The United States Supreme Court has given corporate America a powerful shield against excessive court awards by effectively limiting punitive damages awards to a single-digit multiple of compensatory damages. It has probably changed the conduct of litigation in America.
The State Farm Decision
In State Farm Mutual Automobile Company v. Campbell, the Court reviewed the Utah Supreme Court’s decision to uphold a jury’s punitive damages award of $145 million (in a case involving compensatory damages of only $1 million). The award was in favor of Campbell, a man who killed one person and permanently disabled another while negligently trying to pass six vans on a two-lane highway. Campbell and his wife escaped injury. Though investigators found Campbell to be at fault, Campbell’s insurer (State Farm) initially contested liability, declined offers to settle and took the matter to trial. When judgment was returned against Campbell, State Farm initially refused to cover any damages above his meager policy limit of $135,849, suggesting instead that the Campbells put up "for sale" signs. Eventually, however, State Farm paid the claim in full. Nonetheless, the Campbells sued State Farm, claiming bad faith, fraud, and intentional infliction of emotional distress.
Not surprisingly, the Supreme Court found the punitive damages award to be neither reasonable nor proportionate to the wrong committed. As such, the award was held to be a violation of State Farm’s due process. The Court reviewed three guideposts to assess the appropriateness of punitive damages that it established in BMW of North America, Inc. v. Gore, namely: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual 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. But it set out, among others, three additional important principles that courts must follow:
- First, "a defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business."
- Second, defendants should not be subjected to excessive fines just because they have deep pockets:
Jury instructions typically leave the jury with wide discretion in choosing amounts, and the presentation of evidence of a defendant’s net worth creates the potential that juries will use their verdicts to express biases against big businesses, particularly those without strong local presence.
- Third, and perhaps most importantly, the Court declared that few awards that exceed "a single-digit ratio between punitive and compensatory damages" will pass constitutional scrutiny. The only possible exception is where a particularly egregious act has resulted in relatively meager economic damages. On the other hand, where compensatory damages are substantial, the Court suggests it is possible that a punitive damages award of only equal value may be enough to "reach the outermost limits of the due process guarantee." Within these parameters, the Court is clear that punitive damages are a case-by-case analysis of particular facts and circumstances.
Practical Implications
The reining-in of excessive damages carries obvious benefits, including lower consumer prices, lower insurance premiums and better incentives to develop new products. And the commonly held perception that U.S. damages awards are excessive is borne out in some studies, including one indicating that, on average, the top U.S. companies receive about 55% of their worldwide revenue from the United States, while incurring about 88% of their worldwide legal costs in the United States.
There are other benefits as well. For instance, this decision is a boon to highly regulated industries such as insurance companies and consumer product manufacturers, because in addition to reducing the size of the awards, it will allow them to more accurately assess the cost of litigation. The new ratio should also help companies that are interested in appealing a verdict and are required to post a bond to cover their potential liability.
The Campbell decision may also prove to lessen the dread that many companies associate with litigation in the United States. By limiting the multiplier and clarifying the appropriate range of punitive damages awards, cases in the wake of Campbell may be resolved more quickly because there will be fewer appeals. Conversely, some corporations might be more willing to go to trial rather than settle as the fear of excessive punitive damages awards diminishes.
This article is a general discussion of certain legal and related developments and should not be relied upon as legal advice.