TCS Daily

Larcenies Petty and Grand

By Bruce Fein - April 15, 2003 12:00 AM

Erratic law hikes risks and dampens business activity.

Punitive damages are emblematic. Juries intermittently return astronomical awards pursuant to open-ended standards that invite caprice and whimsy. Such freakish law makes liability insurance for punitive verdicts problematic, and has crippled entire industries.

The United States Supreme Court initially shied from finding meaningful constitutional limits on punitive damages. But last week in State Farm Mutual Automobile Insurance Company v. Campbell (April 7, 2003), the High Court cast aside reticence and spoke forcefully against punitive awards that smacked of Shylock's pound of flesh.

Punitive damages are an anachronism. They aim to punish and to deter morally reprehensible conduct by empowering juries to award damages guided only by instinct and sympathy. The actual harm suffered by the plaintiff is a sideshow. The prospect of bonanza awards to encourage private lawsuits was originally thought necessary to shore up deficient, understaffed or lackadaisical attorneys general.

The growth of modern bureaucracies, however, has overtaken the reason for private attorneys general. Offices of both state and local prosecutors are adequately staffed and funded. They are predisposed to sue businesses for alleged malpractices to further vaulting political ambitions. The tobacco and gun lawsuits are prototypical.

Since vigilante justice fell into desuetude, punishment has been thought an exclusive responsibility of government. Morally culpable wrongdoing is thus customarily prosecuted in criminal proceedings. Prosecutors consider a wide range of public interest factors (including employee and consumer losses from bankrupting a business) in determining the nature of the charges and the punishment to be sought. The defendant enjoys a battery of procedural rights to prevent errant guilty verdicts, such as jury unanimity, proof beyond a reasonable doubt, and a right to confront adverse witnesses.

In contrast to criminal prosecutions, the plaintiff in punitive damages litigation seeks to extract the highest sum from the defendant irrespective of harms to third parties or the community. Moreover, the muscular procedural protections afforded in criminal cases to forestall jury error are unavailable to punitive damage defendants.

In sum, the case for abolition of punitive damages by legislative action is persuasive. But that enlightened reform is chimerical. The American Trial Lawyers Association holds a hammerlock over most state legislatures and the Congress. Capping punitive damage awards by statute or pursuing constitutional litigation to curb treasure trove-like verdicts seem more promising. On that latter score, the State Farm ruling is refreshing.

An insured motorist recovered $1 million in compensatory damages from his insurance company, State Farm, for its bad faith in handling liability claims stemming from an accident in which the insured was incontestably at fault. The jury also awarded $145 million in punitive damages based substantially on evidence that State Farm for 20 years throughout its entire service area schemed to force claims to litigation in hopes of lowering payouts. The Utah Supreme Court elaborated fourfold reasons for affirmance: the reprehensibility of State Farm's conduct; its massive wealth; the difficulty of detecting its wrongdoing; and, the stark civil and criminal penalties State Farm could have confronted for each act of fraud.

By a 6-3 vote, the United States Supreme Court reversed. Writing for the majority, Justice Anthony Kennedy explained that punitive damages invite arbitrary deprivations of property. Jury instructions invite jurors to play fairy godmother with the defendant's money; and, introducing evidence of the defendant's net worth makes the courtroom drama akin to Tiny Tim v. Scrooge in which a lavish punitive damages verdict is never in doubt.

Justice Kennedy thus insisted that the due process clause requires the reasonable tailoring of punitive damages to the reprehensibility of the defendant's conduct, the degree of actual harm suffered by the plaintiff, and, civil penalties authorized or imposed in comparable cases. The $145 million award against State Farm flagrantly flunked the reasonable tailoring benchmarks.

It rested largely on State Farm practices outside Utah completely divorced from the company's wrongdoing that victimized the plaintiff. But punitive damages must be confined to punishing the defendant's misconduct that afflicted the plaintiff, not the entire world. Further, punitive damages that are tenfold or more greater than compensatory damages are presumptively dubious. In this case, the ratio was 145:1; and the damages flowed from an economic transaction, not from a physical assault or loss of limb that would have justified more jury license in punishing. Finally, the most relevant civil sanction under Utah law for State Farm's wrongfulness towards the plaintiff is a $10,000 fine for an act of fraud, a sum dwarfed by the $145 million punitive verdict. Justice Kennedy thus concluded: "The punitive award...was neither reasonable nor proportionate to the wrong committed, and it was an irrational and arbitrary deprivation of the property of the defendant."

The State Farm precedent is no punitive damages panacea. But it at least keeps awards within the domain of petty larceny as opposed to grand larceny.

TCS Daily Archives