U.S. Supreme Court Issues Opinion Clarifying the Scope of Punitive Damages that May Be Imposed in a Civil Case

The Issue

Courts are constantly confronted with determining the type of evidence a jury may hear and use in considering the imposition of punitive damages, as well as evaluating whether the amount of assessed punitive damages is impermissibly large. In its latest foray into this field, the U.S. Supreme Court evaluated the due process concerns presented by a punitive damages figure that was nearly 60 times greater than the amount of compensatory damages awarded by the jury. The Court also examined whether a defendant's dissimilar acts, independent from the conduct upon which liability was premised, may serve as a basis for the imposition of punitive damages. In State Farm Mutual Automobile Insurance Company v. Campbell, the Court clarified these issues by rejecting the use of certain evidence pertaining to a defendant's purported "bad acts" that were committed in other jurisdictions. The Court also suggested that punitive damages should not exceed compensatory damages by more than a single digit multiplier and, in large value cases, might not comply with due process if the award exceeds the amount of compensatory damages.

The Court's Decision

State Farm v. Campbell arose from an insured's bad faith action against his automobile carrier that resulted in an award of $2.6 million in compensatory damages, and $145 million in punitive damages. The Court's ruling relied heavily on the 1996 decision in BMW of North America v. Gore, 517 U.S. 559, which instructed courts to consider three factors when reviewing punitive damage awards:

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.

The Court initially observed that the Campbell case was neither close nor difficult. Assessing the degree of reprehensibility demonstrated by State Farm (the first Gore factor), the Court criticized the introduction of broad-ranging evidence pertaining to State Farm's past conduct toward its insureds. While acknowledging that State Farm's handling of Campbell's claim merited "no praise," the Court observed that the jury used an array of out of state conduct as a means to expose and punish the perceived deficiencies of State Farm's operations around the country. The Court concluded that the Utah courts improperly applied the Gore "reprehensibility" factor by failing to address whether the proffered evidence was improper in the jurisdictions where it occurred, and by allowing the admission of evidence even though it had nothing to do with the particular harm suffered by Campbell. In so holding, the Court cautioned that juries must be instructed not to use evidence of out of state conduct involving dissimilar acts as a basis for imposing punitive damages.

Evaluating the second Gore factor, the Court repeated its reluctance to either identify concrete constitutional limits on punitive damages, or impose a permissible ratio of punitive to compensatory damages. However, noting that courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered, the Court stated that few awards exceeding a single digit ratio (i.e. up to a factor of nine) between punitive and compensatory damages will satisfy due process concerns. Moreover, the Court indicated that when compensatory damages are "substantial," then a lesser ratio -- whereby punitive damages are equal to compensatory damages -- might reach the outermost limit of due process. Applying this assessment to the damages awarded at the trial court level, the Court had no doubt that the amount of punitive damages was presumptively unreasonable.

The Court spent little time addressing the third Gore factor regarding the disparity between the punitive damage award and any sanctions that may have been warranted under Utah statutory law. The Court observed that punitive damages are not a substitute for the criminal process; that the remote possibility of a criminal sanction does not justify their imposition; and that in any event the potential of criminal charges was impermissibly based on State Farm's dissimilar conduct in other jurisdictions.

The Court vacated the punitive damages figure, and suggested that an appropriate punitive damages award would be at or near the amount of compensatory damages.

The Implications of State Farm v. Campbell

The Supreme Court's decision will have an immediate effect on the admissibility of evidence offered to support a finding of punitive damages, and the amount of punitive damages that courts are willing to uphold. Moreover, the decision may also effect jury instructions in various jurisdictions that address the appropriate factors to consider in determining whether to assess punitive damages.

The Court confirmed that the most important factor in assessing the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct. By strongly criticizing the use of tangential out of state evidence to support a claim for punitive damages, the Campbell decision will likely prompt trial courts to more aggressively exclude any evidence offering to support the imposition of punitive damages that is not directly similar to the conduct alleged to have harmed the plaintiff. Although the Court stated that evidence of other acts need not be identical to have relevance in the calculation of punitive damages, it appears clear that prior transgressions in other jurisdictions that do not closely replicate the wrongful conduct at issue should be barred.

One of the most significant aspects of the Court's decision is the extent to which a "bright line" mathematical test was implicitly endorsed. Although the Court has consistently refused to endorse a formula-based approach to reviewing punitive damages awards, the State Farm v. Campbell decision indicates that a single digit ratio between punitive and compensatory damages may be the outermost limit that will satisfy due process concerns. Having made that assessment, the Court went even further and stated that in cases with large compensatory damages awards, a one to one ratio between compensatory and punitive damages may be the maximum permissible award. The end result is that courts will likely use this language as a means to reduce any punitive damages award that either exceeds the amount of compensatory damages either by a factor of nine (in small cases), or surpasses the compensatory damages award at all (in large value cases). It may also be argued that, consistent with State Farm v. Campbell, awards that fall outside these ranges are presumptively unreasonable.

Courts customarily instruct juries regarding the threshold level of reprehensibility that must be evidenced before punitive damages may be assessed. In addition, the State Farm v. Campbell decision may afford defense counsel an opportunity to argue for a jury instruction that:

1. Juries are not to consider a defendant's dissimilar acts -- independent from the acts upon which liability was premised -- as the basis for punitive damages, and
2. Juries may not use evidence of out-of-state conduct to punish a defendant for actions that were lawful in the jurisdiction where they occurred.

Although the Court's clarifying statements regarding the acceptable ratios between punitive damages awards and compensatory damages are helpful, it remains to be seen whether such language can be woven into a jury instruction in light of the Court's statement that "there are no rigid benchmarks" that such awards may not surpass. Defense counsel certainly should try to include the Court's guidelines in their proposed jury instructions.