In BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), the Supreme Court held that Due Process imposes substantive limits on the size of a punitive damage award. Whether a punitive award exceeds the limits provided by Due Process depends upon the reprehensibility of the conduct, the disparity between the awards of compensatory damages and punitive damages, and the difference between the punitive award and the civil penalties imposed in analogous cases.Id. at 582. In State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003), the court stated that in most cases a punitive award should not exceed a single digit multiple of the compensatory damage award. However, the court noted that a greater ratio is permissible when “a particularly egregious act has resulted in only a small amount of economic damages.” Id. at 424.
Last term, in Philip Morris USA v. Williams, 127 S.Ct. 1057 (2007), the court held that the jury may not consider the harm to non-parties in awarding punitives, but may consider such evidence in assessing the reprehensibility of the conduct. From the business point of view, the court’s distinction has little practical value in the context of a jury trial. More distressing is that the court did not reach whether the ratio of compensatory damages ($821,000) to punitive damages ($79.5 million), i.e., 100 to 1, violated Due Process. Judicially-imposed limits on punitive awards splits pro-business Republicans from pro-states’ rights Republicans. The court’s decision not to address the ratio provides some indication that the two newest members of the court (John Roberts and Samuel Alito), might be unwilling to accept any Due Process limitation on state punitive awards.
Against that backdrop, I reviewed some recent court decisions addressing punitive awards. For example, Hampton v. State Farm Mut. Auto. Ins. Co., Case No. WD-66791 (Mo. App., January 8, 2008), involved a punitive award to two plaintiffs aggregating $8 million compared to a compensatory award totaling approximately $400,000, thereby creating a ratio of approximately 20 to 1. The allegations were ugly, i.e., that State Farm had denied an automobile property damage claim on the grounds that the insured had deliberately set the vehicle on fire, had knowingly relied on questionable conclusions and had induced a prosecutor to bring an action for insurance fraud when the insured would not drop the claim. The insureds were acquitted of the insurance fraud and sued for both the unpaid insurance benefits and for malicious prosecution. The trial judge found that State Farm had misrepresented facts to the insureds, had threatened criminal prosecution and used an expert who rendered an opinion on the vehicle’s engine before examining it fully. Accepting the trial court’s findings as true, the appellate court upheld the punitive award on the grounds that the court’s findings evidenced conduct that was “clearly reprehensible.”
In Gehrett v. Chrysler Corp., Case No. 2-06-0507 (Ill. App., January 28, 2008), the plaintiffs sued an automobile dealership for fraud and deceptive business practices, alleging that the dealer had falsely represented that a vehicle carried a “Quadra-Trac” transmission, as opposed to a less desirable “Selec-Trac” transmission. The jury found in favor of the plaintiffs and assessed actual damages of $8,527.97 and punitive damages of $88,168.50, which is slightly under a 10 to 1 ratio. Finding that the defendant’s conduct was “reprehensible, but . . . not heinous or shocking to the conscience” the court reduced the punitive award to $59,695.79, which equals a ratio of 7 to 1.
In Hall v. Farmers Alliance Mut. Ins. Co., Case No. 32326 (Idaho, Feb. 13, 2008), the court addressed a compensatory award of $18,650 with a punitive award of $660,000, a ratio of 35 to 1. The plaintiffs’ home was damaged when intentionally rammed by a tractor-trailer, and the owners and their homeowner’s insurer disagreed on the value of the damages. The plaintiffs introduced disputed circumstantial evidence of bad faith and unnecessary delay.
The court found that the 35 to 1 ratio was presumptively unconstitutional and, applying the Gore factors, determined that a ratio in the mid-range of State Farm’s single digit rule was appropriate. The punitive award was reduced to $74,600 for a ratio of 4 to 1.
I laud the Gehrett and Hall decisions and criticize the Hampton court. In Gehrett, the court reduced a punitive award to a ratio of 7 to 1, notwithstanding that the defendant’s employee had intentionally mislabeled the type of transmission included in the car and had made other misrepresentations. The court found that, while the conduct was reprehensible “it was not heinous or shocking to the conscience.” The decision is remarkable because of the court’s willingness to distinguish among the nature of the fraud, e.g. lies versus concealment, the number of false statements directed at the plaintiff and whether the fraud represents a pattern. These are important factors, and the court considered all of them.
The Hall court accepted that the State Farm single-digit rule may be exceeded only where the actual damages are small or the act is particularly egregious. An act sufficient to exceed the single-digit rule “is not simply ‘regretful, naughty, unscrupulous’ or the like. . . . While it is true that unsuccessful delay tactics may be highly inconsiderate and perhaps even exploitive, they were not ‘particularly egregious.’” As in Gehrett, the court is making analytical distinctions among degrees of wrongful conduct.
The Hampton decision is troubling. The Campbell formulation sets a general ceiling of ten times the compensatory award, except where the compensatories are small. That exception makes sense, since applying the single-digit rule to a small compensatory award could promote economically egregious conduct. However, Hampton is not such a case. The compensatory award, $400,000, was substantial, and the trial court did not find a pattern of conduct extending to other cases. In these circumstances, it is difficult to see why $4 million would not be a sufficient punitive award.
The Supreme Court has just heard oral argument regarding an award of punitive damages relating to the Exxon Valdez. In that case, a jury awarded punitive damages of $5 billion, which the trial court eventually reduced to $4.5 billion and the Ninth Circuit Court of Appeals reduced to $2.5 billion. The $2.5 billion produced a 5 to 1 ratio of punitive damages to compensatory damages. Because the Supreme Court limited its considerations to whether the award is too high in light of maritime law principles, the case should not affect non-maritime jurisprudence. However, the Court may anticipate a broader ruling. When plaintiffs’ counsel noted at oral argument that the Court granted review to clarify the place of punitive damages in maritime law, Justice Scalia interjected, “That, and $2.5 billion.”
Lew Hassett is co-chairman of the firm’s litigation group and chairs the firm’s insurance and reinsurance dispute resolution group. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.
