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From Browning-Ferris to Philip Morris, Part II

March 16, 2007 4:40 PM

In this, my closing comment, I first pay tribute to David. I think he HAS identified a Due Process claim on originalist grounds (since, as he almost concedes, modern punitives are qualitatively different from the symbolic damages of yore; and "bet the company" damages based on jury whim is standardless and lawless). Diversity jurisdiction is easy to defeat (just sue the local retailer), so that out doesn't exist. So Due Process is available, though not for the reasons given in the cases dealt with in my last comment.

Let's see if the Court did any better Post-TXO. That case was perhaps the Supremes' darkest hour concerning punitives. The dam broke in Gore. But did it break in a good way?

BMW of North America, Inc. v. Gore

Mr. Gore purchased a new BMW from an authorized Alabama dealer. He loved his car. But when he took it in for service, he was informed by one of the mechanics that a panel of the car had been repainted. It turned out the car had been scratched during boat transport from Germany. BMW had followed a nationwide policy of repairing predelivery paint chips and scratches to new cars, so long as the cost of repair did not exceed 3% of the car�s suggested retail price. [If repairs cost over 3% of the value of the car, it was removed from new vehicle inventory and given to the sales team to use as a demonstrator, then sold at auction.] This particular paint job cost way under the 3% limit, and it was also under the Alabama consumer protection limit, as that law had always been understood. So BMW shipped the car to its Alabama dealer, who sold it new.

Gore brought this suit for compensatory and punitive damages against BMW, alleging, inter alia, that his car had a lower resale value because of the repainted part; he considered himself a victim of the tort of fraud. Again, local plaintiff, out-of-state defendant. The jury returned a verdict finding BMW liable for compensatory damages of $4,000, the alleged difference in resale value between a �concourse� car and one that had a repainted panel [But wait -- did BMW sell the car for "concourse" purposes? Sigh...] . The jury also assessed $4 million in punitive damages, on the grounds that BMW had likely repainted 1000 cars over the years and should pay $4K for each. Alabama appellate courts reduced the punitive award to $2 million, which they decided was not �grossly excessive� under TXO, because that amount constituted a mere 500 times compensatories (less than the 526 multiple that passed muster in TXO).

A bare majority of the court had had enough. By a 5-4 margin (Stevens, O�Connor, Souter, Breyer, and Kennedy) the court held that a combination of the lack of real wrongdoing by BMW, the lack of notice that any punitive award was possible or even that BMW's practice was illegal in Alabama, the jury's consideration of non-Alabama touch-ups which were surely not violations of Alabama law, and the huge discrepancy between compensatories and punitives all combined to make this award unconstitutional. The court didn�t give any boundaries as to what would be a maximum limit, but said this case was beyond that limit. Three dissenters, Chief Justice Rehnquist, Justices Thomas and Ginsburg, essentially held that the federal constitution did not place any limits on states in determining punitives. Justice Scalia denied that due process could ever affect damages, in federal or state court. Hmmm... it's unconstitutional, we don't know exactly why, it's a "multi-factor test", but this one is beyond the pale. Unless punitives are like obscenity (as opposed to saying "unless punitives are obscene), this decision appears rather lawless.

State Farm Insurance v. Campbell (Utah 2003)

In 1981, Curtis Campbell was driving with his wife in Cache County, Utah. He decided to pass, all at once, six vans traveling ahead of him on a two-lane highway. Todd Ospital was driving a small car approaching from the opposite direction, at a speed in excess of the speed limit. Campbell did not have enough space to pass all six vans. He was headed right toward Ospital. To avoid a head-on collision with Campbell, Ospital swerved onto the shoulder, lost control of his automobile which came back onto the road, and collided with a vehicle driven by Robert G. Slusher. Ospital was killed, and Slusher was rendered permanently disabled. The Campbells escaped unscathed; in fact, they never even collided with anyone � they got back in their lane safe and sound just in the nick of time thanks to Ospital�s sacrificial decision to leave the road.

In the ensuing tort suits against Campbell by Ospital�s estate and by Slusher, Campbell insisted he was not at fault since he never collided with anyone (!) and since Ospital was speeding. Campbell�s insurance company, State Farm Mutual Automobile Insurance Company (State Farm), decided to contest liability and declined offers by Slusher and Ospital to settle their suits for the measley policy coverage limit of $50,000 (i.e., $25,000 per plaintiff). State Farm also ignored the advice of one of its own investigators and took the case to trial, assuring the Campbells that �their assets were safe, that they had no liability for the accident, that [State Farm] would represent their interests.� To the contrary, a jury determined that Campbell was 100 percent at fault, and a judgment was returned for $185,849, way more than the amount of Campbell�s coverage. At first State Farm refused to cover the $135,849 in excess liability (recall that Campbell had purchased only $50,000 of coverage). State Farm�s lawyer told the Campbells, �You may want to put for sale signs on your property to get things moving.� Nor was State Farm willing to post the required bond to allow Campbell to appeal. Campbell thus hired his own lawyer to appeal the verdict. While this appeal was pending, in late 1984, Slusher and Ospital's estate contacted Campbell. The three reached an agreementwhereby Slusher and the estate agreed not to execute their judgment against the Campbells� property. In exchange the Campbells agreed to pursue a bad faith tort suit against State Farm and to be represented by Slusher�s and Ospital�s attorneys. The Campbells also agreed that Slusher and Ospital would have a right to play a part in all major decisions concerning the bad faith suit. No settlement between Campbell and State Farm could be concluded without Slusher�s and Ospital�s approval, and Slusher and Ospital would receive 90 percent of any verdict Campbell obtained against State Farm. In some jurisdictions this might be seen as a fraud on the court.

In 1989, the Utah Supreme Court denied Campbell�s appeal. State Farm then decided to pay the entire $185 thousand. There were now NO pecuniary damages suffered by the Campbells.

The Campbells nonetheless filed (as they had promised the Slushers and the Ospital estate they would) a complaint against State Farm alleging the torts of fraud and intentional infliction of emotional distress. The trial court initially granted State Farm�s motion to dismiss that suit because State Farm for lack of damages, but that ruling was reversed on appeal. Now State Farm had to defend itself. In the first phase the jury determined that State Farm�s decision not to settle for $50,000 was unreasonable. The second phase of the trial would determine damages. Remember that there were NO pecuniary damages (because State Farm had paid all the excess award). There was arguably emotional distress during the short period when the Campbells thought they were going to lose their home. Emotional distress, however, is not usually recoverable unless it was intentionally inflicted, and no one can seriously claim that State Farm is a sadistic company bent on inflicting emotional distress on its clientele. State Farm argued during phase II of the trial that its decision to take the case to trial was, in retrospect, an �honest mistake,� and that it certainly did not warrant punitive damages. The Campbells introduced evidence that State Farm�s decision to take the case to trial was a result of a national scheme to meet corporate fiscal goals (read, O HORROR, TO MAXIMIZE PROFITS) by capping payouts on claims.

Just before the second phase of the trial the Supreme Court decided Gore. Based on that decision, State Farm moved for the exclusion of evidence of all out-of-state conduct. The trial court denied State Farm�s motion. The jury then, amazingly, found $2.6 million dollars in emotional distress for the Campbells, who (to repeat) had not lost one cent. Likely the jury knew that 90% ($2,340,000) of this amount was going to the Slusher and Ospital families, and it wanted to give $260,000 to the Campbells � but this would be totally illegal if done explicitly, because the other two families had settled their suit and had no cause of action against State Farm. In addition the jury awarded $145 million in punitives, to punish State Farm for its aggressive practices throughout the country. The trial court reduced the compensatories to $1 million and the punitives to �only� $25 million, under the
TXO �really mean� standard. The Utah Supreme Court then reinstated the original $145 million punitives award. State Farm appealed to the Supreme Court.

This time the decision was 6-3. Chief Justice Rehnquist abandoned his previous position and joined the majority, leaving Justices Scalia, Thomas, and Ginsburg alone in dissent. The majority this time tried to provide an indication that certain trial court activity would no longer be tolerated:
-Don�t ever again use legal out-of-state behavior to calculate punitive damages. Out-of-state behavior can be invoked to establish a pattern of bad faith or maliciousness, but in that case it has to be the same behavior as the behavior being impugned;
-Don�t ever give more than nine times compensatories as punitive damages, the court said, unless there is a �particularly egregious act that has resulted in only a small amount of economic damages.�
-Moreover, in cases like this one, where the compensatory damages adjudged by the jury are extremely generous, do not let punitives exceed compensatories.

Philip Morris v Williams [Oregon 2007]

As is now well known, Justice Breyer (writing for four others) held that the Due Process Clause does not permit a jury to award punitive damages for harm caused to individuals other than the plaintiff, even in a case of egregious conduct (fraud -- yet see my very first comment in this series -- if you believe there was fraud I have that bridge for sale...). Yet in Gore the Supremes had apparently allowed a jury to award punitive damages for harm caused to individuals other than the plaintiff (so long as the other individuals were in-state). Without this rule, the Court held, defendants would be subjected to a �standardless� damages determination, without fair notice of the punishment to be imposed, and without the opportunity to fully refute the alleged harm to nonparties. But why were the Supremes suddenly concerned about "standardless" interpretation -- this issue had not troubled them in Haslip, TXO and maybe even Gore. Harm to others would be allowed in evidence to ALLOW FOR punitives, but not to CALCULATE punitives. How would the court know that the jury had danced this delicate dance correctly? We just don't know, the Supremes never tell us. Coyly Justice Breyer at one point lets slip that if the punitives were LOWER, we might know that juries were correctly instructed and followed their instructions. But clearly there was no majority to cap punitives once and for all --

Courts will now have to craft jury instructions on this issue. We can look forward to years of litigation and circuit splits trying to sort out what the Court hath wrought.

And so we come to the end of a very rocky and unsettled road. The Supremes have no coherent view of punitive damages. Justice Stevens seemed to admit as much when he harkened for the good ol' days of Excessive Fines (recall that Oregon takes 60% of Williams' booty). This is a mess, a royal mess, and we're in for much more to come. Stay tuned folks, and thanks for reading this far.




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.