Generous Punitives Are Trumped
By Kimberly A. Smith
Edited by Barbara Kate Repa
Most civil litigators appreciate the metaphor of lawsuit as roller-coaster ride. It is the unpredictable ups and downs that drive, thrill, and sometimes confuse or even terrify. But isn't that why we turn in those tickets, proceed through the turnstile, and board?
One area that often seemed to require a crystal ball to predict was the amount of punitive damages a jury might award a victorious plaintiff. Traditionally, case law failed to provide concrete guidance to assist litigants-either plaintiffs or defendants-in determining reasonable and acceptable punitive damages. And in California, where juries have been permitted to consider a defendant's wealth in setting damages, the focus was not always on the reprehensibility of conduct, further complicating attempts at predictions.
That has all changed. On April 7, 2003, the U.S. Supreme Court issued a 6-to-3 decision in Campbell v State Farm (2003) 123 SCt 1513, providing unprecedented guidelines as to what constitutes excessive and impermissible punitive damages awards. It also reemphasized which factors to consider, substantially changing how punitive damages are calculated in California.
Large corporations and insurance companies will likely be most relieved by this legal turn. In a climate in which corporate profits are under particular scrutiny, a jury's wish to punish these entities out of a general sense of distrust will be impeded.
The New Look of Punitives
In Campbell the Court considered the appropriate size of a punitive damages award appealed by an insurance company in the Supreme Court of Utah. In the underlying action, Inez Campbell and the estate of her husband, Curtis Campbell, sued their insurer, State Farm Mutual, for settling an auto accident claim in bad faith.
In 1981, Campbell was driving with his wife on a two-lane highway in Cache County, Utah, when he crossed into oncoming traffic while attempting to pass six vans. Todd Ospital was driving in the opposite direction. To avoid a head-on collision with Campbell, Ospital swerved onto the shoulder of the road. Unfortunately, he lost control of the car, colliding with a car Robert Slusher was driving. Ospital died and Slusher was permanently disabled.
Ospital's estate and Slusher offered to settle with Campbell for his $50,000 State Farm policy limits, each to receive $25,000. However, despite the fact that several investigators concluded that Campbell was liable for the accident, he insisted on no responsibility. Sticking by its insured, State Farm agreed to take the case to trial-and lost. The jury awarded plaintiffs $185,849. Following the judgment, State Farm paid its $50,000 limits and then left Campbell on his own to handle the rest. Because Campbell clearly did not have the funds to satisfy the judgment, Ospital and Slusher agreed during the appeal not to pursue the judgment if he filed a bad faith action against State Farm.
In the Utah trial court, the jury awarded the Campbells $2.6 million in compensatory and $145 million in punitive damages. Finding these awards excessive, the court reduced them to $1 million in compensatory and $25 million in punitive damages. On appeal, the Utah Supreme Court reinstated the $145 million punitives award.
To establish that award, the Campbells focused on a Performance, Planning and Review (PP&R) policy State Farm used to evaluate personnel performances. They alleged that State Farm's PP&R policy set nationwide caps on claim payments so that the insurer could meet corporate fiscal projections. Specifically, they claimed that State Farm set out to be the "most profitable claim service in the industry" and pursued that goal by tying adjusters' compensation to claims payments. At trial, plaintiffs experts described that policy as "taboo in the insurance industry" and "grossly unfair" to consumers.
Before the U.S. Supreme Court, State Farm accused plaintiffs of cherry picking segments from PP&R manuals, citing language that did not even apply to claims adjusters, and manufacturing the appearance of a nationwide scheme to lowball claims and increase profits. Specifically, the insurer argued that the plaintiffs invented the "scheme" by creatively joining "myriad aspects of corporate conduct, including conduct bearing no similarity to the specific conduct supporting plaintiffs' claims, entirely lawful corporate conduct, as well as conduct occurring outside Utah and affecting only residents of other states." State Farm also complained that plaintiffs had been permitted to introduce evidence of conduct by State Farm affiliates that were separate legal entities, taking place over 20 years.
State Farm's complaint about the $145 million punitive damages award was twofold. First, according to the insurer, plaintiffs had been permitted to introduce evidence of so-called "bad acts" that had nothing to do with settling third-party automobile claims. Though punitive damages rely in large part on the reprehensibility of a defendant's conduct, State Farm argued that only relevant similar conduct should be considered. State Farm also claimed the Campbells bootstrapped the alleged malicious conduct against them in Utah into a larger nationwide problem. The U.S. Supreme Court agreed.
What Counts in Court
The backbone of the Court's decision in Campbell is a reaffirmation of its decision in BMW of North America, Inc. v Gore (1996) 517 US 559, which set forth guideposts to determine whether a punitive damages award is excessive. The criteria to consider are the reprehensibility of the defendant's misconduct, the disparity between the actual or potential harm suffered by plaintiff and the punitive damages award, and the difference between the damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.
On the first and most important prong of reprehensibility, the Campbell decision reiterated that courts must consider whether "the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident." The Court explained that the existence of just one of these factors may not be sufficient for an award of any punitive damages. Unless several factors exist, the Court noted that it would be satisfied that a plaintiff was made whole by compensatory damages.
In Campbell the Court was satisfied that punitive damages should be awarded, noting that State Farm left plaintiffs open to an excessive judgment, first assuring them that their assets would be safe, only later telling them to put a For Sale sign on their home to cover the subsequent judgment. However, the Court also chastised plaintiffs for overreaching. Specifically, it agreed with State Farm that plaintiffs should have been permitted to offer evidence of comparable conduct that took place only within Utah. Instead, the Court found that the case had been improperly used "to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country." Furthermore, the Court clarified that only evidence regarding comparable conduct-that is, settlement of third-party automobile claims- should have been presented, emphasizing the historical intent of punitives: "A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business."
For California practitioners perhaps the most significant discussion in Campbell concerns the second guidepost: the disparity between actual harm and punitive damages. In this context actual harm equates with the compensatory damages award in the case. The Court discussed ratios and multipliers in a novel way, introducing hard and fast numbers to determine whether a punitive damages award was excessive.
The Court prefaced the discussion by acknowledging its previous reluctance to identify concrete limits. It then did just that, opining that: "in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process." In other words, once punitive damages hit ten times compensatory damages, there will be trouble. The Court also made the significant comment that, historically, cases upholding punitive damages as nonexcessive have generally not been more than four times the compensatory damages. It concluded that when compensatory damages are substantial, a smaller ratio will be warranted. And it characterized Campbell's $1 million in compensatory damages as substantial.
Though the Court purports not to adopt bright-line mathematical rules but merely to provide guidance, Justice Ginsburg's dissent points out that this decision does throw down some clear lines in the sand. "The numerical controls today's decision installs seem to me boldly out of order," writes Ginsburg, who accuses the majority of failing to exhibit restraint generally and respect for state court discretion specifically.
Finally, the Court briefly turned to the third prong: damages awarded weighed against the sanctions authorized by statute. In Utah, as in California, an insurer can be fined up to $10,000 for the comparable act of fraud-which the Court noted was "dwarfed" compared to the $145 million awarded in Campbell.
How Our Standards Fail to Jibe
Under Campbell the direction of punitive damages awards in California has been transformed. Last summer, in Romo v Ford Motor Co. (2002) 99 CA4th 1115, the Court of Appeal for the Fifth District upheld a $290 million dollar punitive damages award against Ford in a products liability action. The jury awarded compensatory damages of $6.2 million-reduced by the trial court to $4.9 million because of apportionment of fault issues rather than a correction of value. Punitive damages were more than 57 times the amount of compensatories.
Although the Fifth District cited the Gore decision in Romo, it did not apply the criteria from that case. Rather, after describing the guideposts, it simply stated that the true question under Gore is whether an award is "grossly excessive" such that it violates the excessive fines clause of the 8th Amendment or the due process clause of the 14th Amendment. 99 CA4th at 1150. The court then turned to established California law to set out the criteria for measuring a punitive damages award.
In Romo the Fifth District presented three factors earlier prescribed by the California Supreme Court in Neal v Farmers Ins. Exchange (1978) 21 C3d 910: the reprehensibility of a defendant's conduct, the degree of a plaintiff's harm, and the defendant's wealth. The first element, the reprehensibility of a defendant's conduct, is also contemplated by Gore and so remains as a consideration under Campbell. Both courts also seem to take into account the degree of a plaintiff's harm. Under Campbell the disparity between actual harm and punitive damages encompasses the degree of a plaintiff's harm. But, as noted in Romo, that fact never was about ratios or multipliers.
Without a ratio, the Romo court explained that it must consider the amount appropriate "to properly punish and deter." Campbell changes this by introducing an actual mathematical component to reviewing punitive damages awards.
It is the third factor traditionally used in California-the wealth of the defendant-that changes most significantly under Campbell. The Romo court emphasized the goal of punishment and specifically stressed that a $290 million judgment is a pittance to a company worth $25 billion. This "stick 'em where it hurts" factor has long been a cornerstone of California punitive damages award analysis and, as a result, has begotten generous judgments.
Under Campbell such an award would not be permitted. Instead, Romo's compensatory award of $4.9 million would be considered substantial. With the historically evident multiplier of four for "standard" awards (Pacific Mut. Life Ins. Co. v Haslip (1991) 499 US 1), Campbell would probably support an award in Romo no greater than two times compensatory damages. Therefore it is unlikely that a punitive damages award exceeding $10 million would now pass muster. For that reason the U.S. Supreme Court recently granted a writ of certiorari, instructing the Fifth Appellate District to reconsider the award in light of Campbell. Ford Motor Co. v Romo, #02-1097, May 19, 2003. The Court granted similar writs in other cases in which the awards were deemed excessive-including a second case against Ford, this one in Kentucky, in which the family of a man killed in his pickup truck was awarded $18 million in punitive damages. Ford Motor Co. v Estate of Smith, #1997-CA-002420-MR, Oct. 8, 1999. In a second unpublished decision in California, National Union Fire Ins. Co. of Pittsburgh v Textron Fin. Corp., #G020323, June 28, 2002, the Fourth Appellate District upheld a $10 million punitive damages award, previously reduced to $1.7 million by the trial court. In that case compensatory damages totaled approximately $165,000. And finally, in Bocci v Key Pharm., Inc. (2002) 47 P3d 486, a physician and patient received $57 million in punitive damages for a defective drug; compensatory damages totaled $5.5 million. Other cases are likely to follow.
When the court of appeal reconsiders Romo it can do one of two things: reduce the $290 million award on its own or order a new trial on punitive damages. If it reviews punitives, it will likely exclude evidence relating to the wealth of the defendant, which possesses no other relevant purpose.
The bitter pill that plaintiffs must swallow after Campbell is that the wealth of a defendant has all but been removed from the punitive damages equation. As a result it will be even more difficult for a plaintiff to conduct discovery targeted at a corporation's assets. Such discovery would have to be narrowly refined to focus on reprehensibility-specific profits from a single act. Campbell forbids generalized discovery to assess what level of punitive damages will act as a deterrent.
This holding also calls into question the statutory provision that allows defendants to block discovery regarding financial matters until plaintiffs produce evidence of a prima facie case of liability for punitive damages. Civ. C §3295(a)(2). That statute permits plaintiffs to conduct discovery on the profits a defendant gained by wrongful conduct and the defendant's financial condition. Under Campbell, finances are no longer in play and, arguably, should remain protected.
Defendants will also want to enforce Campbell through motions in limine and jury instructions. Before a trial starts, defense counsel should solicit the court's assistance in blocking evidence of unrelated bad acts or a defendant's net worth.
And comprehensible jury instructions should be crafted to prevent runaway awards. Though defendants will not be able to instruct jurors that a specific multiplier must be used, they may still instruct that the law does not allow great disparities between punitive damages and either compensatory damages or the maximum statutory fine of $10,000. Ins C §790.035.
Defendants should also revise the affirmative defenses used in pleadings. Because Campbell clarifies that the Constitution protects against excessive punitive damages awards under the due process clause, but not under the excessive fines clause, only the due process defense needs to be introduced.
Kimberly A. Smith (email@example.com) is a senior litigation associate with Shea McNitt Carter in Los Angeles specializing in civil litigation, including insurance bad faith, ERISA, and products liability.