Whoa, Slow Down! Applying the Constitutional Brakes to Accelerated Punitive Damages Awards - J. Kaz Espy

• Citation: Vol. 55 No. 2
• Publication year: 2004

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Whoa, Slow Down! Applying the Constitutional Brakes to Accelerated Punitive Damages Awards

In State Farm Mutual Automobile Insurance Co. v. Campbell,¹ the United States Supreme Court held that a $145 million punitive damages award violates the Due Process Clause of the Fourteenth Amendment when compensatory damages are merely $1 million.² This decision was neither the first of its kind, nor unexpected, considering the Court's trend in recent years. Nonetheless, the Court has not always been so aggressive in its application of the Due Process Clause to punitive damages awards.

I. Factual Background

In 1981 Curtis Campbell ("Campbell") and his wife, Inez, were driving along a two-lane highway in Utah. In front of them was a group of six vans, one of which was driven by Robert Slusher ("Slusher"). Campbell attempted to pass the caravan. At the same time, Todd Ospital ("Ospital") was driving a vehicle in the opposite direction. To prevent a head-on collision with Campbell, Ospital swerved onto the shoulder.

Ospital lost control of his vehicle and crashed into the van driven by Slusher. As a result, Ospital was killed and Slusher was seriously injured. The Campbells were unhurt.³

Slusher brought a tort action against Ospital's estate and Campbell. The Ospital estate filed a cross-claim for wrongful death against Campbell. Campbell responded by asserting he was not at fault. Campbell's insurance carrier, State Farm Mutual Automobile Insurance Company ("State Farm"), assigned Ray Summers ("Summers"), a claims adjuster, to analyze the claims. Although initial investigations were inconclusive, Summers discovered that all of the eyewitnesses believed Campbell was the primary cause of the accident. Furthermore, photographs of the scene and skid-marks appeared to corroborate the eyewitnesses' beliefs. Summers concluded that taking the claims to trial would expose Campbell to a high probability of a judgment in excess of his $50,000 policy limit. Therefore, Summers advised State Farm that it would be wise to settle the claims. Despite the physical evidence and Summers's evaluation, State Farm decided to contest liability. State Farm's divisional superintendent ordered Summers to alter his report concerning Campbell's liability. State Farm did not notify Campbell of Summers's evaluation and findings, nor did State Farm tell Campbell that he would be legally liable if he was found even partially at fault. Instead, State Farm assured Campbell there was no evidence supporting his liability and told him there was no danger of a judgment being rendered in excess of his policy limit.⁴

Before trial State Farm declined numerous offers by the Ospital estate and Slusher to settle their claims for the policy limit of $50,000 ($25,000 per claimant). At trial in 1983, a jury found Campbell to be 100 percent at fault and rendered verdicts against him totaling $185,849 (after jury offsets). State Farm informed Campbell that it would pay the policy limits, but the difference was Campbell's liability. State Farm moved for a new trial or, alternatively, judgment notwithstanding the verdict. The motions were denied and judgments were entered in favor of Ospital's estate and Slusher. State Farm appealed. Campbell retained his own counsel regarding the excess judgment and provided information about his assets. State Farm refused demands by Campbell, Slusher, and Ospital's estate to pay the full amount of the excess verdict. It maintained this stance for the next three years.⁵

In January of 1984, the parties reached an agreement whereby Campbell agreed to seek a bad faith action against State Farm. Slusher and the Ospital estate would receive ninety percent of any recovery, equally divided. In exchange the Ospital estate and Slusher agreed not to seek satisfaction of their claims against Campbell's personal assets. In July 1986 Campbell filed suit against State Farm for bad faith.⁶ The suit was dismissed "pending the final disposition of the underlying action against Campbell."⁷ Ultimately, in June 1989, the Utah Supreme Court affirmed the judgments against Campbell. The next month State Farm paid the entire $185,849 judgment.⁸

In August of 1989, Campbell filed another complaint against State Farm alleging: "1) a breach of the implied covenant of good faith and fair dealing; 2) the tort of bad faith; 3) a breach of fiduciary duty; 4) fraudulent misrepresentation; and 5) intentional infliction of emotional distress."⁹ Campbell further claimed State Farm's conduct warranted punitive damages because it acted maliciously, deliberately, and with a conscious disregard of Campbell's interests.¹⁰ State Farm moved for summary judgment, and the district court granted its motion because "the insurer immediately satisfied the entire excess judgment when it became final."¹¹

The Utah Court of Appeals reversed the trial court and remanded the case.¹² The court determined that "material facts [existed] . . . which, if believed, might lead a jury to conclude that State Farm acted in bad faith."¹³ On remand State Farm moved "in limine to exclude evidence of alleged conduct that occurred in unrelated cases outside of Utah."¹⁴ The trial court denied the motion. However, the court granted State Farm's motion to bifurcate the trial into two phases, each with different juries. The first phase would determine State Farm's liability. If State Farm was found liable, the second phase would take place to address damages.¹⁵

The jury in the first phase found State Farm's decision not to settle unreasonable because evidence demonstrated "there was a substantial likelihood of an excess verdict."¹⁶ Before the second phase, State Farm again moved to exclude evidence concerning dissimilar out-of-state conduct based on the Supreme Court's recent decision in BMW of North America, Inc. v. Gore.¹⁷ The trial court denied this motion, finding such out-of-state conduct admissible evidence because it could establish "whether State Farm's conduct. . . was indeed intentional and sufficiently egregious to warrant punitive damages."¹⁸

In the second phase, State Farm argued that its decision to take Campbell's case to trial was an "honest mistake," and thus punitive damages were not warranted.¹⁹ To counter this assertion, Campbell introduced evidence of State Farm's business practices for over twenty years in different states.²⁰ This evidence revealed a "national scheme" whereby State Farm sought to meet corporate goals by capping payouts on claims.²¹ This nationwide scheme "was referred to as the 'Performance, Planning, and Review,' or 'PP & R,' policy."²² Campbell claimed that State Farm's decision to take his particular third-party claim to trial was a result of this national scheme. To demonstrate the existence of the PP & R policy, Campbell introduced expert testimony concerning State Farm's fraudulent practices in its nationwide operations.²³ Consequently, "the jury awarded [Campbell] $2.6 million in compensatory damages, and $145 million in punitive damages."²⁴ The court denied all of State Farm's motions for judgment notwithstanding the verdict.²⁵ Nevertheless, the trial court ordered a remittitur of damages to "$1 million in compensatory damages and $25 million in punitive damages."²⁶ Both parties appealed.²⁷

The appeal went before the Utah Supreme Court in October of 2001. The court determined that under Utah law, there were several factors to consider:

(i) the relative wealth of the defendant; (ii) the nature of the alleged misconduct; (iii) the facts and circumstances surrounding such conduct; (iv) the effect thereof on the lives of the plaintiff and others; (v) the probability of future recurrence of the misconduct; (vi) the relationship of the parties; and (vii) the amount of actual damages awarded.²⁸

After separately analyzing the factors, the court concluded that the punitive damages award was appropriate.²⁹ However, the court disagreed with the trial court's analysis of factor seven and its subsequent decision to remit the punitive damages to $25 million.³⁰ The court stated that "if the other six factors support a large punitive damages award, a judge should not decrease the amount solely because of the ratio of punitive to compensatory damages."³¹

The Utah Supreme Court then analyzed federal law and applied the three guideposts the Supreme Court identified in Gore to the issue of whether punitive damages are grossly excessive.³² As it did in analyzing the second and third state factors, the court looked at the evidence Campbell presented regarding State Farm's nationwide PP & R policy and held that State Farm's conduct was reprehensible.³³ The court concluded that the ratio between compensatory and punitive damages was reasonable.³⁴ In doing so, the court noted, "State Farm's fraudulent conduct has been a consistent way of doing business for the last twenty years . . . ."³⁵ Furthermore, the court noted that State Farm would likely continue its misconduct as evidenced by its actions toward the Campbells "despite a previous $100 million punitive damages award."³⁶ Finally, statistical probability demonstrated that State Farm would be punished in only one out of every 50,000 cases; thus, "the harm propagated by State Farm is [comparatively] extreme . . . ."³⁷

Finally, the court compared the punitive damages award to other civil and criminal penalties that could possibly be imposed upon State Farm.³⁸ The court determined that the punitive damages were not excessive when compared with a "$10,000 fine for each act of fraud, the suspension of [State Farm's] license to conduct business in Utah, the disgorgement of profits, and imprisonment."³⁹ Therefore, the court reinstated the $145 million punitive damages award.⁴⁰ State Farm appealed, and the United States Supreme Court granted certiorari.⁴¹

In a 6-3 decision, the United States Supreme Court held that when compensatory damages are $1 million, the award of $145 million in punitive damages is excessive...