SUPREME COURT CHANGES RULES FOR PUNITIVE DAMAGES

SUPREME COURT CHANGES RULES FOR PUNITIVE DAMAGES

HAROLD S. SMALL, J.D., CPA, and AEP

Each year the United States Supreme Court (“Supreme Court”) delivers a number of rulings and opinions on a wide variety of matters, and each term typically has a couple of decisions with wide reaching implications. Such a situation arose on April 7 when the Supreme Court issued its decision in State Farm Mutual Automobile Insurance Co. v. Campbell, et al. (“State Farm”) and changed the rules in the litigation arena as they relate to punitive damages. This decision is important for those involved in pending litigation where punitive damages have been requested, cases where appealable judgments have been entered, and cases currently in litigation.

In this case, Curtis Campbell (now deceased) and his wife, Inez Preece Campbell, sued State Farm (their insurer) for intentionally inflicting emotional distress upon them. Mr. Campbell and others were injured in an automobile accident. In that accident one person was killed, and that person’s family sued Mr. Campbell. State Farm refused to settle the case for the policy limit of $50,000. The case was tried and Mr. Campbell was found liable for the injuries he caused and damages of $136,000 were assessed. State Farm offered to pay the $50,000 policy limits and suggested that Mr. and Mrs. Campbell sell their home to pay the difference. Some one and one-half years later (after a change of mind), State Farm paid the $136,000. The Campbells alleged that they suffered emotional distress because State Farm refused to pay the settlement offer and refused to take the case seriously.

The Campbells subsequently sued State Farm and won a judgment of $2,600,000 in compensatory damages (reduced by the trial judge to $1,000,000) and punitive damages of $145,000,000 (reduced by the trial judge to $25,000,000). The Utah Supreme Court upheld the award, reinstated the punitive damages to $145,000,000, and State Farm appealed.

Justice Anthony Kennedy wrote the opinion for the 6-3 court and indicated: “A punitive damages award of $145 million, where full compensatory damages are $1 million, is excessive and violates the Due Process Clause of the Fourteenth Amendment.” The decision also indicated that “(a) Compensatory damages are intended to redress a plaintiff's concrete loss, while punitive damages are aimed at the different purposes of deterrence and retribution. The Due Process Clause prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeaser. E.g., Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U. S. 424, 433. Punitive damages awards serve the same purpose as criminal penalties. However, because civil defendants are not accorded the protections afforded criminal defendants, punitive damages pose an acute danger of arbitrary deprivation of property, which is heightened when the decisionmaker is presented with evidence having little bearing on the amount that should be awarded. Thus, this Court has instructed courts reviewing punitive damages to consider (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.” BMW of North America, Inc. v. Gore, 517 U. S. 559, at 575. ... (b) Under Gore's guideposts, this case is neither close nor difficult.

The Supreme Court indicated by its decision that the ratio of punitive and compensatory damages must be kept under control and that they must relate to the circumstances of the litigants and the facts presented to the trial court. In other words, the ability of plaintiffs to send a message to a company that acts badly will be limited to a more reasonable ratio of the compensatory and punitive damages, rather than awarding a monstrous punitive damage award as a deterrent to future bad conduct.

It is clear that this decision marks a significant change after the many years that the Supreme Court has been silent about punitive damages being used as a deterrence. The lengthy decision, and the dissents will be studied for many years. The dissents of Justices Scalia, Thomas and Ginsburg would have left the punitive damage award of the Utah Supreme Court intact. Justice Ginsburg stated in her dissent, “The large size of the award upheld by the Utah Supreme Court in this case indicates why damage-capping legislation may be altogether fitting and proper. Neither the amount of the award nor the trial record, however, justifies this Court's substitution of its judgment for that of Utah's competent decisionmakers. In this regard, I count it significant that, on the key criterion ‘reprehensibility,’ there is a good deal more to the story than the Court’s abbreviated account tells.” As is apparent from these comments, at least a part of the court would rather see legislation dealing with capping punitive damage awards while other justices believe that the guidance and roadmap provided in the State Farm decision gives the needed directions to trial counsel and lower courts.

Readers involved in pending litigation involving punitive damages should discuss this case with their litigation and general counsel. Changes in litigation strategy and/or pleadings may be appropriate. When readers become involved in litigation (as plaintiff or defendant) where punitive damages are sought, they should talk with their counsel about the import and impact of the State Farm decision to their own circumstances.

THE FOREGOING CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS FOR CONSIDERATION IN BUSINESS AND TAX PLANNING. CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE USER REGARDING THE USE AND APPLICATION OF THE CONCEPTS. YOUR LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF THE IDEAS INDICATED HEREIN. SHOULD YOU HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT 12526 HIGH BLUFF DRIVE, SUITE 200, SAN DIEGO, CALIFORNIA 92130 OR AT 858.350.8888.