Constitutional Limits on Punitive Damage Awards

Source: ABA Commercial & Business Litigation

When the U.S. Supreme Court announced that it had granted certiorari in Philip Morris USA v. Williams,1 the business community anticipated the next installment in the BMW/Cooper Industries/State Farm triumvirate of cases restricting punitive damage awards. The two questions accepted for review are: (1) whether "highly reprehensible" conduct can override the constitutional limit that punitive damages be reasonably related to the plaintiff’s harm, and (2) whether due process protects a defendant from being punished for the effects of its conduct on nonparties. But when the Court heard oral argument in Philip Morris on October 31, 2006, it quickly became apparent that the road was not paved for an easy ruling that further extends the Court's restrictive punitive damage jurisprudence. This article reviews the Court’s recent history of imposing constitutional limits on punitive damage awards, then examines the Court's reaction to Philip Morris and what it portends for future punitive damage awards.

BMW of North America, Inc. v. Gore

In BMW of North America, Inc. v. Gore,2 Gore had purchased a new automobile, then sued the manufacturer, distributor, and dealer for the distributor's failure to disclose that the automobile had been damaged and repainted before delivery. A jury awarded him compensatory damages of $4,000, and punitive damages of $4 million. The Alabama Supreme Court affirmed after reducing the punitive damages award to $2 million.

The Supreme Court held that the punitive damages award was a "grossly excessive arbitrary punishment" that violated substantive due process.3 A "[s]tate may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors' lawful conduct in other States,"4 and here, trial court testimony showed that approximately 60 percent of vehicles that had been similarly refinished "were sold in states where a failure to disclose the repair was not an unfair trade practice."5 Accordingly, the Court reversed and remanded for a new determination of an acceptable punitive damage amount, articulating three criteria by which the constitutionality of punitive damage awards should be judged:

Three guideposts, each of which indicates that BMW did not receive adequate notice of the magnitude of the sanction that Alabama might impose for adhering to the nondisclosure policy adopted in 1983, lead us to the conclusion that the $2 million award against BMW is grossly excessive: the degree of reprehensibility of the nondisclosure; the disparity between the harm or potential harm suffered by Dr. Gore and his punitive damage award; and the differences between this remedy and the civil penalties authorized or imposed in comparable cases. 6

The Court observed that of these three factors, "the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct,"7 followed by the ratio of the punitive damages award to the actual harm inflicted.8 On the latter point, the Court rejected a strict mathematical line, but suggested that an acceptable ratio "was not more than 10 to 1."9

In a strongly worded dissent, Justice Scalia, joined by Justice Thomas, rejected the majority's approach, concluding that the due process clause did not embody any protection against excessive punitive damage awards. "Since the Constitution does not make that concern any of our business, the Court's activities in this area are an unjustified incursion into the province of state governments."10 Justice Ginsburg, joined by Chief Justice Rehnquist, also filed a dissent because the majority "unnecessarily and unwisely ventures into territory traditionally within the States' domain."11

Cooper Industries, Inc. v. Leatherman Tool Group, Inc.

Five years later, the Court revisited its BMW holding in Cooper Industries, Inc. v. Leatherman Tool Group, Inc.12Cooper involved a dispute between commercial competitors arising out of alleged false advertising. A jury awarded $50,000 in compensatory damages and $4.5 million in punitive damages.

The Supreme Court's primary holding in Cooper was clarification that the standard is de novo for reviewing whether a punitive damages award is excessive: "Our decisions in analogous cases, together with the reasoning that produced those decisions, thus convince us that courts of appeals should apply a de novo standard of review when passing on district courts' determinations of the constitutionality of punitive damages awards."13

State Farm Mutual Automobile Insurance Co. v. Campbell

Demonstrating its continuing interest in the subject, the Court further refined its punitive damage jurisprudence just two years later in State Farm Mutual Automobile Insurance Co. v. Campbell.14 The Court began by restating slightly the BMW factors:

[I]n Gore, we instructed courts reviewing punitive damages to consider three guideposts: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. 15

Regarding the second factor, the Court declined to set a bright line limit for "disparity," but it did suggest, in strong language, that the ratio of punitive damages to actual damages should not ordinarily reach double digits:

We decline again to impose a bright-line ratio which a punitive damages award cannot exceed. Our jurisprudence and the principles it has now established demonstrate, however, that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process. . . . Single-digit multipliers are more likely to comport with due process, while still achieving the State's goal of deterrence and retribution . . . . 16

The Court also limited "potential harm" to harm involving the plaintiff, rather than others not party to the litigation.17

As for the first factor, reprehensibility, the Court articulated several facets for lower courts to consider:

• whether the harm "was physical as opposed to economic"; "evinced an indifference to or a reckless disregard of the health or safety of others"; was inflicted on someone of "financial vulnerability"; involved repeated or an isolated action; or "was the result of intentional malice, trickery, or deceit, or mere accident;18
• out-of-state conduct that is lawful where it occurred may not be used to find reprehensibility; 19
• neither may dissimilar conduct be used to find reprehensibility;20 and
• recidivism may also be considered in a reprehensibility analysis if the challenged conduct "replicates the prior transgressions."21

Finally, the Court discussed the third factor, a comparison with civil or criminal penalties, cautioning courts not to place too much reliance on the availability of criminal penalties:

When used to determine the dollar amount of the award, . . . the criminal penalty has less utility. . . . Punitive damages are not a substitute for the criminal process, and the remote possibility of a criminal sanction does not automatically sustain a punitive damages award. 22

Finally, the Court reiterated that "the wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award."23

Philip Morris USA v. Williams

Notwithstanding the substantial new guidance the Court provided in State Farm, the courts have continued to struggle with various aspects of the punitive damages analysis. This brings us to Philip Morris. Unfortunately, it appears the Court may be forced to remand Philip Morris without issuing its fourth punitive damages ruling.

Philip Morris involved a $79.5 million punitive damage award for Philip Morris's alleged role in creating hazards for smokers. The trial court concluded the award was excessive and reduced it to $32 million, but the award was reinstated by the Oregon Court of Appeals, and the Oregon Supreme Court affirmed. On its face, the award appeared to reward the plaintiff for harms done to others who were not parties to the case. The dispute thus separately tested whether egregious corporate conduct is sufficient to sidestep the BMW analysis.

Once oral argument began, the Court quickly focused on a procedural technicality—the meaning of jury instruction No. 34, which Philip Morris had proposed and the trial court had rejected:

The size of any punishment should bear a reasonable relationship to the harm caused to Jesse Williams [the deceased smoker] by the defendant's punishable misconduct. Although you may consider the extent of harm suffered by others in determining what that reasonable relationship is, you are not to punish the defendant for the impact of its alleged misconduct on other persons, who may bring lawsuits of their own in which juries can resolve their claims and award punitive damages for those harms, as such other juries see fit.

The Court expressed confusion as to what the instruction meant, and what the jury might have concluded if the instruction had been given. As the argument progressed, various justices began to coalesce around the idea of remanding the case to the state court with a request that the court explain what the instruction meant. Such a remand would open the door to the possibility that the state court could resolve the case on state law grounds, making further U.S. Supreme Court review inappropriate.

Unfortunately, a procedural remand would delay indefinitely a holding for which there seemed to be general agreement among the justices (and to some extent, even among the parties’ counsel) with respect to the first question presented: Punitive damages cannot be awarded based on harm to nonparties. As Justice Breyer articulated it:

[S]uppose we were to say, there are many issues in this case, some of them very difficult, but one thing we’re certain about: You cannot in a trial consistent with the due process clause in a trial of plaintiff versus defendant take money from the defendant and give it to the plaintiff for the purpose of punishing the defendant for something he did to a different person who wasn’t there. . . .

Now, we’re not certain whether that’s what happened here. It may have [been]. There is certainly a lot of language to suggest it, and there is some language the other way. So we remand it to the court with the instruction that they cannot permit this to have happened if it happened. Whether it happened and what happened is a matter of Oregon law in large part and things about instructions, etc.

Thus, it appears most likely that the case will be remanded to the Oregon state courts, and the issue of whether punitive damages may be assessed based on harm to nonparties, though forever preserved in the oral argument transcript, will have to await final resolution until another case properly presents the issue.

[Author's note: On February 20, 2007, the U.S. Supreme Court issued its opinion in Philip Morris. Bypassing the concerns expressed at oral argument about the confusing jury instruction, the Court reversed in a 5-4 decision. The majority held that Philip Morris could not be punished for harm to smokers who were not parties to the lawsuit. The plaintiff had argued that the $79.5 million punitive damages award was appropriate because Philip Morris had engaged in a massive fraud on the market that misled the public into believing cigarettes were not addictive or dangerous. Writing for the majority, Justice Breyer disagreed that this was an appropriate basis for a punitive damages award: a State must "provide assurances that juries are not asking the wrong question . . . seeking, not simply to determine reprehensibility, but also to punish for harm caused strangers." Chief Justice Robert and Justices Alito, Kennedy and Souter joined the majority opinion, which did not decide whether the award's size was constitutionally excessive or whether alleged reprehensible conduct can somehow override the constitutional limit on punitive damage awards. Justices Ginsburg, Scalia, Stevens, and Thomas dissented.]

John J. Bursch is a partner at Warner Norcross & Judd LLP in Grand Rapids, Michigan, where he chairs the Firm's Appellate Practice Group. John can be reached at (616) 752-2474 or at jbursch@wnj.com.

Notes:

1. Case No. 05-1256.

2. 517 U.S. 559 (1996).

3. Id. at 562.

4. Id. at 572.

5. Id. at 573.

6. Id. at 575.

7. Id.

8. Id. at 580.

9. Id. at 581 (citations omitted).

10. Id. at 598.

11. Id. at 607.

12. 532 U.S. 424 (2001).

13. Id. at 436. The Court also held that a punitive damages award does not implicate the Seventh Amendment. Id. at 437.

14. 538 U.S. 408 (2003).

15. Id. at 418.

16. Id. at 425.

17. Id. at 422–23.

18. Id. at 419.

19. Id. at 422.

20. Id.

21. Id.

22. Id. at 428.

23. Id. at 427–28, quoting Gore, 517 U.S. at 585, 591.