• U.S. Supreme Court Ruling On Punitive Damages Should Result In Fewer -- And Lower -- Punitive Awards Against Corporate Defendants
  • December 9, 2003 | Author: William M. Savino
  • Law Firm: Rivkin Radler LLP - Uniondale Office
  • Five years ago, the U.S. Supreme Court ruled for the first time that a punitive damages award against a company can be unconstitutional if it is "grossly excessive." In that case, BMW of North America, Inc. v. Gore, the plaintiff contended that the manufacturer had repainted a new car to cover some damage and then had sold the car to the plaintiff without disclosing the paint job. The Court found that the $2 million punitive damages award that had been entered against the manufacturer violated constitutional requirements and had to be reversed.

    Many expected that the Court's decision in the BMW case would slow the rapid increase in the number -- and size -- of punitive damages awards that had begun in the 1980s. At least to some extent, it seems, the Court's ruling has done just that.

    Now, an 8-1 decision issued late this past term by the Supreme Court in Cooper Industries, Inc. v. Leatherman Tool Group, Inc. may further limit punitive damages awards.

    In the Cooper case, the Court found when a defendant appeals a punitive damages award, the appellate judges must make a "thorough and independent" review of the award -- a quite demanding test. The Court rejected arguments that appellate courts may use a less restrictive standard, i.e., whether a trial court abused its discretion in upholding a punitive damages award. In essence, the Supreme Court has told appellate courts that they may second-guess the juries that award punitive damages and the trial courts that approve those awards. This decision will permit corporate defendants the opportunity to contest punitive damages awards on appeal, and makes it more likely that they will be successful in overturning or sharply reducing them.

    Unfair Competition

    The Cooper case was a federal lawsuit between competing tool manufacturers. In the 1980s, Leatherman Tool Group, Inc., introduced its "Pocket Survival Tool" or "PST" -- a multi-function pocket tool based on the classic "Swiss army knife." Thereafter, Cooper Industries decided to design and market a competing multifunction tool. Cooper planned to copy the basic features of the Leatherman tool, add a few features of its own, and sell it under the name "ToolZall."

    Cooper introduced the original ToolZall at a trade show in August 1996. At that show, it used photographs in its posters, packaging, and advertising materials that purported to be of a ToolZall but were actually of a modified PST. Leatherman then filed an action against Cooper asserting claims of trade-dress infringement, unfair competition, and false advertising under Section 43(a) of the federal trademark law known as the Lanham Act.

    After a trial, the jury found that Leatherman had trademark rights in the overall appearance of the PST and that the original ToolZall infringed those rights, but that the infringement had not damaged Leatherman. With respect to the advertising claims, the jury found Cooper liable for passing off, false advertising, and unfair competition and assessed aggregate damages of $50,000 on those claims. It also awarded $4.5 million in punitive damages.

    After the jury returned its verdict, the trial court considered, and rejected, arguments that the punitive damages were "grossly excessive" under the Supreme Court's BMW decision. The court of appeals then affirmed the punitive damages award, concluding that the award did not violate Cooper's due process rights under the federal Constitution and that the district court had not abused its discretion in declining to reduce the amount of punitive damages. The case reached the Supreme Court.

    Compensatory vs. Punitive Damages

    In the majority decision, the Court first pointed out that compensatory damages and punitive damages serve distinct purposes. As the Court stated, compensatory damages are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant's wrongful conduct, whereas punitive damages operate as "private fines" intended to punish the defendant and to deter future wrongdoing. The Court continued by noting that a jury's assessment of the extent of a plaintiff's injury is essentially a factual determination, whereas its imposition of punitive damages is an expression of its "moral condemnation."

    In other words, the Court said, unlike the measure of actual damages suffered, which presents a question of historical or predictive fact, the level of punitive damages is not really a "fact" that is "tried" by a jury. Because the jury's award of punitive damages does not constitute a finding of fact, appellate review of the trial court's determination that an award is valid under the Constitution does not implicate jury-trial concerns, the Court said.

    The Court then noted that in BMW, it had instructed courts evaluating a punitive damages award's constitutionality to consider three criteria: (1) the degree or reprehensibility of the defendant's misconduct, (2) the disparity between the harm (or potential harm) suffered by the plaintiff and the punitive damages award, and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. According to the Court, only with respect to the first inquiry do trial courts have a somewhat superior vantage over courts of appeals, and even then the advantage exists primarily with respect to issues turning on witness credibility and demeanor. The Court said that trial courts and appellate courts seem equally capable of analyzing the second factor, and the third criterion -- which calls for a broad legal comparison -- seems more suited to the expertise of appellate courts. "Considerations of institutional competence therefore fail to tip the balance in favor of deferential appellate review," the Court concluded.

    The Court then rejected the limited review test and held that an independent appellate review of punitive damages awards was appropriate.

    Practical Significance Of The Ruling

    Can the standard used by an appellate court to review a lower court's decision really make a difference? The answer is clearly yes.

    In this case, for example, the court of appeals affirmed the district court's decision using the "abuse of discretion" test. The Supreme Court itself reviewed the decision by engaging in a thorough, independent review of the district court's rejection of Cooper's objections to the punitive damages award and strongly suggested that the district court's conclusions should not survive.

    For example, in evaluating the second BMW factor -- the ratio between the size of the award of punitive damages and the harm caused by Cooper's improper conduct -- the Supreme Court said that the district court might have been influenced by Leatherman's contention that it was not the actual injury -- which the jury assessed at $50,000 -- that was relevant, but rather the potential harm Leatherman would have suffered had Cooper succeeded in its wrongful conduct. Leatherman calculated that "potential harm" by referring to the fact that Cooper had anticipated gross profits of approximately $3 million during the first five years of sales. The Supreme Court said that even if that estimate were correct, however, it would be "unrealistic" to assume that all of Cooper's sales of the ToolZall would have been attributable to its misconduct in using a photograph of a modified PST in its initial advertising materials. Among other things, the Supreme Court stated, the picture of the PST did not misrepresent the features of the original ToolZall and could not have deceived potential customers in any significant way. Its use was wrongful because it enabled Cooper to expedite the promotion of its tool, but that wrongdoing, the Supreme Court emphasized, could not be treated as the principal cause of Cooper's entire sales volume for a 5-year period.

    Because the court of appeals had relied on the improper standard to review the trial court's decision, the Court vacated the judgment and remanded the case for further proceedings.