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From Browning-Ferris to Philip Morris, Part I

March 15, 2007 4:15 PM

Since Browning-Ferris had not made a timely Fourteenth Amendment claim (who knew that was the hook the Supremes would hang their hat on?), the Supreme Court expressly reserved ruling on the due process argument. In fact, Justices Brennan and Marshall hinted strongly that they thought this kind of punitive award did violate due process. But these Justices would soon leave the court.

Subsequent to the Browning Ferris decision, several states modified their statutes to provide that a certain percentage of punitive damages (up to 60% in some instances, notably in Oregon, home of Philip Morris v Williams, according to a recent Washington Post report) must henceforth be payable to the state government, not to the plaintiffs. Gee, sort of undercuts the majority's view in Browning Ferris that punitives cannot be paid to the state, so cannot be fines, doesn't it? This makes the state an explicit accomplice in the increasing acceleration of punitive awards, and puts the lie to the claim that punitives are not fines.

This set the stage for act 2 of the Supremes' Punitives Saga: Pacific Mutual Life Ins. Co. v. Haslip.

Lemmie Ruffin (I am not making that name up) was an insurance agent. He worked for a lot of insurance companies, including Pacific Mutual Life. As a Pacific Mutual agent, Lemmie sold �major medical� health insurance policies to a group of female civic employees in Alabama. They paid monthly premiums to Lemmie, and he was to forward these premiums to the company. The employees thought they had health insurance. In reality, Lemmie stopped sending money to Pacific Mutual Life, and kept the money for himself. So the insurance company gave Lemmie warning letters to give to the women (to pay their overdue premiums or have their policies cancelled) � of course Lemmie never transmitted those letters, he just kept deceiving the insurance company and the employees. Finally the women�s policies lapsed, and when one got very sick, she found she was not covered anymore. Needless to say, she sued Pacific Mutual Insurance for its �bad faith.� An Alabama jury found bad faith and inadequate supervision of Lemmie by the (out-of-state�) insurance company. The jury held that Pacific Mutual Life had to pay Ms. Haslip $230,000 to cover her hospital bills. But Ms. Haslip was not yet done with Pacific Mutual � she asked for punitive damages. Alabama�s punitive damages scheme gave a jury virtually complete discretion: it merely required a jury to make two distinct decisions: (1) whether or not to impose punitive damages against the defendant, and (2) if so, in what amount. It provided no standard for decision (1), and no method of calculation for decision (2). On the threshold question of whether to impose punitive damages, the trial court instructed the jury as follows: �Imposition of punitive damages is entirely discretionary with the jury, that means you don�t have to award it unless this jury feels that you should do so.� There was, in my opinion, absolutely no law here. Can there be "due process of law" when there is NO law? Do you agree on this theoretical point, David?

The jury condemned Pacific Mutual to $1 million in punitives. The company appealed all the way to the US Supreme Court, on the grounds that it was deprived of due process by the standardless discretion invested in the hometown jury, and by the huge amount of punitives when clearly the company had had no malice whatsoever � it was just as tricked by Lemmie Ruffin as the plaintiff had been. Pacific Mutual lost its appeal, 7-1. Again only Justice O�Connor dissented. The due process claim that everyone had thought so promising after the Browning Ferris case flubbed, as the two Justices who had espoused it had left the court. The Alabama jury instruction was deemed precise enough (!) that the jury would have legal guidance about what to do. The punitive award of 4 times compensatory damages was not so exorbitant as to violate due process standards, said the majority. They did say it was �close to the line,� however. This is utterly unprincipled, sez me -- rejecting the sound "no law" argument while intimating that higher damages might somehow violate Due Process. After the rejection of the Excessive Fines rationale in Browning Ferris, Haslip represents a further slide into unintelligibilty as regards punitives.

But the darkest hour had not yet been reached. It would come, in 1993. That is act 3, TXO Production Corp. v. Alliance Resources Corp.

TXO and Alliance were engaged in a complex series of negotiations so that TXO could get oil and gas rights to land owned by Alliance. They were bickering back and forth over what royalty rate would be paid to Alliance. During these negotiations, a third party claimed that it owned the rights to Alliance�s land by virtue of an obscure deed. TXO expressed concern that any title it might get to the oil and gas rights was vulnerable; because of this it asked for a reduction in its royalty rate to cover itself from possible claims by this third party. After more complex and ambiguous declarations on both sides, TXO claimed that a deal had been reached, but Alliance denied it. TXO sought a declaratory judgment from the West Virginia Circuit Court that, through all these negotiations, it had finally acquired resource rights over the land.

Alliance defended against this claim, and countersued for what Alliance called �slander of title,� (an old English tort that had never once been recognized in West Virginia�s entire history), asserting that TXO was falsely diminishing public belief that Alliance had full property rights. At bottom, this suit was little more than an episode in rather hardball contractual dispute about royalty rates. That is, until the West Virginia courts got through with it. The trial judge rejected TXO�s claim that a deal had been reached. The judge let a jury decide whether Alliance�s title had been slandered. The jury accepted Alliance�s slander of title suit, and condemned TXO to pay $19,000 to Alliance for damages, which represented its lawyer�s costs in defending against the declaratory suit by TXO. Alliance had no other losses.

So far, so good, I guess � the case was a close call in a hardball contracts dispute. I have not mentioned that Alliance was a local West Virginia company, while TXO was a fully-owned subsidiary of U.S. Steel. That explains, perhaps, why the jury also condemned TXO to ten million dollars in punitive damages, or 526 times the compensatory award. TXO appealed, and had great confidence in the appeal. Recall that in Haslip punitives were �only� 4 times compensatories and the court said that was �close to the line.� Moreover, West Virginia�s instructions to the jury on punitives were so totally devoid of standards as to make a mockery of the Supreme Court�s pious command to the states in Haslip to henceforth guide the jury with some precision. Here was the standard as stated by the West Virginia Supreme Court, when it heard the TXO appeal: we know we are now compelled by the United States Supreme Court to set punitive damages standards if our decision is to pass constitutional scrutiny, so we hereby distinguish between the �really mean� defendant and the �really stupid� defendant. For the really stupid defendant, punitives can be 10 times compensatories. For the really mean defendant, punitives can be 500 times compensatories. Since this defendant �failed to conduct [itself] as a gentleman�, the �really mean� standard applies, and 526 times punitives is close enough to 500, so we uphold the award.

[pause to allow readers to gasp]

The Supreme Court affirmed the West Virginia Supreme Court, 6-3, saying that its standard passed constitutional scrutiny. Justices White and Souter joined Justice O�Connor in dissent this time. On the one hand, O�Connor was no longer alone in thinking that there were some punitive damage awards that could not pass constitutional muster. On the other hand, this case looked like MOPA (the mother of all punitive awards), and if six Justices found it constitutional, one wondered what could possibly fail to pass muster. Again, in my opinion, the WV court called the Supremes on their incoherent Haslip jurisprudence.

Tomorrow I will deal with Gore and Campbell, wherein the Supremes seemed to decide to rescue tort law from the abyss perhaps approached through its poor Browning Ferris and Haslip jurisprudence.

Where has this left us? Are there any disagreements between David and me? Perhaps we disagree about whether "condemn the defendant to any amount you please" satisfies Due Process of Law requirements? And as David suggested, we may disagree (though David's jury seems still out on this onw) about the Excessive fines issue. But we surely agree that by TXO the Supremes were in it up to here...




Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.