Punitive Damages Guideposts

Punitive Damages: An Analysis of the

 

States’ Response to B.M.W. v. Gore

 

Donald L. Myles, Jr.

I.

Introduction

Punitive damages are subject to award in nearly all states.[1]  In most states, punitive damages are also insurable.[2]  After carefully analyzing punitive damage verdicts across the country, and drawing upon professional observation, it appears that punitive damages have increased dramatically in frequency and amount when submitted to the jury for consideration.  In part, this trend may be attributable to the fact that the public generally has been desensitized to multi-million dollar verdicts.[3]

The purpose of this article is to explore the Supreme Court decision in BMW of North America, Inc. v. Gore,[4] and discuss its interpretation by various federal and state courts.  Finally, this article will attempt to determine the effect of BMW v. Gore and other Supreme Court decisions on subsequent punitive damage verdicts.

II.

The Supreme Court Decision

            A. Punitive Damages and Due Process

In 1996, the Supreme Court decided BMW v. Gore. The Supreme Court there determined that the amount of a punitive award could be so grossly excessive that it would violate the Due Process Clause of the Fourteenth Amendment.  In its decision, the Court examined three “guideposts” for determining whether an award was “grossly excessive.”  Unfortunately, subsequent judicial decisions have distinguished Gore on its facts instead of following Gore’s overriding principle.  As a result, Gore has had little practical effect in limiting punitive damage verdicts.

BMW v. Gore involved the purchase of a “new” BMW by Dr. Gore.  The facts disclosed that, prior to purchase, the vehicle had been damaged by acid rain.  BMW repainted the car but sold it as “new,” without disclosing the fact that it had been repainted.  Evidence at trial indicated that the resale value of the car was reduced by approximately $4,000.  However, the jury awarded Dr. Gore $ 4 million in punitive damages, which the Alabama Supreme Court later reduced to $2 million.[5]

On review, the United States Supreme Court overturned the punitive award because it was “grossly excessive” and a violation of the Due Process Clause.[6]  In its analysis, the Court considered the scope of the state’s interest when imposing punitive damages.  It concluded that Alabama had no interest in imposing sanctions for conduct outside Alabama or in changing BMW’s behavior in other states.  Alabama’s interest was confined to its own citizens, and it could justifiably award punitive damages to deter conduct occurring only within its own borders.  The Court determined that such a large punitive award could not be justified on the necessity to change the defendant’s conduct nationwide.[7]

The Supreme Court also admonished that BMW could not be punished unless it had fair notice of the conduct that was subject to sanction, as well as notice of the severity of the penalty.  The Court examined three “guideposts” that appropriately measured whether BMW had received adequate notice justifying an award of punitive damages. These “guideposts” were identified as follows: (1) the degree of reprehensibility of the non-disclosure; (2) the disparity between the harm or potential harm suffered by the plaintiff and the punitive damage award; and (3) the difference between the remedy and the civil penalties authorized or imposed in similar cases.[8]  In Gore, the Court compared the punitive damage award with the statutory penalty for similar conduct and held that the disparity between the punitive damage award and the penalty made the award in Gore “grossly excessive.”  Each of the relevant factors is analyzed below in greater detail.

B. Degree of Reprehensibility

The Supreme Court stated that the first and most important factor in determining whether a punitive damage award is reasonable must be “the degree of reprehensibility of the defendant’s conduct.”[9]  In this regard, lower courts are instructed to “examine the gravity of the defendant’s conduct and the harshness of the award of punitive damages.”[10]  The Supreme Court noted that Dr. Gore’s harm was purely economic in nature; BMW’s pre-sale refinishing had no affect on the car’s safety or performance.

C. Ratio of Harm to Punitive Award

The second and probably most common factor cited in BMW v. Gore is the ratio between the actual harm inflicted on the plaintiff and the amount of punitive damages awarded.  The Supreme Court ostensibly endorsed the “reasonable relationship” test that compares compensatory damages with punitive damages.  Prior Supreme Court decisions in cases such as TXO Production Corp. v. Alliance Resources Corp.[11] and Pacific Mutual Life Insurance Co. v. Haslip[12] have followed the proposition that a comparison between the compensatory and punitive damage awards is significant.[13]

In Haslip, the Supreme Court allowed that a punitive damage award more than four times a compensatory damage award might be “close to the line.”[14]  The Court concluded, however, that it did not “cross the line into the area of constitutional impropriety.”[15]  In TXO, the Supreme Court observed again that there must be an inquiry to determine “whether there is a reasonable relationship between [a] punitive damage award and the harm likely to have resulted from the defendant’s conduct.”[16]  However, the Court upheld the $10 million punitive award.  In Gore, the Court noted that the $4 million punitive damage award allowed by the Alabama trial court was 500 times the actual harm, as determined by the jury.  This factor proved significant when overturning the punitive damage award.[17]

Although the Supreme Court enunciated the importance of this relationship (the “ratio”), state and federal courts have not embraced this language.  As a matter of practice, the “ratio” argument, which is used when attempting to reduce or eliminate a punitive damage award, has been ineffective.[18]  State and federal courts run the gamut in determining what ratios are constitutionally acceptable.  Indeed, as a practical matter, arguing that the ratio is unconstitutional has proved the weakest argument on appeal.[19]

In retrospect, the Gore decision has been cited to support the following propositions:

1. A punitive damage award may be grossly excessive in relation to the goal of punishment and deterrence, violating due process;[20]
2. The reviewing court should consider the size of the punitive damage award in light of the reprehensibility of a defendant’s conduct;[21]
3. The court should consider the ratio of compensatory damages to punitive damages;[22] and
4. The court should consider the civil or criminal penalties available within the jurisdiction to sanction comparable conduct.[23]

 

Several district courts and state supreme courts have articulated specific criteria to implement the “guideposts” enunciated in BMW v. Gore.  In Arizona, for example, the court must conduct a post-verdict review of punitive damage awards under the following criteria:

1. The proportionality of the award to the wrongdoer’s financial position, to insure that the goals of punishment and deterrence are served without financially devastating the defendant;
2. The reprehensibility of the defendant’s conduct, including the duration of the misconduct, the defendant’s awareness of the risk or any concealment, and
3. The profitability to the defendant derived from the wrongdoing.[24]

To some extent, application of the Gore “guideposts” suffers because the Supreme Court in all of these cases has acknowledged the relevance of similar punitive awards in any given jurisdiction.  Thus, what is constitutionally permissible must be determined by state courts of review, which are charged to examine similar cases in light of their own experience.[25]

III.

Factors, Factors, Factors

In addition to Gore’s due process analysis, a variety of other factors were articulated in the Haslip opinion that may be relevant in determining whether a punitive damage award is excessive.  These include the following:

1. Whether a reasonable relationship exists between the punitive damage award and the harm likely to result from the defendant’s conduct, as well as the harm that actually occurred;
2. The degree of reprehensibility of the defendant’s conduct, the duration of that conduct, the defendant’s awareness of any concealment, and the existence and frequency of similar past conduct;
3. The profitability to the defendant of its wrongful conduct and the desirability of removing that profit in favor of a sustained loss;
4. The financial position of the defendant;
5. The costs of litigation;
6. Any mitigation resulting from the imposition of criminal sanctions on the defendant for its conduct, and
7. The existence of other civil awards against the defendant for the same conduct, these also to be taken in mitigation.[26]

Although they overlap, the Gore and Haslip factors serve different ends.  The Gore analysis is aimed at determining whether an award comports with the requirements of the Due Process Clause.  The Haslip factors, although potentially relevant to the due process analysis, are used in the Ninth Circuit to determine whether a punitive award is excessive, even if it is not also unconstitutional.  This distinction is critical.  Essentially, a dual analysis is required: (1) whether the jurisdiction’s jury instructions and post-trial procedures satisfy the Due Process Clause, and (2) whether the amount of punitive damages is excessive.  The first inquiry considers only the limits of constitutionality.  The second, and significantly weaker analysis, is tantamount to pleading with the original or reviewing courts that the award simply “isn’t fair,” applying the factors identified in Haslip.

Multi-million dollar punitive damage awards are not unique in products liability and bad-faith cases.  Decisions by the different judicial circuits have concluded that the typical ratio for punitive damages amounts to approximately one percent of a defendant’s net worth.  In Cash v. Beltmann North American Co.,[27] for example, the court concluded that a $25 million award amounting to nearly one percent of the defendant’s $2.2 billion net worth fell within the range of reasonableness.  However, in Gregg v. U.S. Industries, Inc.,[28] the court concluded that a $2 million punitive damage award, representing four percent of a defendant’s net worth of $520 million, was reasonable.  In other cases, courts have ordered a remittitur to the punitive damage award.  In Grimshaw v. Ford Motor Co.,[29] a $125 million award was reduced to $3.5 million.  Likewise, in State Farm Mut. Automobile Insurance Co. v. Zubiate,[30] a $15 million punitive damage award was reduced to $660,000.

IV.

Constitutional Defenses

In the past, litigants have alleged that the Excessive Fines Clause of the Eighth Amendment might prohibit excessive punitive damage awards. In Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc.,[31] however, the Supreme Court determined that the Excessive Fines Clause did not apply to private litigants.[32]  The Court held that the clause applied to situations in which the State seeks punitive damages against a private party.

Two years after Browning, the Court considered due process allegations in Pacific Mut. Life Insurance Co. v. Haslip.[33]  As noted earlier, a majority of the Court refused to reverse an award of over $1 million in punitive damages, an amount that was four times the compensatory award.  The majority held that the jury instructions provided adequate guidance and that Alabama case law had established a number of factors by which the trial and appellate courts could fairly gauge whether an award of punitive damages was reasonable.

The Supreme Court next decided TXO Production Corp. v. Alliance Resources Corp.,[34] a West Virginia slander of title case that resulted in a verdict of $19,000 in compensatory damages and $10 million in punitive damages.  The Court refused to recognize a due process violation even though the punitive damage award was 526 times greater than the compensatory award.  The Supreme Court noted again that the jury instructions were adequate to guide the jury and that the post-trial review process ensured sufficient adherence to the standards of Haslip.[35]

The TXO decision was followed by Honda Motor Co. v. Oberg.[36]  The Court there identified an unconstitutional punitive damage scheme, noting that Oregon law was unconstitutional because it failed to provide meaningful judicial review of the size of the punitive damage verdict.  The Court observed that, despite Oregon’s elaborate jury instructions, there must be thorough post-trial review to determine if the evidence sufficiently supports the punitive damage award.

Recently, the United States Supreme Court decided a case styled Cooper Industries, Inc. v. Leatherman Tool Group, Inc.[37] The Court had granted certiorari to determine the appropriate standard of appellate review when analyzing a punitive damage award that is allegedly excessive.  Both the petitioner, Cooper Industries, Inc., and the respondent, Leatherman Tool Group, Inc., were tool manufacturers.  The underlying complaint alleged copyright infringement. The case was tried in an Oregon federal district court, and the jury returned a verdict concluding that Cooper had infringed Leatherman’s patent.  Although Leatherman was awarded $50,000 in compensatory damages and $4.5 million in punitive damages,  the trial court refused to reduce the award.  On appeal, the Ninth Circuit Court of Appeals upheld the district court’s refusal to reduce the punitive award, applying a deferential standard of review.  Cooper Industries later petitioned the Supreme Court for review.  The Supreme Court determined that a jury’s award of punitive damages is not a finding of fact, but an expression of moral condemnation.  As such, the Court required de novo review of any punitive award challenged as excessive.

 

V.

Effect of Punitive Damages on Out-of-Court Settlements

Punitive damages have become a frequent occurrence in civil litigation; thus, they are the subject of fierce controversy.  An overwhelming majority of these cases result in settlement.  However, research suggests that matters which include punitive damage claims take significantly longer to resolve.[38]  Therefore, plaintiffs who demand punitive damages have potent leverage against defendants who are risk-averse.  Nevertheless, there is no strong research that indicates an increased cost to corporations, businesses, or the insurance industry because of the increased settlements resulting from exposure to punitive damages.  For example, the American Trial Lawyers Association cites a 1990 American Bar Foundation study of 25,000 jury verdicts in eleven states over a four-year period showing that punitive damages are awarded in less than five percent of civil jury verdicts.  It should be noted, however, that this research is outdated and fails to consider settlement in those cases where defendants were exposed to punitive damage claims.  Likewise, data on the website for the American Trial Lawyers Association emphasizes that in a Justice Department study conducted by the Bureau of Justice Statistics and the National Center for State Courts (NCSC), punitive damages were awarded in just 3.3 percent of the 4,879 trials won by plaintiffs.  Furthermore, among those cases, most punitive awards were less than $40,000.[39]  Again, however, this study is flawed since it fails to consider settlements or the passage of time.

On the Internet, there many sources that track and analyze punitive damage awards.  These are available by using any of the well-recognized legal search engines.[40]  However, it is important to keep in mind when reviewing jury verdict data, whether from the defense or the plaintiff’s perspective, that cases tried to verdict do not fully represent the effect of punitive damages on cases filed in the United States.  Most cases are settled before reaching trial.  Practice within a given jurisdiction will dictate to what extent the threat of punitive damages factors into settlements.  Common sense and personal observation indicate that cases involving claims for punitive damages, whether credible or not, inflate the costs of settlement. Furthermore, jurisdictions vary significantly with respect to punitive damage awards.  Some states, like California, Texas, Florida, and New York, for example, report notoriously high punitive damage verdicts.  However, this is not to suggest that other states reputedly more “conservative” in their compensatory or punitive damage awards have not produced significant numbers.

Many states maintain caps on punitive damage awards, and these have significantly reduced punitive damage verdicts and exposure.[41]  Civil justice studies prepared by the Rand Corporation have incorporated much of this data.[42]  The Rand study is interesting because it examines certain factors, including punitive damages, among major types of disputes, and it examines punitive damages as a percentage of total award (ratios).

VI.

Conclusion

The Supreme Court decision in BMW v. Gore has resulted in improved jury instructions and some constitutional parameters aimed at preserving the reasonableness of punitive damages on appeal.[43]  Nevertheless, the decision alone has done nothing to constrain the amount and frequency of punitive damage verdicts in those jurisdictions where punitive damage caps do not exist. At best it can be said that judicial review provides some constitutional safeguards when punitive damages are awarded.

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