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Publications
--Campbell and Punitive Damages: Looking for Loopholes
Just a year ago, the U.S. Supreme Court handed the defense bar a major win on punitive damages in State Farm v Campbell (2003) 538 US 408, 155 L Ed 2d 585, 123 S Ct 1513. Striking the jury’s $145 million punitive verdict against State Farm, the court sent the case back to the Utah Supreme Court to reset the award at a lower amount, in the process providing unmistakable guidelines on when and how much monetary punishment is constitutionally permissible.
April 2003: The U.S. Supreme Court’s Campbell Decision
Campbell was a ringing indictment of the system for assessing punitive damages in this country. It expressed concern that juries use their ability to render large punitive awards as a means of “express[ing] their biases against big business,” complained that juries are given virtually no guidance on how much punishment is appropriate and that evidence of the defendant’s wealth, required in most states, simply serves to inflate the award. 155 L Ed 2d at 601.
As a result, the Campbell majority set the clearest guidelines yet on when punitive damages are constitutionally appropriate, what evidence may (and may not) be used, and how to set the permissible number. It created a ‘relative reprehensibility’ scale, explaining that courts and juries must evaluate the degree of reprehensibility of defendant’s act, examining how bad was the defendant’s conduct when compared to other types of reprehensible behavior. 155 L Ed 2d at 604. Campbell went on to conclude that because the plaintiff has already been made whole by the compensatory award, punitive damages should be awarded only if the defendant’s culpability is “so reprehensible as to warrant the imposition of further sanctions.” 155 L Ed 2d at 602 (emphasis added). Notably, the opinion observed that although the defendant’s conduct in handling the insured’s claim “merited no praise,” the company’s acts were not “so reprehensible” as to warrant $145 million, concluding a “more modest punishment . . . could have satisfied the State’s legitimate objectives, and the Utah courts should have gone no further.” 155 L Ed 2d at 602.
The Court also made its plainest statements yet on the permissible ratio of punitives to compensatory damages, another benchmark to use in deciding if the punishment is too high. Though declining to adopt a bright line rule, the court made no secret that there are lines which may be only rarely crossed. Double digit multipliers will typically be too high: “few awards exceeding a single digit ratio” (i.e., over 9:1) will be permissible. 155 L Ed 2d at 605. In fact, a 4:1 ratio is “close to the line” of constitutional excessiveness, but when, as was true in Campbell, the compensatory damages are themselves “substantial,” or contain an element of punishment, “then a lesser ratio, perhaps only equal to the compensatory damages,” can reach the outermost limit of the due process guarantee” against excessive awards. 155 L Ed 2d at 607.
Campbell also condemned the trial court’s admission of evidence of the defendant’s nationwide acts, spanning a twenty year period, that it believed had little if any relevance to what defendant did to the Campbells here. “A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for conduct that harmed the plaintiff, not for being an unsavory individual or business.” 155 L Ed 2d at 604.
Campbell’s majority also chided the Utah Supreme Court for justifying the award based on the state’s “comparable penalties” for similar misconduct. The Utah opinion had concluded State Farm’s conduct could have resulted in its losing its license to sell insurance in Utah, disgorgement of profits, or even criminal penalties. The high court warned against using the civil process, with its lesser safeguards, as a shortcut to assessing what are, in essence, criminal penalties. 155 L Ed 2d at 608. It also discounted the Utah court’s justification, the potential loss of license to sell insurance, as “speculat[ive].” Campbell observed that the most relevant civil sanction under Utah law appeared to be $10,000 for a single act of fraud. Having clearly signaled that the punitives must come down drastically, the high court remanded the case to Utah to set a constitutionally permissible number. And after issuing Campbell, the court remanded a dozen other cases around the country, instructing the lower courts to reassess the amount of punitives in light of this new decision.
April 2004: The Utah Supreme Court Sets the Punitives at 9:1
In late April 2004, the Utah Supreme Court set the punitive award against State Farm at $9 million. Campbell v State Farm Mut. Auto. Ins. Co. (Campbell III) (2004) 2004 UT 34; 498 Utah Adv Rep 23; 2004 Utah Lexis 62. Rejecting State Farm’s argument that the federal decision set the bar at 1:1 or at most 4:1, the Utah court concluded it had been left with discretion to set the amount, and states remain free to decide what conduct they deem particularly egregious and how much punishment that act deserves. Although no one would dispute that $9 million is a significant reduction, the number flies in the face of the federal Campbell decision, that in most cases a ratio of 4:1 is “close to the line,” and when the compensatory damages are substantial and/or punitive, “perhaps” the number should be closer to 1:1. In Campbell III, the Utah court took the no-double-digit multipliers literally, setting the award at 9:1. By comparison, a California court of appeal recently reduced the punitive damages in a tobacco/cancer case to 6:1, finding that the extreme reprehensibility of the conduct warranted more than 4:1. Henley v Philip Morris Co. (review granted Apr. 28, 2004, S123023; superseded opinion at 114 CA4th 1429, 9 CR3d 29). Another state court of appeal reduced punitives to what it believed the maximum permissible, 4:1, for an act of insurance bad faith. Diamond Woodworks, Inc. v. Argonaut Ins. Co. (2003) 109 CA4th 1020, 1056, 135 CR2d 736.
Note to readers: within a year, California should have more guidance on how to apply the Campbell decision. In March of 2004, the California Supreme Court granted review on post-Campbell issues in two cases in a single day. One will address whether setting the punitive award based on disgorgement of defendant’s profit from the wrongful conduct still passes constitutional muster. Johnson v Ford Motor Co. (review granted Mar. 24, 2004, S121723; unpublished court of appeal opinion). The other will decide what compensatory damages may be used in the ratio analysis and calculation. Simon v Sao Paolo U.S. Holdings, Inc. (review granted Mar. 24, 2004, S121933; superseded opinion at 113 CA4th 1137, 7 CR3d 367).
Why Do We Care What Utah Does?
Though Campbell III is a Utah case, its ramifications should be deeply troubling for defendants everywhere. Since 1996, the U.S. Supreme Court has issued three major decisions on punitive damages, each time sending a plainer message, that the system for awarding punitive damages in this country is in need of rethinking and repair. See BMW v Gore (1996) 517 US 559, 134 L Ed 2d 809, 116 S Ct 1589; Cooper v Leatherman Tool Group (2001) 532 US 424, 149 L Ed 2d 674, 121 S Ct 1678; Campbell, supra. However, after the first two decisions, BMW and Cooper, it was essentially business as usual. Neither made an appreciable difference in the trial or appeal of punitive damages cases.
But after Campbell, courts around the country were starting to come around. California is a prime example. Courts of appeal that had readily affirmed high punitive awards before Campbell suddenly began reversing course. See, e.g., Diamond Woodworks, supra; Romo v Ford Motor Co. (2003) 113 CA4th 738, 6 CR3d 793 (court of appeal reduced $290 million verdict to about $24 million, though a year before it had reinstated the jury’s $290 million verdict); Taylor Woodrow Homes, Inc. v Acceptance Ins. Cos. (May 28, 2003, G029532; not certified for publication) 2003 Cal App Unpub Lexis 5208 (reducing punitives to “somewhat less than four times” compensatories).
Although Utah’s assessment of $9 million represents a huge reduction, it is still nine times higher than the punishment contemplated by the U.S. Supreme Court for the handling of a single insurance claim. Whether one agrees or disagrees with Campbell, the Utah court misread the decision and created loopholes where, clearly, loopholes were not intended. If Utah’s Campbell III is not challenged, state and federal courts may feel free to make even further inroads into the Supreme Court’s landmark decision. From the defendant’s perspective, this would be a significant setback to recent progress on the punitive damages front. When it comes to plaintiffs, for the first time in a year they may have something to cheer about.
For further information, contact:
Christina J. Imre
Sedgwick, Los Angeles
213.615.8049
This material is reproduced from California Civil Litigation Reporter, copyright 2004 by the Regents of the University of California. Reproduced with permission of Continuing Education of the Bar - California. (For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit their Web Site, http://ceb.com/.
Christina J. Imre is a partner in Sedgwick's Los Angeles office. An appellate lawyer with more than 20 years of experience, Ms. Imre specializes in civil appeals, writs and post-trial motions in bad faith, health care (including managed care), business torts, and institutional matters of significance to major corporations and insurers.
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