APRIL 8, 2003
In a decision that the majority opinion described as "neither close nor difficult," the United States Supreme Court struck down a $145 million punitive damages award resulting from a insurance bad faith claim against State Farm Mutual Automobile Insurance Company. See State Farm Mutual Automobile Insurance Co. v. Campbell, slip op. 01-1289, 538 U.S. ___ (2003). The Court found the punitive damages award to be in violation of the Due Process Clause of the Fourteenth Amendment which "prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor" and remanded the case to the Utah courts to calculate "a more modest" punitive damages award.
The six to three decision of the Supreme Court marks that latest chapter in a long succession of legal battles arising from a car accident that occurred almost 22 years ago in Cache County, Utah. The bad faith action arose after State Farm refused to settle a claim for policy limits of $50,000 in an auto accident that resulted in permanent disabilities to one claimant and death to another claimant. The wrongful death and tort claims proceeded to trial wherein Mr. Campbell was determined to be 100 percent at fault and a verdict was entered for more than three times the amount offered in settlement ($185,849). A cause of action for bad faith followed, resulting in a verdict of $2.6 million in compensatory damages and $145 million in punitive damages against State Farm. The trial court reduced to the verdict to $1 million and $25 million respectively but the $145 million punitive damages award was later reinstated by the Utah Supreme Court.
The United States Supreme Court set forth three "guideposts" to use in determining whether a punitive damages award is appropriate: "(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 stopped short of imposing a "bright-line ratio" that cannot be exceeded but warned that "few awards exceeding a single-digit ratio between punitive and compensatory damages . . . will satisfy due process." The Court also expressed a hesitancy to uphold a large punitive damages award where the harm caused was purely economic as opposed to physical harm. The Court was further troubled by the admission into evidence at the Utah trial of State Farms' conduct in other states and expressed concerns that basing a punitive damages award upon such conduct could result in a party being punished multiple times for the same conduct.
There are several lessons that could be learned from the Supreme Court's recent decision. First, punitive damages awards that exceed compensatory damage awards by double-digit multipliers will face an uphill battle to pass constitutional scrutiny. Second, punitive damage awards are more likely to be upheld if the evidence used to establish such damages relates to conduct that occurred in the same jurisdiction and the conduct has a close relationship to the plaintiff's injury. Finally, as demonstrated by the Campbell case and others, punitive damage awards are no longer the sole prerogative of state courts.