Class actions can put defendants under enormous and undue pressure to settle or face a crippling verdict. That pressure is intensified when there is the specter of class-wide punitive damages. These awards can serve the state's legitimate interest in punishing and deterring unlawful conduct, State Farm Mutual Automobile Ins. Co. v. Campbell, 2003 U.S. LEXIS 2713, *15-16 (April 7, 2003), and so punitive damages cannot be avoided completely in high-stakes litigation. That said, "grossly excessive" awards do not further any legitimate purpose, and perhaps nowhere is the risk of a grossly excessive award more likely than in the context of a class trial. Campbell is the Supreme Court's fifth opportunity to address substantively the due process limitations on punitive damages. The Court is now reining in such awards, albeit not yet in the context of a class action. These decisions nonetheless provide important guidance on the issue of punitive damages in the class context. More important from a defense perspective, this case law continues to offer avenues for resisting class certification in the first place.
The Court's jurisprudence has evolved rapidly over a bit more than a decade. In Browning-Ferris Industries of Vermont v. Kelco Disposal, Inc., 492 U.S. 257 (1989), the Court both rejected a challenge to punitive damages under the Eighth Amendment's Excessive Fines Clause and declined to address as untimely raised the due process implications of such damages. Dissenting in part, however, Justice O'Connor (joined by Justice Stevens) signaled a future willingness to review carefully what she described as "skyrocketing" punitive damages awards that were having "a detrimental effect on the research and development of new products" – such as prescription drugs, airplanes and motor vehicles. Id. at 282. Her dissent specifically criticized the historical and precedential underpinnings of the majority's Eighth Amendment holding. See id. at 286-99. In a separate concurrence, Justice Brennan emphasized that the Court was leaving "the door open for a holding that the Due Process Clause constrains the imposition of punitive damages ...," at least where they are "grossly excessive" or "so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable...." Id. at 280-81 (internal citations and quotations omitted).
Limiting Jury Discretion
The Court took its first tentative step through that open door two years later in Pacific Mutual Life Ins. Co v. Haslip, 499 U.S. 1 (1990). In Haslip, plaintiffs alleged an insurance agent fraudulently misappropriated insurance premiums. An Alabama jury awarded $200,000 in compensatory damages and $840,000 in punitives. The Court suggested that "unlimited jury discretion – or unlimited judicial discretion for that matter – in the fixing of punitive damages may invite results that jar one's constitutional sensibilities." Id. at 18. The Court went no further, however, and declined to "draw a mathematical bright line between the constitutionally acceptable and the constitutionally unacceptable that would fit every case." Id. at 18. It upheld the jury's award, finding it had been properly instructed to award punitive damages confined to serving the state's policy of retribution and deterrence. Id. at 19. In addition, the Court held, Alabama had in place appropriate procedures for post-trial review of the award, ensuring "that punitive damages awards are not grossly out of proportion to the severity of the offense and have some understandable relationship to compensatory damages." Id. at 22. With these procedural safeguards in place, the Court found that the punitive award of four times compensatory damages, and 200 times plaintiff's out-of-pocket expenses, was close to, but did not cross, the line of constitutional impropriety. Id. at 23-24.
The Court next had occasion to address the issue in TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993), where it upheld a $10 million punitive damage award that was 526 times greater than the $19,000 in compensatory damages. The Court noted that the jury properly considered the defendant's wrongdoing in other states, as well as the defendants' "impressive net worth." Id. at 462 n.28. Perhaps most significantly, the jury could properly consider the potential harm to plaintiffs that defendants conduct could have caused if completely successful. Plaintiffs presented evidence that defendants conduct could have caused as much as $8.3 million in harm. Even if the potential harm were "closer to $4 million, or $2 million, or even $1 million, the disparity between the punitive award and the potential harm does not, in our view, 'jar one's constitutional sensibilities.'" Id. at 462.
Punitive Awards Criteria
The Court's leading pronouncement on the issue came in its 1996 Gore decision, where it set explicit criteria for punitive awards for the first time. BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996). There, plaintiff alleged that BMW sold him a new automobile without disclosing that it had been damaged and re-painted before sale. An Alabama jury awarded $4,000 in compensatory damages and $4 million in punitives. The Alabama Supreme Court reduced the punitive award to $2 million. But the Supreme Court found even this reduced award – 500 times the compensatory award – so "grossly excessive" as to violate the due process clause. Id. at 586-87. Writing for the majority, Justice Stevens set forth three "guideposts" to evaluate the award:
- the "degree of reprehensibility" of BMW's conduct;
- the "disparity" between the punitive damages and the actual or potential harm to the plaintiff; and
- the difference between the punitive damages and any civil penalties authorized or imposed for comparable misconduct. Id. at 574-75.
The Court held that the award could satisfy none of the three "guideposts." First, BMW's conduct was low on the "reprehensibility" scale, as BMW inflicted only economic injury; repainting the car did not affect performance or safety. BMW also did not engage in any deliberate false statements or affirmative acts of concealment. Id. at 576, 579. Second, describing the 500 to 1 ratio of punitive to compensatory damages as "breathtaking," the Court found the award "must surely 'raise a suspicious judicial eye-brow." Id. at 583 (internal citations and quotations omitted). Third and finally, the Court found that the $2 million award dwarfed the maximum civil penalty of $2,000 authorized under the Alabama Deceptive Trade Practices Act. Id. at 584. All three guideposts convinced the Court "that the grossly excessive award imposed in this case transcends the constitutional limit." 517 U.S. at 586-87.
The Court recently applied the Gore guideposts to invalidate a $145 million punitive award in State Farm v. Campbell, 2003 U.S. LEXIS 2713 (April 7, 2003). In Campbell, a Utah jury had imposed the punitive figure after awarding $1 million in compensatory damages for intentional infliction of emotional distress based on State Farm's bad faith refusal to settle a fatal automobile accident claim within policy limits. At trial, the court allowed evidence of State Farm's national claims handling practices. This allowed the jury improperly to condemn State Farm for its conduct in other jurisdictions, even though the conduct may have been lawful in those jurisdictions and Utah had "no legitimate concern in imposing punitive damages to punish a defendant [even] for unlawful acts committed outside the State's jurisdiction." Id. at *25. Instead, the jury should have focused on "that conduct [having] a nexus to the specific harm suffered by the plaintiff." Id. at *26. Echoing and amplifying its earlier punitive damages decisions, the Court held that "[a] defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory business or individual." Id. at *27.
As it had in Haslip, TXO, and Gore, the Court refused to apply a "bright line" ratio to evaluate the relationship between the punitive and compensatory awards. Id. at *30-31. It did note, however, that "few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." Id. at *31. Apropos of that, it reaffirmed its dictum in Haslip "that an award of more than four times the amount of compensatory damages might be close to the line of constitutional propriety." Id. The Court also noted that, "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee." Id. at *32. The Court emphatically rejected the argument that the punitive award should be compared to State Farm's wealth: "[T]he wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award." Id. at *35. Finally, the $145 million punitive award far exceeded Utah's maximum statutory penalty of $10,000, thus failing the final Gore guidepost. Id. at 36-37.
Class Action Implications
Campbell (in concert with its predecessors) should have a restraining impact on punitive damage awards in single-plaintiff cases. It should also, however, have important ramifications for class action litigation. Campbell makes clear that punitive damages may not be awarded based on a general assessment of a defendant's "bad conduct" and net worth. They must be awarded based on an evaluation of the unlawful conduct directed at and causing injury to specific, identifiable plaintiffs. Moreover, Gore and Campbell emphasize that the unlawfulness and "reprehensibility" of a defendant's conduct can only be evaluated in the context of the substantive and punitive damage law of the jurisdiction whose law governs the transaction or occurrence involved. (Gore also makes clear that the treatment of punitive damages varies state-by-state, making certification of multi-state punitive damage classes problematic. See Mack v. General Motors Acceptance Corp., 169 F.R.D. 671, 678-679 (M.D. Ala. 1996).)
The Court wrote in Gore that, "the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendants conduct." Gore, 517 U.S. at 575. The most apparent post-Campbell attack on punitive damage claims in the class context, however, will come under the second Gore guidepost: The disparity between punitive awards and actual or potential harm. The "reasonable relationship" between compensatory and punitive damages "has a long pedigree" dating back more than 700 years. Id. at 580-81. The Court has reaffirmed the importance of that relationship at each opportunity. Thus, in TXO it reconfirmed its statement in Haslip that the proper inquiry is "whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred." 509 U.S. at 460 (quoting Haslip, 499 U.S. at 21).
The significance for classwide adjudication comes from the shift in focus from the defendants' conduct alone to an analysis that sweeps the absent class member's unique circumstances within its view. Punitives cannot be assessed strictly from the defendants' conduct. The effect of that conduct on the individual class member – together with any contributory misconduct – necessarily must be considered. See Haslip, 499 U.S. at 22 (under Alabama law, "effect upon the victim" of defendants' alleged misconduct considered). Relatedly, the traditional class trial paradigm could be thrown into disarray. Normally, the individual claims of the named plaintiffs are tried first, with the issue of compensatory damages to absent class members determined in later proceedings. To determine the appropriate proportionality of punitive damages, however, the jury must have determined a compensatory award for each class member at the end of the principal class trial. See Southwestern Refining Co. v. Bernal, 22 S.W.3d 425, 433 (Tex . 2000) (punitive damages must have an understandable relationship to compensatory damages and be in proportion to the severity of the offense for each class member). The potential unmanageability of presenting all this evidence to one jury likely may preclude class treatment – but permitting the jury to punish a defendant without all the relevant evidence raises palpable due process concerns.
Such arguments have met with some success in helping defeat class certification. The Fifth Circuit's post-Gore decision in Allison v. Citgo Petroleum Corp., 151 F.3d 402 (5th Cir. 1998), perhaps foreshadowed Campbell and properly analyzed the difficulties in managing punitive damages in the class context. Punitives cannot be awarded as incidental damages based upon a finding that the defendant engaged in bad conduct and harmed a number of persons. 151 F.3d at 417. Rather, "punitive damages must be reasonably related to the reprehensibility of the defendant's conduct and to the compensatory damages awarded to the plaintiffs...." 151 F.3d at 417. Therefore, punitive damages can only be determined after proof of liability and compensatory damages for individual plaintiffs. Id. They "are uniquely dependent on the subjective and intangible differences of each class member's individual circumstances." Id. at 418. To the extent these determinations require individualized analysis, certifying the issue of punitive damages for class treatment may be entirely inappropriate.
The court held similarly in In re Copley Pharmaceutical, Inc., 161 F.R.D. 456, 467-68 (D. Wyo. 1995), finding class treatment of punitive damages impermissible, because punitives depend on an individual's injury and compensatory damages, as well as on how outrageous the conduct was as to that particular plaintiff. See also id. at 467 ("punitive damages are measured, in part, by how outrageous such punitive conduct is relative to a particular plaintiff") (citing TXO); Southwestern Refining Company, 22 S.W.2d at 433 (TX 2000) ("the modified trial plan is nevertheless prejudicial because it fails to ensure that punitive damages have some understandable relationship to compensatory damages and are not grossly out of proportion to the severity of the offense for each of the 885 plaintiffs").
Although there are significant cases adopting contrary procedures, see, e.g., Hilao v. Marcos, 103 F.3d 767 (9th Cir. 1996), such cases must be looked at critically in light of Campbell. In Hilao, a class of some 10,000 torture victims asserted claims against former Philippine president Ferdinand Marcos. A jury trial established liability in favor of the class and in favor of 22 of 23 class representatives. The court then ordered a bifurcated damage trial, in which punitive damages were established before the award of compensatory damages. The same jury that established liability heard evidence on punitive damages, without hearing evidence of compensatory damages, and returned a verdict for $1.2 billion. Although that amount probably was not constitutionally defective in light of the ultimate compensatory award of $750 million, the result was fortuitous rather than the result of a trial process that assured compliance with due process.
The propriety of punitive damages in class actions will clearly be subject to further debate. The Supreme Court's guidance suggests, however, that a punitive damage award will comply with due process only if it accounts for a specific claimant's compensatory damages and the defendant's conduct as to that claimant. Quite often, this required analysis will devolve into individual issues entirely unsuited for class treatment.