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Regulation and Compliance > State Regulation

High Court Knocks Down Punitive-Damages Award Ruling

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NU Online News Service, April 7, 2003, 5:32 p.m. EDT — Washington

A U.S. Supreme Court decision today overturning a $145 million punitive damage award against State Farm Mutual Automobile Insurance Company, Bloomington, Ill., could have implications for other litigation reform efforts.

The decision in the case, State Farm v. Campbell, holds that a $145 million punitive damage award in a Utah case in which compensatory damages were assessed at $1 million was excessive and violated the Due Process Clause of the 14th Amendment to the U.S. Constitution.

In issuing its 6-3 opinion, the court noted that the punitive damage award was calculated in part by presenting evidence of alleged misconduct by State Farm in other states, even though State Farm’s actions may have been legal in the states where they occurred.

However, the Supreme Court said, a state cannot punish a defendant for conduct that is legal where it occurred.

“A basic principle of federalism is that each state may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each state alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction,” the court said in a opinion written by Justice Anthony Kennedy.

Victoria Fimea, senior counsel for litigation with the American Council of Life Insurers, Washington, which filed an amicus brief in the case, says the court made a very important statement that could apply to the controversy about class-action litigation.

In many class actions, she says, plaintiffs obtain “outrageous” punitive damage awards by bringing in evidence of extra-territorial conduct that can be used to inflame the emotions of the jury.

Defendants can look to the decision in the State Farm case for guidance on the award of punitive damages in class actions, Fimea says.

Meanwhile, she adds, the decision helps demonstrate the need for federal reform of class-action procedures. Several class-action reform bills are already pending in Congress.

A consumer started the State Farm case by suing the company over allegations of fraud and intentional infliction of emotional distress that came up in connection with an auto insurance claim.

During the trial, the plaintiff was allowed to present evidence of alleged national efforts on the part of State Farm to cap claims payments and meet corporate goals.

Partly on the basis of this evidence, the company was hit with a $145 million punitive damage judgment.

But the Supreme Court noted that most of State Farm’s practices, which occurred over a 20-year period, bore no relationship to the auto insurance claim at issue in the case.

Moreover, the court added, even the plaintiffs did not dispute the fact the much of the out-of-state conduct by State Farm was lawful where it occurred.

The court noted that in previous cases, it has outlined a three-part guidepost to determine the constitutionality of punitive damage awards.

The three factors are the degree of reprehensibility of the defendant’s conduct, the disparity between the harm and the award, and the difference between the award and criminal penalties imposed in comparable cases.

Regarding the first factor, the court said the $145 million figure was based on out-of-state conduct that had no relationship to the auto claim at hand.

Thus, the award violated the first part of the test.

As for the second part, the disparity between the award and the harm, the court noted that the punitive damage award was 145 times the amount awarded for compensatory damages.

The court said that while it did not want to establish a concrete limit on the ratio between the award and the harm, in practice a “single digit” ratio will satisfy due process.

The presumption against the constitutionality of a 145-to-1 ratio is “substantial,” the court said.

Finally, as to the third part of the guidepost, the court noted that the most relevant civil sanction under Utah law for an act of grand fraud is $10,000, which is dwarfed by the $145 million punitive damage award.

The court said that rather than $145 million, a punitive damage award at or near the compensatory figure of $1 million would likely be justified.