Justices Act to Restrict Punitive Damage Awards
In a major victory for American corporations, the Supreme Court on Monday sharply limited the power of juries to punish companies with huge damage awards, a decision that could spare the tobacco industry, insurers and automakers from paying the pending verdicts.
The 6-3 ruling sends a stern warning to state judges and juries to rein in excessive awards. In general, they may not seek to punish an entire industry or an “unsavory business” in the guise of doing justice in a single case, the court said.
Moreover, big companies should not be hit with enormous verdicts just because they are large and wealthy, the justices added.
Juries in civil cases are intended to compensate victims for their actual losses, not to mete out punishment, said Justice Anthony M. Kennedy for the court.
“Great care must be taken to avoid the use of the civil process to assess” society’s punishment, he said. “Punitive damages are not a substitute for the criminal process.”
Monday’s opinion goes further than ever before in restricting what the court called “irrational and arbitrary” verdicts against business.
Tobacco companies hope to use the ruling to reverse or lower punitive damage awards. Cigarette makers including Philip Morris USA and R.J. Reynolds are appealing nine punitive damage awards, ranging from $15 million to $144.8 billion, made to smokers who suffered from lung cancer or other illnesses.
The ruling also could lead to reversals in two record-setting California cases involving auto accidents.
In one, a jury in Stanislaus County handed down a $290-million punitive verdict against Ford Motor Co. four years ago in a fatal accident involving a Ford Bronco.
“This is an extremely strong opinion, and it demonstrates why the $290-million award cannot stand,” said Los Angeles lawyer Theodore J. Boutrous, who represents Ford.
In the other, General Motors Corp. is appealing a Los Angeles jury’s $4.8-billion punitive verdict -- later reduced to $1.2 billion -- in a case involving a fiery crash of a Chevrolet Malibu.
Business leaders hailed the court’s decision.
Robin Conrad, an attorney for the U.S. Chamber of Commerce, said the ruling cracked down on “unfair and unrealistic” damage awards. The decision makes clear “punitive damages should only be awarded in extraordinary circumstances,” she said.
Philip K. Howard, a Washington lawyer and head of Common Good, a group that promotes legal reform, said the decision “takes an important step toward restoring reliability to American justice.” The mere possibility of “ruinous verdicts” forces many companies to agree to pay very large settlements, he said.
Although the Bush administration favors limiting lawsuits, it has not proposed a measure to cap damages across the board. Instead, its current proposal is focused on limiting awards in medical malpractice cases.
For nearly 20 years, the Supreme Court has been troubled by the increasing number of very large verdicts for punitive damages.
In civil cases, juries that rule for a plaintiff and find a company guilty of wrongdoing are called upon to compensate the victim for the loss. This may include money for actual losses, such as medical bills, and other losses such as emotional distress.
Punitive damages are different. They are not assessed based on the victim’s loss, but instead are supposed to punish the wrongdoer separately. Because there is no clear standard, these verdicts are especially unpredictable. The victim receives the extra award as a windfall.
One of the biggest pressures on businesses to settle lawsuits is the inability to predict the potential for punitive damages, even when the value of the underlying injury is relatively easy to estimate, said Fred Main, vice president and general counsel for the California Chamber of Commerce.
“If you had a $50,000 case and you wind up with $500 million to $1 billion in punitive damages, there’s something disproportionate there,” he said.
In California and many other states, businesses cannot purchase insurance against punitive damage awards the way they can for compensatory and contractual damages, Main said.
In the late 1980s, the court saw a series of decisions from Alabama and Mississippi in which insurance companies failed to pay claims ranging from $5,000 to $10,000 that resulted in million-dollar punitive verdicts. In nearly every case, jurors had been urged to “send a message” to the big insurance company based far away in Chicago, New York or Los Angeles.
In 1996, the Supreme Court for the first time struck down a punitive verdict as unconstitutional. In that case, an Alabama jury had awarded a doctor who bought a BMW with a hidden scratch $4 million in punitive damages, supposedly to punish the German automaker for failing to disclose its policy of repainting scratched bumpers.
The Constitution says states may not deny people “property without due process of law,” and a jury verdict based on no standards is lawless, the court said.
That ruling in BMW vs. Gore set “guideposts” for judges to consider in reviewing punitive damages.
But in Monday’s decision, the court made clear it is not satisfied with how the guideposts are being followed. Too many extraordinary verdicts are being handed down, and judges are approving them.
In the central California case involving the Ford Bronco, the California Supreme Court refused to even hear the automaker’s appeal, even though its action upheld the largest punitive verdict in U.S. history.
In January, Ford appealed to the Supreme Court. The case is pending.
In the case decided Monday, a Utah man who caused an auto accident that killed another driver ended up winning $145 million in punitive damages against his insurer.
The driver, Curtis Campbell, had an insurance policy with State Farm that had a limit of $50,000. Rather than settle the case for this amount, State Farm told Campbell it wanted to fight in court. However, the jury found Campbell at fault, and gave his victim $185,000. Again, rather than paying the full amount, State Farm told Campbell he would have to pay $135,000.
At this point, the elderly man and his wife faced the prospect of losing their home. With the aid of a lawyer, they sued State Farm.
Jurors were told State Farm schemed all across the country by refusing to pay legitimate claims. They awarded Campbell $2.6 million in compensation for his emotional distress, and $145 million more to punish State Farm.
Although the trial judge reduced the amount to $1 million and $25 million respectively, the Utah Supreme Court revived the original punitive verdict.
In State Farm vs. Campbell, the high court sided with the insurer. “This case is neither close nor difficult. It was an error to reinstate the jury’s $145-million punitive damages verdict,” Kennedy said.
“A more modest punishment for [the insurer’s] reprehensible conduct” could stand, he said, but the verdict was way out of line. At one point, Kennedy noted that an act of business fraud yields a criminal penalty of $10,000 in Utah, a pittance compared with the jury’s verdict.
There was no justification for using “this case as a platform to expose and punish the deficiencies of State Farm’s operations throughout the country,” Kennedy said. He went on to say that jurors should not be told of the company’s “out of state conduct” as a way to multiply the punishment.
This statement is significant in itself. Typically, large punitive damages come about when jurors are told to punish the company for its actions nationwide. In the Ford Bronco case, for example, the Stanislaus County jury said it came up with the $290 million by calculating all the profit the automaker earned on its Broncos over three years.
Kennedy also said punitive awards should not greatly exceed the compensatory verdict. “In practice, few awards exceeding a single digit ratio between punitive and compensatory damages will satisfy due process,” he said. If a compensatory verdict is $1 million, this suggests the punitive damages cannot exceed $9 million.
Sometimes, even that is too high, the court said. “When the compensatory damages are substantial, a lesser ratio, perhaps only equal to compensatory damages, can reach the outer limit,” he said.
In dissent, Justice Ruth Bader Ginsburg said the ruling boldly and unwisely reins in state courts and juries. The “flexible guides” set seven years ago have turned into “marching orders,” she said. Justices Antonin Scalia and Clarence Thomas dissented separately, saying the Constitution sets no limits on jury verdicts.
*
Times staff writers Myron Levin and Lisa Girion contributed to this report.
