Justices Uphold Large Punitive Damage Awards
The Supreme Court dealt big business a major setback Monday, ruling that the Constitution permits juries to punish corporations with multimillion-dollar verdicts, even if the award far outweighs the injury.
The 7-1 decision requires an Orange County insurance company to pay more than $1 million in damages to an Alabama woman over an unpaid $3,000 medical claim.
Over the last decade, business attorneys have strongly criticized soaring jury verdicts that not only compensate a person for his losses but tack on huge “punitive” damages.
Manufacturers, insurance companies, drug makers and even religious groups such as the Scientologists and the Hare Krishnas have been hit with punitive verdicts that are hundreds of times greater than the actual losses suffered by the plaintiffs.
Their attorneys have contended that juries are out of control and that these verdicts are fundamentally unfair. They had hoped the Supreme Court would rein in the jury system and put new limits on its verdicts.
But those hopes were dashed Monday.
By a surprisingly large margin, the court swept away the last major constitutional challenge to punitive damages.
So long as a state court has decided that a punitive verdict is “not grossly out of proportion to the severity of the offense” and has “some understandable relationship to the compensatory damages,” it is constitutional, the court said.
Most business attorneys conceded defeat.
“I think this all but closes the door to any challenge in the Supreme Court,” said Stephen Bokat, an attorney for the U.S. Chamber of Commerce. “What it means is that business will have to look to the state legislatures.”
That has become a familiar theme for attorneys bringing constitutional cases to the Supreme Court. On issues as varied as abortion, the “right to die” and now punitive damages, the court under Chief Justice William H. Rehnquist has been inclined to leave the solution to the states.
In a series of cases since 1986, the high court voiced concern about what appeared to be skyrocketing punitive damage awards. At least five justices suggested a need for some new limits. But a majority never settled on any formula.
Two years ago, the high court ruled, 7 to 2, that the 8th Amendment’s ban on “cruel and unusual punishment” and “excessive fines” did not limit the monetary punishments imposed by civil juries.
And on Monday, the court ruled that huge punitive awards do not violate a corporation’s right to “due process of law” under the 14th Amendment.
The most liberal and most conservative justices concurred in the decision, although perhaps for different reasons. The liberals have been reluctant to shield big business. The conservatives have been reluctant to tamper with the decisions of state courts and state legislatures.
“I think the justices threw up their hands and decided there is not much they can do or should do about this problem,” said University of Chicago Law Prof. Geoffrey Miller.
Consumer groups and trial attorneys hailed the outcome as a victory for the little guy who battles giant corporations.
Business officials “should spend more time figuring out how to make their products safer and less time trying to escape their responsibilities under law,” said Linda Lipsen, legislative counsel for Consumers Union.
Juries “are acting as the conscience of the community. When they are faced with reprehensible behavior, they punish it as a way to deter that kind of conduct in the future,” said Washington attorney Bruce Ennis, who represented the Alabama woman before the Supreme Court.
But the business attorneys pointed out that the company being punished in Monday’s ruling did not even know of the fraud perpetrated by one of its agents.
In 1982, Cleopatra Haslip entered a hospital for treatment of kidney infection. As an employee of Roosevelt City, Ala., she thought that she had insurance coverage. The year before, Lemmie Ruffin Jr.--an agent for both Pacific Mutual Life Insurance Co. and Union Fidelity Life Insurance Co.--sold a medical insurance policy to the city. The coverage was to be provided by Union Fidelity.
But Ruffin simply pocketed the premiums and Union Fidelity canceled the policy.
When Haslip discovered that she had no insurance, she filed a suit for fraud against agent Ruffin and Pacific Mutual, which is based in Newport Beach.
Haslip testified that she thought Union Fidelity was a subsidiary of Pacific Mutual. Although it is not, Pacific Mutual was held responsible because Ruffin used Pacific Mutual stationery and business cards.
When Ruffin fled, Pacific Mutual was left to defend itself against his fraud.
A jury in Birmingham, Ala., ruled that the company was liable for Haslip’s losses. The judge then told the jurors that if they believed they should “punish the defendant . . . in addition to compensatory damages you may in your discretion award punitive damages.”
Based on that advice, the jury handed down a total verdict of $1,040,000. The Alabama Supreme Court upheld the verdict and the company appealed. In October, attorneys for Pacific Mutual told the justices that the company had been a “victim of embezzlement” and did not commit fraud. Moreover, they said, the punitive award was unconstitutional because it was unrelated to any actual loss.
Dozens of other business groups, including auto makers, drug firms, architects and the press, joined the appeal, arguing that big punitive awards do serious harm to American business and give an undeserved “windfall” to individual plaintiffs.
But in Monday’s decision in the case (Pacific Mutual vs. Haslip, 89-1279) the high court rejected those arguments and upheld the status quo.
Justice Harry A. Blackmun, writing for the court, noted that Haslip’s award was “more than 200 times” as great as any actual losses she suffered. Nonetheless, the Alabama courts scrutinized the verdict to see that it was “reasonable,” and that is all the Constitution demands, he said.
Justice Sandra Day O’Connor read a lengthy dissent in the courtroom.
“The existing system is not rational,” she said, deriding her colleagues for choosing to do nothing about a serious national problem.
In other actions, the court:
--Let stand the state “lemon laws,” which protect consumers who find themselves the owners of defective cars (MVMA vs. Abrams, 89-2026). For example, a New York law requires auto makers to repair any defect that shows up during the first 18,000 miles of the car’s life. The Motor Vehicle Manufacturers Assn. contended that a 1975 federal law on auto warranties had preempted such state laws.
--Indicated that churches are not exempt from landmark preservation laws. The court overturned a Washington state ruling in the case (Seattle vs. First Covenant Church, 90-852), which said that Seattle’s churches have a religious right to be shielded from the city’s law. The church wanted the right to renovate a 1911 building designated as a landmark. It is one of only three domed structures in the city.
Separately, the justices turned down a church’s challenge to New York’s landmark preservation law (Rector vs. New York, 90-900). In that case, St. Bartholomew’s Church on Park Avenue in Manhattan wanted to replace one of its buildings with a 47-story office tower.
Last year, the court ruled that the Constitution does not give religious groups a right to be exempt from general laws.
--Turned down an appeal from a former Navy reservist who contended that he was removed from active service because he has tested positive for the AIDS virus (Doe vs. Garrett, 90-803).
