidepost, comparing the disparity between the punitive damages and civil penalties possible, the court stated that an act of fraud would subject State Farm to only a $10,000 fine under Utah state law.

   The Court then remanded the case to determine punitive damages in light of its new ruling.

2. Problems in State Farm

   Unfortunately, the U.S. Supreme Court's analysis is ambiguous and contains various contradictions, specifically with respect to the reprehensibility and ratio guideposts of BMW. As a result, it remains difficult for lower courts to apply the proposed standards consistently.

   1. Failing to Prevent Multiple Punitive Damages

      In determining the evidence that can be allowed to show the reprehensibility of the defendant's conduct, the Court emphasized that a "state cannot punish a defendant for conduct that may have been lawful where it occurred." (15) It also indicated that a state does not "have a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the state's jurisdiction," stating that the "proper adjudication of conduct" occurring outside of Utah would "require their inclusion" in the current case and "would need to apply the laws of their relevant jurisdiction." However, evidence of out-of-state conduct is allowed in order to prove the defendant's actions within the state where the case is being tried, as long as it has a "nexus to the specific harm suffered by the plaintiff." The Court went on to say that only a defendant's similar acts can be used to determine punitive damages.

      Although...