Punitive Damages, Excessive – Securities Law News Update, From the Securities Law Home Page


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Punitive damages awards that exceed single-digit ratios, deal with economic transactions, and occur in tandem with compensatory awards with punitive elements are particularly susceptible to a due process challenge.

State Farm Mutual Auto Ins. Co. v. Campbell, Dkt. No. 01-1289 (U.S. Sup. Ct., 4/7/03). Punitive Damages * Constitutional Issues (Due Process).

Punitive damages awards that exceed single-digit ratios, deal with economic transactions, and occur in tandem with compensatory awards with punitive elements are particularly susceptible to a due process challenge.

Mr. Campbell killed another driver and paralyzed a third when he sought to pass some slow-moving vehicles on a two-lane highway. State Farm, his insurer, refused to settle and, not surprisingly, lost in court for an amount that exceeded the policy limits. Ultimately, State Farm covered the entire verdict, but its initial refusal, despite promises and inducements to the contrary, led to the insured’s suing State Farm for bad faith and emotional distress. A Utah jury awarded $145 million in punitive damages against State Farm and a compensatory award for emotional distress that was set at $1 million.

The Utah Supreme Court ruled that the verdict fell within the constitutional parameters articulated in BMW v. Gore, 517 U.S. 559 (1996). Ruling 6 to 3, the U.S. Supreme Court reverses and remands for further consideration.

It first expresses concern for “the imprecise manner in which punitive damages are administered” in the courts of our country and traces the constitutional underpinnings that warrant some controls. In Gore, three standards were established to guide reviewing courts: (1) the reprehensibility of the conduct; (2) the disparity between the award and the injury caused; and (3) the comparability of related civil penalties. Applying these standards to the case at bar, the Court writes, compels a ruling that is “neither close nor difficult.” State Farm was clearly at fault in their assessment of the case and their treatment of their insured, but, just as clearly, “a more modest punishment for this reprehensible conduct could have satisfied the State’s legitimate objectives….”

Where Utah’s top court erred in assessing reprehensibility was in weighing punishment for nationwide policies exposed in this case, rather than the conduct directly at hand. “Lawful out-of-state conduct may be probative when it demonstrates the deliberateness and culpability of the defendant’s action in the State where it is tortious, but that conduct must have a nexus to the specific harm suffered by the plaintiff. A jury must be instructed, furthermore, that it may not use evidence of out-of-state conduct to punish a defendant for action that was lawful in the jurisdiction where it occurred.” Such nationwide practices should not be weighed at all, if they are dissimilar in nature to what occurred in the Campbell case. “The reprehensibility guidepost does not permit courts to expand the scope of the case so that a defendant may be punished for any malfeasance, which in this case extended for a 20-year period. In this case, because the Campbells have shown no conduct by State Farm similar to that which harmed them, the conduct that harmed them is the only conduct relevant to the reprehensibility analysis.”

On the second prong of the Gore test, regarding proportionality, the Court suggests that few awards exceeding a “single digit” proportionality ratio will survive a due process challenge. This will be especially true, where compensatory damages are substantial and “arise from a transaction in the economic realm.” Effect must also be given to an award for emotional distress, as occurred here, as such awards are both compensatory and contain an element of punishment.

Finally, the civil penalty comparison also argues for reversal, as comparable penalties are either relatively small or relate to the same broad pattern of out-of-state and dissimilar conduct as the Utah Supreme Court inappropriately applied in its reprehensibility analysis. (ed: Justices Scalia, Thomas and Ginsburg each wrote separate dissents. Justice Ginsburg writes at some length, maintaining, first, that state-based verdicts on punitive damages should be corrected, if appropriate, by state courts and legislatures and that the Court’s adopted task places it in the lone position of policing practices in all the states. This Opinion is also the most illuminating in terms of understanding the “dirty tricks” and bad acts State Farm was accused of conducting. Justices Scalia and Thomas state in brief terms their continuing belief that the Constitution places no substantive constraints on the size of punitive damages awards.) (SAC Ref. No. 03-15-01)



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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | mja@sallahlaw.com | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.