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This month, we examine State Farm Mutual Automobile Insurance Company v. Campbell, [FOOTNOTE 1] decided April 7, 2003, in which the Supreme Court held that a jury’s punitive damage award of $145 million for an automobile liability insurer’s bad-faith failure to settle, where the compensatory damage award was $1 million, was neither reasonable nor proportionate to the wrong committed and, therefore, violated due process. By way of background, in a series of incremental opinions during the past decade, the Supreme Court has emphasized that the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution places substantive limits on the size of punitive damage awards. After recognizing this principle in Pacific Mutual Life Insurance Co. v. Haslip, [FOOTNOTE 2] the Court held that meaningful judicial review of jury-imposed punitive damage awards is essential to assure that such awards satisfy procedural due process. The Court concluded that Alabama’s post-trial procedures employed in Haslip for scrutinizing the punitive damage award afforded sufficient due process protection to pass constitutional muster. A plurality in TXO Production Corp. v. Alliance Resources Corp. [FOOTNOTE 3] held that a “grossly excessive” punitive damage award would violate substantive due process, while Justice Sandra O’Connor, who dissented because she favored more rigorous standards, noted that “[i]t is thus common ground that an award may be so excessive as to violate due process.” The award in TXO, the Court held, was not so “grossly excessive” as to violate due process. In Honda Motor Co. v. Oberg, [FOOTNOTE 4] the Court concluded that due process was violated by an amendment to the Oregon Constitution that prohibited judicial review of the amount of punitive damages awarded by the jury “unless the court can affirmatively say there is no evidence to support the verdict.” The Court vacated the punitive damage award on the ground that due process requires adequate judicial review of the amount of such awards. In the Court’s last major pronouncement on the due process issue, BMW of North America, Inc. v. Gore (Gore), [FOOTNOTE 5] it reiterated that punitive damage awards are subject to due process protection because “[e]lementary notions of fairness enshrined in our constitutional jurisprudence dictate that a person receive fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a state may impose.” [FOOTNOTE 6] The Court identified three guideposts for determining whether a punitive damage award is so grossly excessive as to violate due process: (1) the degree of reprehensibility of the defendant’s conduct; (2) the ratio between the plaintiff’s compensatory damages and the amount of punitive damages; and (3) the difference between the punitive damages and the civil or criminal sanctions that could be imposed for comparable misconduct. The Court held that the $2 million punitive damage award in Gore was grossly excessive, and thus constitutionally impermissible, in light of the low level of reprehensibility of the defendant’s conduct and the 500-to-1 ratio between punitive and compensatory damages. STANDARD OF REVIEW Although these Supreme Court decisions established that due process places substantive limits on the size of punitive damage awards, federal courts of appeals were divided over the proper standard for reviewing district court determinations on this constitutional issue. Two years ago, the U.S. Supreme Court resolved this issue in Cooper Industries, Inc. v. Leatherman Tool Group, Inc., holding that “courts of appeals should apply a de novo standard of review when passing on district courts’ determinations of the constitutionality of punitive damage awards[FOOTNOTE 7].” The de novo standard entails an independent determination of the excessiveness issue by the appellate court, and this standard is viewed as more favorable to the verdict loser. The Supreme Court reiterated in Cooper that the Due Process Clause places substantive limits on the states’ discretion with respect to the imposition of punitive damages by prohibiting grossly excessive or disproportional punitive awards. In its decisions marking these constitutional limits, such as Gore, the Court engaged in an independent examination of the relevant criteria, including the defendant’s reprehensibility or culpability, the relationship between the penalty and the harm to the victim caused by the defendant’s action and the sanctions imposed in other cases for comparable misconduct. These prior decisions, and the reasoning that produced them, convinced the Supreme Court that courts of appeals should apply a de novo standard of review of punitive damage awards. ‘STATE FARM’ DECISIONS As noted, State Farm involved an insured’s claim against his automobile liability carrier for bad-faith failure to settle within the policy limits, fraud and intentional infliction of emotional distress. In 1981, while driving his car in Utah, Curtis Campbell, the insured, was involved in a multi-vehicle collision that resulted in a fatality and serious injuries. Although Campbell, in the ensuing wrongful death and tort action, denied fault in causing the accident, a consensus was reached early on by investigators and witnesses that he was indeed liable. State Farm still contested liability, declining offers that would have settled all claims for the $50,000 policy limit, and assuring Campbell that his assets were safe, he had no liability and State Farm would represent his interests and he did not need separate counsel. To the contrary, a jury determined that Campbell was 100 percent at fault and awarded $185,849. After Campbell’s appeal proved unsuccessful, State Farm paid the entire judgment. Campbell then sued State Farm for bad faith and related relief. Over State Farm’s repeated objections and motions to preclude, Campbell presented extensive evidence at trial that State Farm’s decisions to take the underlying case to trial stemmed from a national scheme to meet fiscal goals by capping payouts on claims companywide. The evidence included fraudulent practices by State Farm nationwide over a 20-year period. The jury awarded Campbell $2.6 million in compensatory and $145 million in punitive damages, which the trial court reduced to $1 million and $25 million, respectively, on post-trial motions. Both parties appealed, and the Utah Supreme Court reinstated the $145 million punitive damage award. The U.S. Supreme Court granted certiorari, reversed the reinstatement of the award, and remanded the matter for further proceedings. ‘GORE’ CRITERIA Under the principles outlined in Gore, said the U.S. Supreme Court in a majority opinion by Justice Anthony Kennedy, the State Farm case was “neither close nor difficult.[FOOTNOTE 8]” While acknowledging a state’s discretion over the imposition of punitive damages, the court criticized the rationale underlying the de novo review afforded by the Utah Supreme Court. The first and most important of the three Gore guideposts — “reprehensibility” — requires a consideration of whether (1) the injury was physical or economic; (2) the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; (3) the target was financially vulnerable; (4) the conduct involved repeated actions or an isolated incident; and (5) the harm stemmed from malice, trickery or deceit, or mere accident. Since Campbell presumably was made whole through the $1 million compensatory award, these factors were relevant in determining whether State Farm’s conduct warranted further sanctions aimed at punishment or deterrence. In the Supreme Court’s view, State Farm’s actions were indeed reprehensible and justified exemplary damages. The company’s non-praiseworthy conduct, acknowledged by the majority, included altering company records to make Campbell appear less culpable and disregarding overwhelming likelihood of liability and near-certain probability of a judgment exceeding the coverage. This harm was amplified by State Farm’s assurances to Campbell that his assets were safe, but then its later suggestion that he sell his home to satisfy the excess liability. The court nevertheless held that the $145 million punitive damage award far exceeded Utah’s legitimate objective of punishing this reprehensible conduct for several reasons. First, this case was improperly used as a platform to expose, and punish, perceived deficiencies in State Farm’s countrywide operations. This purpose was disclosed in the rationale of the Utah appellate court’s decision as well as through the Campbells’ opening statements, evidentiary focus and overall litigation position. The court found this national scope fundamentally problematic because a state neither can punish a defendant for conduct that was lawful where it occurred, as conceded by Campbell, nor possess a legitimate concern for punishing wrongs committed outside its borders. Next, and more fundamentally said the court, reinstatement of the punitive award was unconstitutional because it aimed to punish and deter conduct bearing no relation to Campbell’s harm. Due process, however, prohibits courts in reviewing punitive damages from adjudicating the merits of other hypothetical claims under the guise of a reprehensibility analysis. Otherwise, the possibility of multiple punitive damage awards for the same conduct arises. Since a court may not expand the scope of the reprehensibility guidepost to punish a defendant for every malfeasance ever committed, the only conduct by State Farm relevant to that analysis was the conduct that injured Campbell. SECOND GUIDEPOST Regarding the second Gore guidepost — the ratio between the plaintiff’s compensatory damages and the amount of punitive damages — the court declined once again to identify concrete constitutional limits on or impose a bright-line ratio between a compensatory and punitive damage award. It noted, however, that its prior holdings establish that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.”[FOOTNOTE 9] In any case, the facts and circumstances of the defendant’s conduct and the plaintiff’s harm govern whether the measure of punishment is reasonable and proportionate. Besides the inherent presumption against its 145-to-1 ratio, the validity of the punitive damage award against State Farm was undermined for several additional reasons: Campbell’s compensatory award was substantial and provided complete reparation for 18 months of emotional distress; the harm arose in an economic, not a physical, context; State Farm paid the entire judgment prior to Campbell’s action, causing only minor financial injury; and the emotional damages covered by compensatory award likely were duplicated in the punitive award. Moreover, the vourt held that neither State Farm’s wealth nor the unlikelihood of the company being punished in this way again justified the 145-to-1 ratio. The final Gore guidepost — the difference between the punitive damages and the civil or criminal sanctions that could be imposed for comparable misconduct — warranted little discussion. The most relevant civil penalty under Utah law for State Farm’s wrongdoing was a $10,000 fine for an act of fraud. In considering this guidepost, however, the Utah high court had improperly speculated about implications of State Farm’s broad, nationwide fraudulent scheme of dissimilar conduct, instead of that directed to Campbell. CONCUSIONS While the court in State Farm pointedly declined the opportunity to set an absolute constitutional limit on punitive damage awards, its holding that “single-digit multipliers are more likely to comport with due process, while still achieving the state’s goals of deterrence and retribution” and, further, that in some cases a punitive award should not exceed a compensatory award at all, provides the clearest guidance to date concerning the permissible size of punitive damages. Thomas R. Newman is counsel to Luce, Forward, Hamilton & Scripps (www.luce.com) and author of New York Appellate Practice (Matthew Bender). Steven J. Ahmuty Jr. is a partner at Shaub, Ahmuty, Citrin & Spratt. They are both members of the American Academy of Appellate Lawyers. Christopher Simone, an associate at Shaub, Ahmuty, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1 2003 WL 1791206. FN2 499 US 1 (1991). FN3 509 US 443 (1993). FN4 512 US 415 (1994). FN5 517 US 559 (1996). FN6 Id. at 574. FN7 532 US 424 (2001). FN8 2003 WL 1791206, at *7. FN9 2003 WL 1791206, at *11. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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