High Court to Consider Putting Lid on Huge Punitive Damage Awards

The Supreme Court, heeding pleas from big business, announced Monday that it will consider setting limits on the huge punitive damage awards that have been assessed against corporations for fraud or faulty products.

Entering a dispute that has divided state legislatures, the justices said they would rule on the novel argument that multimillion-dollar punitive damage penalties are unconstitutional as “excessive fines” banned by the Eighth Amendment.

This case, to be argued in April and decided by July, raises a number of questions that have provoked debate among academics and lawyers.

Is the jury system out of control? Should large corporations have to pay especially large penalties because they are large? And what is an “excessive” penalty for a billion-dollar company?

Before 1978, punitive damage awards were relatively rare. Although the law provides for them to punish wrongdoing in civil cases and to create a deterrent to future abuses, most awards were for “actual” damages--losses actually suffered by the injured party.

But that year, an Orange County jury slapped Ford Motor with $125 million in punitive damages, along with $2.8 million in compensatory damages, in the case of a teen-ager who was badly burned when his Pinto automobile was hit and its fuel tank ruptured. The injury was blamed partly on negligence in design of the car.

Since then, there has been a “truly explosive” increase in the number and size of punitive damage awards, attorneys for business told the high court.

Insurance firms, drug companies and auto manufacturers have been especially hard hit, they said.

“The effect of these massive punitive damage awards on American industry has been, and continues to be, devastating,” Los Angeles attorney Malcolm E. Wheeler said in a brief for the National Assn. of Manufacturers and the Motor Vehicle Manufacturers Assn.

The jury verdicts have driven up prices for some products and caused drug manufacturers to shy away from new vaccines and other drugs because of the potential for enormous damage awards, Wheeler said.

But RAND Corp. researchers who have studied court verdicts dispute the notion that jury awards are out of control.

“I would compare them (punitive damages) to lightning bolts,” Mark Peterson, co-author of a 1987 RAND study on punitive damages, said in a telephone interview. “They scare people. They certainly get your attention. But they are really not very common.”

Legislatures in some states, although not California, have put limits on punitive damage awards or specified that they be no more than three times the compensatory award.

In California, judges are supposed to reduce punitive awards that do not have a “reasonable relationship” to the compensatory award and the net worth of the company. The vast majority of punitive damage awards returned by state courts are later reduced.

The case to be heard by the Supreme Court arose in Vermont and resulted in a punitive damage award more than 100 times larger than the actual loss suffered by the plaintiff.

Browning-Ferris Industries, a Houston-based firm, once had full control of the industrial waste collection business in Burlington, Vt., but a new local company began competing and by 1982 had won 42% of the market.

To fight back, Browning-Ferris slashed its prices.

Though the Houston firm’s price-cutting failed to win back its customers, the local company, Kelco Disposal Inc., filed an antitrust suit against Browning-Ferris, alleging that it was trying to monopolize the market. A Burlington jury agreed and awarded Kelco $51,146 in damages.

Kelco’s lawyer then asked the jury “to send a message back to Houston, send a message to Wall Street that the conduct that they engaged in is simply not acceptable.” The jury agreed again and tacked on $6 million in punitive damages.

A federal appeals court upheld the entire verdict in the case (Browning-Ferris vs. Kelco, 88-556), noting that the punitive damage total amounted to only “0.6% of (the Houston company’s) net worth and less than 5% of its net income for fiscal 1986.”

Appealing to the Supreme Court, Browning-Ferris said the punitive damage award was “wildly excessive” and should be struck down as a violation of the Eighth Amendment.