Yesterday, April 7, 2013, marked the ten-year anniversary of the U.S. Supreme Court’s decision in State Farm Mutual Automobile Insurance Co. v. Campbell, in which it struck down a civil punitive damage award as excessive and thus in violation of the Due Process Clause of the Fourteenth Amendment. In light of that anniversary, I will discuss in this column that case, as well as the Court’s major decisions on punitive damages that were issued both before and after State Farm was decided.
I will first provide a brief description of the purpose and nature of punitive damages. I then will discuss eight major Supreme Court cases on punitive damages, including State Farm.
The Role of Punitive Damages in Civil Lawsuits
Generally speaking, punitive damages may be awarded to the plaintiff in a civil lawsuit if the trier of fact (either the judge or a jury) finds that the defendant’s conduct is particularly egregious or intentional. Common law and statutes vary from state to state in terms of what level of conduct merits punitive damages, but generally evidence of circumstances like fraud or malice, or conduct rising to the level of being outrageous, wanton, violent, or reckless will qualify. This type of conduct is often prohibited under penal codes, which is why such conduct may result in punitive damages.
Much like criminal sanctions, punitive damages are intended to punish a defendant for outrageous misconduct and to deter future misconduct of the same nature. Indeed, some commentators have described punitive damages as “quasi-criminal” sanctions because their purposes are nearly aligned with the purpose of criminal punishment, albeit that they are imposed through the civil system. In almost all cases where punitive damages are awarded, the defendant must have acted intentionally, maliciously, or with complete disregard for the rights and interests of the plaintiff.
A civil plaintiff who receives a punitive damage award also receives an award for compensatory damages, which are targeted at restoring an injured plaintiff, rather than punishing the defendant.
Punitive damages have been subject to much criticism, particularly by large businesses and insurance companies; not surprisingly, these are the types of defendants that are most likely to have large punitive damages awarded against them.
Until the Supreme Court first took up the issue in Browning-Ferris v. Kelco, many business and lobbyists, as well as scholars and commentators, were concerned that extremely large punitive damages were, at best, unfair and most likely unconstitutional. However, the Supreme Court’s jurisprudence has shed some light on the subject, although the issue is far from resolved.
The Supreme Court’s Evolving Views on the Constitutionality of Punitive Damages
The first major case in which the Supreme Court ruled on the constitutionality of punitive damages was in 1989, in Browning-Ferris v. Kelco. In that case, the Court held that the Eighth Amendment of the Constitution (which is most commonly known for its Cruel and Unusual Punishment Clause, but which also contains a clause prohibiting “excessive fines”) does not apply to punitive damages awards in civil lawsuits to which the United States is not a party.
In the Browning-Ferris case, a jury had awarded the plaintiff, Kelco Disposal, over $51,000 in compensatory damages and over $6 million in punitive damages against Browning-Ferris Industries for engaging in unfair business practices. Browning-Ferris appealed the judgment to the U.S. Court of Appeals for the Second Circuit, where it raised the Eight Amendment issue. The Second Circuit affirmed the trial court’s decision, finding that the amount of punitive damages awarded was not excessive regardless of whether the Eighth Amendment applied. The Supreme Court agreed to review the case to decide whether the Eighth Amendment’s Excessive Fines Clause applies to civil cases in which the United States is not a party.
In holding that the Excessive Fines Clause does not apply to civil cases, the Supreme Court declined to consider whether the punitive damages award at issue was excessive under the Due Process Clause of the Fourteenth Amendment, because Browning-Ferris had not raised that issue at trial.
Two years after the Supreme Court decided Browning-Ferris, however, it heard another case on punitive damages, Pacific Mutual Life Insurance Co. v. Haslip. There, the Supreme Court upheld a ruling by the Alabama Supreme Court, finding that a state common law rule for awarding punitive damages does not in itself violate the Fourteenth Amendment’s Due Process Clause. The $1 million in punitive damages awarded in that case was four times the amount of compensatory damages that had been sought and awarded.
The Court reinforced it holding in Haslip again in 1993, when it decided TXO Production Corp. v. Alliance Resources Corp. In TXO, the Court upheld an award of $19,000 in compensatory damages and $10 million in punitive damages in a bad-faith slander of title action against TXO. In so holding, the Court explicitly refused to establish a clear line between constitutionally acceptable and unacceptable punitive damage awards, but it acknowledged that reasonableness was a consideration in drawing that line.
The next year, in Honda Motor Co. v. Oberg, the Court departed from its pattern of upholding punitive damages awards that came before it. In that case, the Court held that an Oregon statute disallowing judicial review of the size of punitive damages awards violated the Due Process Clause. In that case, the jury had awarded the plaintiff, Oberg, $5 million in punitive damages, which was over five times the amount of his compensatory damages award. Both the court of appeals and the state supreme court upheld the punitive damages award, but the Supreme Court reversed and remanded the case, finding that the state law at issue provided insufficient protection against arbitrary and inaccurate adjudications. Notably, in invalidating the law, the Court did not consider whether the actual amount of punitive damages that had been granted violated due process.
The High Court did, however, make that determination in one of the most cited and widely known decisions on punitive damages, BMW of North America Inc. v. Gore. In that case, the Court struck down a $2 million punitive damages award against BMW as excessive and unconstitutional, where the economic damages were a mere $4,000. The Court also established in BMW a three-part test for determining whether a punitive damages award is unconstitutional: (1) the reprehensibility of the defendant’s conduct, (2) the ratio of punitive damages to actual harm, and (3) the size of the award vis-à-vis the statutory sanctions for comparable misconduct.
In Cooper v. Leatherman, decided in 2001, the Supreme Court held that the standard of appellate review of punitive damages awards was de novo, rather than the less stringent abuse of discretion standard that the U.S. Court of Appeals for the Ninth Circuit used in that case. In de novo review, an appellate court reviews an issue as if it were considering the legal question for the first time. This standard of review allows the appeals court to use its own judgment as to the application of the law to the facts of the case. In contrast, under the abuse of discretion standard, an appellate court reviews only whether the lower court’s decision was unreasonable; if it was not unreasonable (even if the appellate court might have reached a different decision if it had been in the lower court’s shoes), the lower court’s decision still must stand.
The Court provided more substantive guidance regarding punitive damages awards in its decision in State Farm Mutual Insurance Co. v. Campbell, the inspiration for this column. In that case, the Court struck down a punitive damages award of $145 million, where compensatory damages were only $1 million, as violating the Due Process Clause of the Fourteenth Amendment. In striking down the award, the Supreme Court held that the ratio of punitive damages to compensatory damages awarded must generally not exceed a single-digit ratio (in this particular case, the award’s ration would have been three digits: 145:1).
The State Farm Court also held that a jury may not consider the defendant’s assets to justify an otherwise excessive reward, nor may it consider the defendant’s dissimilar conduct to heighten an award. This case was crucial in providing substance to the general test that had been established seven years earlier, in BMW.
The most recent case the Supreme Court has decided on the issue of the constitutionality of punitive damages is Philip Morris USA v. Williams. In that case, decided in 2007, the Court held that a jury may not award punitive damages for a defendant’s conduct against individuals who are not parties to a suit. Put another way, a jury may consider only harm that the defendant caused to the parties of the lawsuit when calculating punitive damages.
Williams involved a jury’s awarding the plaintiff $821,000 in compensatory damages and $79.5 in punitive damages (nearly a 100:1 ratio). Interestingly, the Supreme Court did not strike down the award under the single-digit ratio guideline it had established in State Farm. Rather, it remanded the case to the Oregon Supreme Court to determine whether there had been a procedural-due-process violation in the trial judge’s instructions to the jury. The Oregon Supreme Court ended up finding no procedural-due-process violation and affirmed the verdict, and in 2009 the U.S. Supreme Court surprisingly dismissed the certiorari petition as having been improvidently granted, leaving the verdict untouched.
The Supreme Court has heard a punitive damage case nearly every two years since it first decided Browning-Ferris in 1989, yet the nuances and contours of how punitive damages do and do not comport with constitutional requirements of due process are still murky at best. With the most recent decision on the issue being made in 2007, it seems likely that the Court will consider another case on the matter in the near future. Until that time, however, civil litigants have little guidance as to how punitive damages awards may and may not be calculated, given the recent mixed messages coming from the High Court.