Supreme Court Deals a Double Blow to Business : Justices Reject Limits on Punitive Damage Awards, Use of Racketeering Law

Big business suffered two losses Monday in the Supreme Court as the justices refused to put new limits on skyrocketing punitive damage awards or on the use of a controversial federal racketeering law.

In recent years, business officials have complained about soaring liability judgments and about lawsuits that attack legitimate businesses under a statute designed to wipe out organized crime.

This year, they had hoped that a more conservative Supreme Court could help with both problems. Instead, they were disappointed Monday when the court rejected legal attacks in both areas, although the justices left open the possibility of further challenges.

The court ruled that huge punitive damage awards do not violate the Eighth Amendment’s ban on “excessive fines.” On a 7-2 vote, the justices said this clause limits government prosecutors but that it does not limit private citizens who sue other citizens or companies in court.

Additional Damages Awarded

In the second ruling, the court upheld a broad reading of the Racketeer Influenced and Corrupt Organizations Act that permits businesses to be sued if they commit two or more acts of fraud, including mail fraud or securities fraud. Under this interpretation, a company that sends out several misleading flyers can be charged with racketeering and potentially be forced to pay three times as much in damages to a plaintiff who lost money because of them.

In the punitive damages case, the court upheld a $6-million punitive award against a Houston company, Browning Ferris Industries. A jury in Burlington, Vt., had concluded that Browning-Ferris competed unfairly with a local Burlington firm and cost it $51,000 in lost business.

After first awarding the firm $51,000 in actual damages, the jury tacked on the additional $6 million in punitive damages to “send a message” to the Texas firm.

The company appealed the decision (Browning Ferris vs. Kelco, 88-556), saying this award was “wildly excessive” and simply a windfall for the local company.

While upholding the award, all nine members of the court left open the possibility that huge punitive awards may violate the Constitution’s guarantee of “due process of law.” Critics of multimillion-dollar punitive damage awards say that they violate “due process” because a defendant is not given fair warning that his conduct may result in a huge fine.

Moreover, the fine is based on the company’s wealth. They liken this system to allowing a police officer to write the amount of a parking ticket based on his judgment about the wealth of the car owner.

Consumer advocates and trial lawyers, however, say the threat of punitive damages is needed to keep big companies in line. They cite the case of a Ford Pinto that allegedly exploded because of a defective fuel tank and burned the driver. Only the threat of a multimillion-dollar punitive damage award will force a giant company to spend the money to build a safer product, they argue.

Lawyers for national business groups said they were especially disappointed by the court’s failure to limit punitive damages.

“This was certainly the biggest case of the year for us, maybe the biggest case of this decade,” said Quentin Riegel, deputy general counsel for the National Assn. of Manufacturers. “They have closed off one avenue of challenge to punitive damages. Now we have only one left.”

Stephen Bokat, general counsel for the U.S. Chamber of Commerce, said: “These huge verdicts are a tremendous problem for business, but they hurt consumers, too. Products get taken off the market . . . because companies can’t face the possibility of these damage awards.”

In the RICO case, the high court again said that it is up to Congress to rewrite the law, if it chooses to do so. When enacted in 1970, RICO was supposed to attack organized crime by authorizing both criminal and civil suits against enterprises that engage in a “pattern of racketeering activity.” Racketeering was defined to include everything from murder and extortion to mail fraud and securities fraud.

In recent years, the law has been used by angry investors to sue brokerage or accounting firms. Earlier this year, an appeals court upheld a RICO suit against aggressive anti-abortion protesters in Philadelphia. In an unusual appeal, Chief Justice William H. Rehnquist, in a speech in April, urged Congress to rewrite the law to narrow its focus.

In 1985, the court declined to limit the law’s use to organized crime alone. The justice on Monday unanimously refused to limit the definition of a “pattern of racketeering activity.”

Justice William J. Brennan Jr. said that a pattern means only two criminal “acts” that are “related” and pose a threat of continued criminal activity. He rejected a lower court conclusion that a RICO suit requires two separate “schemes” of illegal activity.

Concurring in the ruling (H.J. Inc. vs. Northwestern Bell, 87-1252), Justice Antonin Scalia said the law is so hazy that it may well be unconstitutional. The court’s guidance on what the law demands is about “as helpful to the conduct of (business) affairs as ‘life is a fountain.’ ” He was joined by Justices Anthony M. Kennedy, Sandra Day O’Connor and Rehnquist.