The U.S. Supreme Court and punitive damages: on the road to reform: after years of developing its jurisprudence, the Supreme Court in State Farm signals that the days of runaway, irrational punitive damages may be ending.

• Author: Bonino, Mark G.
• Position: State Farm Mutual Automobile Insurance Co.

LAST APRIL, the U.S. Supreme Court issued what may be the most important punitive damage ruling ever to come from that Court--State Farm Mutual Automobile Insurance Co. v. Campbell. (1) First, the Court set a single-digit multiplier as the ordinary constitutional limit for the permissible ratio between compensatory damages and punitive damages. Second, it also dealt a body blow to the pattern-and-practice cases by imposing a "similarity to the conduct that caused the harm" test on the admissibility of evidence that can be used to prove malice or reprehensibility. It stated: "A defendant's dissimilar acts, independent from the acts upon which liability was premised, may not serve as a basis for punitive damages." (Emphasis supplied.)

The Court set the foundation for both these rules in the procedural and substantive constitutional limitations imposed by the due process clause of the 14th Amendment. That clause, the Court stated, "prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor."

In addition, the court made a number of other important comments:

* The wealth of the defendant cannot justify an otherwise unconstitutional punitive damage award.

* The disparity between permissible civil fines and penalties for the same conduct and punitive damages award based on that conduct are indicative of an improper measure of punitive damages.

* When the compensatory damages are substantial, then a lesser ratio--perhaps only equal to compensatory damages--can reach the outermost limits of the due process guarantee.

THREE-PART DECISION

The decision contains three major parts, each of which creates a different constitutional test for punitive damage awards. First, the Court examined and rejected as not sufficiently similar the evidence used in the Utah courts to prove "reprehensible" conduct. Second, it limited the constitutionally permissible ratio between compensatory damages and punitive damages to a single-digit multiplier (nine times or less). Third, it focused on the civil penalties available for the conduct and used those penalties as a measure to determine the propriety of the punitive damage award.

All three tests, denominated as "guideposts" by the Court, should be considered in any given case.

The facts giving rise to the massive verdict in the Utah state courts and then to this landmark decision involved an excess verdict case arising from an automobile accident in which one driver was killed and another permanently disabled. Curtis Campbell, the State Farm insured, asserted that he was not at fault for the accident, but the facts indicated otherwise. Campbell's policy limits were $50,000, and State Farm declined the claimants' offers to settle for that amount--$25,00 per claimant. State Farm ignored the advice of its own investigator and took the case to trial. At trial, the jury returned a verdict against Campbell for $185,000. State Farm refused to pay the excess judgment, and its counsel made the bonehead statement to the insured: "You may want to put 'for sale' signs on your property."

Campbell then obtained his own counsel and gave an assignment of his rights to the claimants in exchange for a covenant not to execute. Campbell and the underlying claimants then pursued a bad faith action, using the claimants' counsel.

In reviewing the punitive damages award, the U.S. Supreme Court focused on State Farm's egregious conduct. It concluded that the handling of the claim "merits no praise" and that by disregarding the overwhelming likelihood of liability, State Farm caused the Campbells harm. The harm was amplified by State Farm's refusal to pay the excess verdict and by what was claimed to be a "national scheme to meet corporate fiscal goals by capping payouts on claims company-wide." This was asserted to be a consistent nationwide feature of the business operations orchestrated from the highest levels of corporate management. (2)

During the course of the bad faith action in the Utah courts, evidence of all manner of allegedly improper conduct by State Farm across the United States over a 20-year period was admitted. Issues of original equipment manufacturer parts, corporate financial goals, compensation of claims representatives, and disposition of claims manuals were admitted in an attempt to prove wrongful conduct. Much of the proof was remote in time, nature and geography from Utah and the instant bad faith claim.

The jury in the bad faith action returned a verdict of $2.6 million in compensatory damages and $145 million in punitive damages. The trial court reduced the compensatory damages to $1 million and the punitive damages to $25 million. The Utah Supreme Court reinstated the $145 million punitive damage award.

U.S. SUPREME COURT RULING

Justice Anthony Kennedy wrote the opinion for the U.S. Supreme Court's 6-3 majority. He was plainly appalled by the punitive award, to which he referred as "punishment," "grossly excessive," "arbitrary," "massive," "irrational" and "neither reasonable nor proportionate to the wrong committed."

The opinion begins with the assumption that the Campbells were made whole by the compensatory award. Punitive damages, Justice Kennedy wrote, are intended to punish, rather than redress, loss. Punitive damage awards, themselves, create a danger of "arbitrary coercion" and carry "devastating potential for harm." The states cannot allow their courts to "classify arbitrariness as a virtue." There are procedural and substantive constitutional...