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State Farm ruling in April builds on the record in 1996 BMW case

U.S. Supreme Court Brings Reason to Punitive Damages

Punitive award of $145 million for compensatory damages of $1 million is excessive

By Carol W. LaGrasse
May 31, 2003

The United States Supreme Court ruled on April 7 that a Utah court's punitive damage award of $145 million where the full compensatory damages were $1 million is excessive and violates the Constitutional right of Due Process. "The punitive award of $145 million...was neither reasonable nor proportionate to the wrong committed, and it was an irrational and arbitrary deprivation of the property of the defendant," wrote Justice Anthony M. Kennedy for the majority of the Supreme Court.

The ruling in State Farm Mutual Automobile Insurance Co. v. Campbell strengthens the trend widely noticed in the Court's 1996 ruling in favor of BMW against unrestrained punitive damage awards.

The irony in the State Farm case is that Curtis Campbell, the man awarded the damages, caused an accident in which one person was killed and another permanently disabled. However, the court decisions were in response to the insurance company's refusing to settle the claims for wrongful death and injury for the $50,000 policy limit and taking the case to trial, where a higher verdict resulted.

After the 1981 auto accident, Mr. Campbell insisted that he was not at fault. At first, investigations did not refute this conclusion, but a consensus was reached early on by the investigators and witnesses that Mr. Campbell's unsafe attempt to pass six vans traveling ahead of him on a two-lane highway had caused the crash, according to the Supreme Court's summary of the case. As Mr. Campbell drove down the wrong side of the highway, Todd Ospital, driving a small car in the opposite direction, swerved onto the shoulder to avoid the car approaching in his lane, lost control, and was killed when he hit an oncoming car. Robert Slusher, the driver of that car, was permanently disabled, but Mr. Campbell and his wife, who was in the car with him, escaped unscathed.

State Farm declined offers by Ospital's estate and Slusher to settle the claims for the policy limit of $25,000 per claimant or $50,000. The company ignored advice of its investigators and took the case to trial, assuring the Campbells that "their assets were safe, and that they had no liability for the accident, that [the company] would represent their interests and that they did not need to procure separate counsel," according to the Supreme Court's summary which provided the information for this narrative. But the opposite occurred. A jury determined that Mr. Campbell was 100 percent at fault and that he was liable for $185,849. At this stage, State Farm refused to cover the excess liability over the policy limit.

Ospital's estate and Mr. Slusher made an agreement with Mr. Campbell to not seek satisfaction of their claims in exchange for Mr. Campbell agreeing to use their lawyer to seek a bad faith action against State Farm and ultimately give them 90 percent of any award. In 1989, the Utah Supreme Court denied Mr. Campbell's appeal in the wrongful death action, whereupon State Farm paid the entire judgment, including the amounts in excess of the policy limits.

The Campbells sued State Farm anyway, for bad faith, fraud, and intentional infliction of emotional harm. After an initial trial court granting State Farm's motion for summary judgment, the ruling was reversed on appeal. The case was sent back to trial, divided into two parts for jury deliberation, and one jury determined that State Farm's refusal to settle was unreasonable because there was a substantial likelihood of an excess verdict At that time, the U.S. Supreme Court decided BMW of North America, Inc. v. Gore in 1996. In this famous case, the high court overturned an award of $2 million punitive damages to Dr. Ira Gore, Jr., where the compensation award was only $4,000 for failure to disclose that his new BMW had been repainted before he purchased it from an authorized Alabama dealer.

In disputing Mr. Campbell's claim for punitive damages, State Farm claimed that it had made an honest mistake; but evidence showed that the company had a national policy of meeting fiscal goals by capping payouts on claims. A complication arose where the Campbells introduced evidence about fraudulent practices by State Farm outside of Utah, much of which bore no relation to third-party automobile insurance claims.

A Utah jury awarded Mr. Campbell $1.6 million plus $145 million punitive damages from State Farm, but the trial court reduced the award to $1 million and $25 million, respectively. Both sides appealed. Even though the Utah Supreme Court stated it was applying guidelines from the 1996 U.S. Supreme Court ruling in BMW of North America v. Gore (known as Gore), the high Utah court reinstated the punitive award of $145 million, pointing out State Farm's "massive wealth" and the clandestine nature of State Farm's actions, which "will be punished at most in one of every 50,000 cases as a matter of statistical probability." The top Utah court also stated that the punitive damages were not excessive when compared to various civil and criminal penalties the company could have faced, including $10,000 for each act of fraud, suspension of its license to conduct business, and the forfeiture of profits and imprisonment.

However, the majority of the U.S. Supreme Court, rejected this interpretation of Gore. Justice Kennedy wrote, "A punitive damages award of $145 million, where full compensatory damages are $1 million, is excessive and violates the Due Process Clause of the Fourteenth Amendment."

Three Guideposts

The Supreme Court held that punitive damages should be awarded if the defendant's culpability, after having made the victim whole for his injuries by compensatory damages, is so "reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence." However, the Utah Supreme Court had gone too far, by using the case "as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country." The U.S. Supreme Court made it clear that a State cannot punish a defendant for conduct in another State. In addition, the Supreme Court pointed out, the Campbells did not even dispute that much of the out-of-state conduct was lawful where it occurred. The out-of state conduct must "have a nexus to the specific harm suffered by the plaintiff." The ruling also pointed out, "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."

Furthermore, the Utah courts erred in awarding punitive damages to punish and deter conduct that bore no relation to the Campbells' harm. Punitive damages should not be based on "reprehensibility analysis" of conduct harmful to others. This would be a violation of Due Process. Punishment on these bases creates the possibility of multiple punitive damages awards for the same conduct.

Based on the second guidepost in Gore, the U.S. Supreme Court refused to pronounce a constitutional limit of the ratio of punitive and compensatory damages. The Court stated, "Our jurisprudence and the principles it has now established demonstrate, however, that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." In Gore, the Supreme Court cited a 4-to-1 ratio. Judge Kennedy pointed out that in Gore, "The Court further referenced a long legislative history, dating back over 700 years and going forward to today, providing for sanctions of double, treble, or quadruple damages to deter and punish."

"In sum, courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered. In the context of this case, we have no doubt that there is a presumption against an award that has a 145-to-1 ratio," wrote Judge Kennedy.

While explaining other aspects of its reasoning, the Supreme Court furthermore held, "the wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award."

The third guidepost that the Supreme Court considered from Gore is the disparity between the punitive damages award and the civil penalties authorized in comparable cases. Criminal penalties may also to be compared, the Court noted. The Court warned against using punitive damages to substitute for the criminal process, where higher standards of proof are required. The Court pointed out that the most relevant civil sanction under Utah law for the wrong done to the Campbells appears to be a $10,000 fine for an act of fraud, "an amount dwarfed by the $145 million punitive damages award." The Supreme Court rejected the other potential penalties mentioned by the Utah Supreme Court because they were related to the out-of-state allegations.

In reversing the Utah Supreme Court and remanding the case back for the a consideration of proceedings consistent with the U.S. Supreme Court's opinion, Judge Kennedy concluded, "An application of the Gore guideposts to the facts of this case, especially in light of the substantial compensatory damages awarded (a portion of which contained a punitive element), likely would justify a punitive damages award at or near the amount of compensatory damages,"

Justice Antonin Scalia and Clarence Thomas, dissented, citing their dissents in Gore. Justice Ruth Bader Ginsburg also dissented, emphasizing state's rights and the justification for considering out-of-state conduct. The opening sentence in her dissent reads, "The large size of the award upheld by the Utah Supreme Court in this case indicates why damage-capping legislation may be altogether fitting and proper."

The Corrective Trend Continues

On May 19, the U.S. Supreme Court further weakened the nation's propensity for giant punitive damage awards, rejecting two judgments against Ford Motor Co. Punitive damages in both cases exceeded the single-digit ratio to compensatory damages that the Court favored in the State Farm ruling. Ford successfully appealed a $290 million punitive damages ruling in California court and a $15 million punitive award in Kentucky.

According to the Wall Street Journal, which reported on the Ford ruling on May 20, "The action is part of a much bigger trend: After decades of trying, lobbyists and lawyers for American businesses are making quiet but steady gains in the battle to roll back hefty punitive damage awards." The Journal article, by Robert S. Greenberger, with Joseph P. White and Susan Warren, quoted Richard Faulk, a Houston defense attorney specializing in asbestos cases, "While the Supreme Court's ruling may not reduce juries' inclination to award such damages at the trial level, it will spur more defendants to appeal those verdicts, with a better chance of having the awards reduced."

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