United States: Sixth Circuit Invalidates Tennessee's Punitive-Damages Cap And Holds That Punitive Damages Are Available Under Tennessee Law For Bad-Faith Denial Of Insurance Benefits

Should divided panels of federal appellate courts really be deciding state-law issues of first impression? That's what happened last month in Lindenberg v. Jackson National Life Insurance Co. In Lindenberg, two Sixth Circuit judges—over a lengthy dissent by the third member of the panel—resolved two state-law issues in a manner that expands the availability of punitive damages under Tennessee law.

First, the majority held that Tennessee's statutory cap on punitive damages—enacted in 2011 as part of comprehensive tort-reform legislation—violates the Tennessee Constitution's jury trial right and therefore is unenforceable. Second, overruling a prior Sixth Circuit panel, the two-judge majority held that a plaintiff claiming bad-faith denial of insurance benefits is not limited to the statutory damages for that offense but may also recover punitive damages under the common law.

The plaintiffs in Lindenberg sued Jackson National in state court for failure to pay benefits due under a $350,000 life insurance policy. Jackson National, which did not deny that the benefit should be paid but questioned who should receive it, removed the case to federal court based on diversity jurisdiction.

Although Jackson National had paid the death benefit by the time of trial, the jury awarded $350,000 in contract damages, $87,500 in statutory damages for bad-faith refusal to pay insurance benefits (an amount equal to 25% of the amount owed under the policy), and $3,000,000 in punitive damages. The district court reduced the punitive damages to $700,000 under Tennessee Code Section 29-39-104, which caps punitive damages at the greater of two times the compensatory damages or $500,000.

On appeal, plaintiffs argued that the statutory cap on punitive damages was unconstitutional, and the defendant contended that the plaintiffs could not recover punitive damages at all but instead were limited to statutory damages for bad faith. The two-judge Sixth Circuit majority held in favor of the plaintiffs on both issues.

According to the majority, punitive damages were part of the right to trial by jury when the Tennessee Constitution was adopted. The majority reasoned further that the amount of punitive damages historically has been treated in Tennessee as a finding of fact within the province of the jury.

Based on these and other factors, the majority held that the Assembly's attempt to cap punitive damages was an "unconstitutional invasion of the right to trial by jury." It followed the lead of the Missouri Supreme Court, which invalidated that state's punitive-damages cap for similar reasons, and rejected the reasoning of the North Carolina Supreme Court, which upheld a statutory punitive damages cap against a constitutional challenge.

The majority also held that Tennessee's statutory remedy for bad-faith denial of insurance benefits, which allows bad-faith damages equal to 25% of the insurer's liability for the loss, is not exclusive. Thus, plaintiffs could also seek punitive damages under the common law, which according to the majority allows punitive damages for an "egregious" breach of contract.

The majority recognized that a prior Sixth Circuit panel had held that punitive damages were unavailable, but determined that an intervening decision of the Tennessee Court of Appeals—not the Tennessee Supreme Court, mind you—justified overturning that precedent.

In dissent, Judge Larsen questioned whether Tennessee's jury-trial right—a procedural guarantee—even provides the rule of decision in federal court. As she recognized, that is a knotty issue.

On one hand, the right to obtain punitive damages is generally treated as substantive, not procedural, under Erie. And the Erie rule has the aim of discouraging forum-shopping. So it may seem to follow that state law governs questions relating to liability for and amount of punitive damages in federal court.

On the other hand, because the Seventh Amendment, not state law, governs the right to jury trials in federal court, it is not clear why a state jury-trial right should dictate the amount of punitive damages that may be awarded in federal court.

Judge Larsen also criticized the majority for deciding "uncertain and important questions of state law" without seeking guidance from the Tennessee Supreme Court. As she pointed out, the Tennessee Supreme Court had declined to review the district court's certified questions regarding the constitutionality of the punitive-damages cap, but only because the district court had not also certified "the issue of the availability of the common law remedy of punitive damages in addition to the statutory remedy of the bad faith penalty."

The Tennessee high court said that "it would be imprudent" to opine on the constitutionality of the punitive-damages cap when the "question of the availability of those damages in the first instance has not been and cannot be answered by this Court" (Lindenberg v. Jackson Nat'l Life Ins. Co., 2016 Tenn. LEXIS 390, at *1–2 (Tenn. June 23, 2016) (per curiam)), but it made clear that its order did not "suggest any predisposition by the Court with respect to the ... Sixth Circuit's possible certification to this Court" of both questions (id. at *2 n.1).

The Sixth Circuit did not accept the Tennessee Supreme Court's invitation to certify the two issues. That is dubious enough when a state court indicates a willingness to decide manifestly important state-law issues of first impression. But it is all the more troubling when the federal appellate court is divided on the merits of the issues. It smacks of partisan judging and can only exacerbate the public's impression that the judiciary has become politicized.

On the merits, Judge Larsen stated that she would uphold the punitive-damages cap—even assuming that the state constitution's jury-trial provision rather than the Seventh Amendment provides the rule of decision in federal court. She maintained that the cap does not interfere with the jury's fact-finding role; that the majority gave short shrift to the legislature's power to abrogate common-law remedies; and that the relevant question—which the majority did not address—is whether juries could award punitive damages in similar cases when the state constitution was adopted.

Judge Larsen also disagreed with the majority's decision to "jettison[]" the Sixth Circuit's prior ruling that Tennessee's bad-faith statute precludes a common-law claim for punitive damages. In her view, the intermediate appellate court decision cited by the majority both addressed a different issue and misconstrued the Tennessee Supreme Court's decisions.

Needless to say, the Sixth Circuit is unlikely to have the last word on either of the two issues it decided. The Tennessee Court of Appeals and ultimately the Tennessee Supreme Court eventually will resolve both issues. Until then, however, cases in federal court will be governed by the two-judge decision in Lindenberg.

Meanwhile, in Lindenberg itself the district court will need to decide whether the punitive award is unconstitutionally excessive (unless, of course, the parties settle the matter). Because the punitive damages are almost nine times the compensatory damages, and few if any of the reprehensibility factors identified by the Supreme Court appear to be present, a substantial reduction of the punitive damages seems likely.

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