• Corporate Counsel Cheers U.S. Supreme Court Restriction on Punitive Damages Awards: Defendants Benefit From New Constitutional Restrictions
  • August 14, 2003 | Author: Adrian J. Murphy
  • Law Firm: Hanson, Bridgett, Marcus, Vlahos & Rudy, LLP - San Francisco Office
  • Huge punitive damages awards that exponentially exceed compensatory damages may not yet be dead, but recently the Supreme Court gave a strong indication that they are on life support.

    In 1981, Curtis Campbell caused a car accident in which one person died and another suffered permanent, disabling injuries. State Farm, who insured Mr. Campbell and his wife, refused to settle the resulting claims for the policy limit of $50,000, forcing the matter to trial. Mr. Campbell was found liable for $185,849. State Farm initially refused to pay the portion of the verdict that exceeded the insurance policy, telling Mr. Campbell and his wife to "put for sale signs on your property." The couple eventually sued State Farm for refusing in bad faith to settle the underlying claims and then initially refusing to pay the excess liability. Following trial, the jury found State Farm liable for bad faith, fraud, and intentional infliction of emotional distress, awarding the Campbells $1 million in compensatory damages and slapping State Farm with $145 million in punitive damages.

    On appeal, the United States Supreme Court, in a 6-3 vote, found that the punitive damage award was unconstitutionally excessive, violating State Farm's due process rights under the United States Constitution. See State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289 (USSC 4/7/03). In so doing, the Court further developed principles enunciated in BMW of North America v. Gore, 517 U.S. 559 (1996), where it had identified the following factors to consider in determining whether punitive damages meet due process standards: (1) the reprehensibility of defendant's conduct; (2) the disparity between the harm plaintiff suffered and the punitive damages awarded; and (3) the difference between the punitive damages and civil penalties in similar cases.

    With respect to the first Gore factor, the State Farm Court determined that evidence presented by the Campbells at trial exposing perceived deficiencies in State Farm's operations throughout the country -- which included evidence that State Farm had investigated the personal life of one of its employees and that its policies corrupted its employees -- had little to do with the type of conduct that had harmed the Campbells. Such dissimilar acts may not serve as the basis for punitive damages: "A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business." Furthermore, the Court said, punitive damages cannot be used to punish out-of-state conduct that was lawful where it occurred, as was the case with much of the State Farm conduct relied upon by the Campbells.

    With respect to the second Gore factor, the Court stopped short of imposing a "bright-line" ratio between the plaintiff's injuries and the amount of punitive damages. However, it declared that "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." The Court went so far as to suggest that a punitive damages award that is more than four times the compensatory damages "might be close to the line of constitutional impropriety," while when compensatory damages are substantial, "a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee."

    State Farm calls into question many cases currently before appellate panels, including the Supreme Court. For example, in coming weeks, the high court's justices decide whether to hear a $290 million punitive damages award against Ford Motor Company, whose Bronco was involved in a roll-over accident that killed three. (See Romo v. Ford Motor Co. (2002) 99 Cal.App.4th 1115.)

    While there is much for corporate counsel to like in the State Farm decision, it is, nonetheless, a mixed blessing. Some commentators have noted already that it may prompt trial courts to be more liberal in admitting evidence of other, similar "bad" conduct on the part of the defendant. Moreover, the Court's opinion holds open the possibility that proportionately higher punitive damages awards may survive constitutional scrutiny where "a particularly egregious act has resulted in only a small amount of economic damages." Regardless, State Farm promises, at a minimum, to exert a limiting influence on expectations of the plaintiffs' bar when it comes to litigating and attempting to settle claims having the potential for punitive damages.