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In April of 2003, the United States Supreme Court again undertook to define what limits the due process clause of the Fourteenth Amendment places on the award of punitive damages in state courts. State Farm Mut. Automobile Ins. Co. v. Campbell, 123 S.Ct. 1513 (2003). State Farm v. Campbell was an insurance bad faith case that arose as the result of an automobile accident. The 1981 accident was caused by Curtis Campbell’s attempt to pass six vans that were traveling ahead of him on a two-lane road. Though Mr. Campbell and his passenger were uninjured, this passing attempt resulted in an oncoming vehicle being forced off the road, ultimately colliding with a third vehicle. Both drivers of the additional cars – the one forced off the road and the one with which it collided — were injured, resulting in the death of one and the permanent disability of the other. Mr. Campbell was sued in a Utah state court. 

State Farm was Mr. Campbell’s insurer having issued a policy with a limit of $50,000. Despite this policy limit and the facts in this case, State Farm denied Campbell had any liability for the accident and refused to settle the matter for the policy limits by providing $25,000 to each of the other two drivers or their representatives; State Farm assured Mr. Campbell he had no personal exposure and did not need to retain separate counsel, despite the potential exposure in excess of his insurance coverage. However, when the jury in the wrongful death and negligence case rendered a verdict for $185,849, State Farm refused to pay the amount that exceeded the policy limits and refused to post the bond necessary for Mr. Campbell to appeal the verdict. A representative of State Farm told Mr. Campbell he “may want to put for sale signs on [his] property to get things moving.” While the appeal was pending, Campbell settled the matter with the claimants, in part by agreeing to bring a bad faith action against State Farm. The appeal was denied, affirming the jury’s verdict. Though State Farm eventually paid the entire verdict, Campbell filed the bad faith action in Utah state court as agreed. 

The bad faith action resulted in a jury verdict against State Farm for $2.6 million compensatory damages and $145 million punitive damages. The trial court reduced this verdict to $1 million compensatory and $25 million punitive damages, but the Utah Supreme Court reinstated the $145 million punitive award. The case was then appealed to the United States Supreme Court. 

The U.S. Supreme Court granted certiorari and, applying the factors first set forth in BMW of N. Amer., Inc. v. Gore, 517 U.S. 559 (1996), reversed the decision of the Utah Supreme Court, remanding the case for further proceedings consistent with its opinion. This Supreme Court decision sent ripples through the legal community as lawyers and judges began opining on whether it changed the legal standards for the assessment of punitive damages. Indeed, the Court’s less than clear opinion raises a number of issues that now must be resolved by state and federal courts, including but not limited to the following issues: (1) to what extent is evidence of out-of-state conduct by the defendant relevant and admissible in determining punitive damages? (2) does it matter whether the out-of-state conduct was legally permissible in the state in which it occurred? (3) to what extent is evidence of dissimilar but egregious conduct of the defendant relevant and admissible, (4) can a ratio between compensatory and punitive damages that exceeds 10:1 ever be constitutionally permissible and, if so, under what circumstances? (5) when, if ever, can defendant’s wealth be relevant to the award of punitive damages? (6) is bifurcation of liability and punitive damages portions of a trial a viable option to protect against the admission of evidence that may be relevant to liability but is no longer proper for consideration of punitive damages? (7) is the amount in controversy for federal diversity litigation going to be impacted where it would take a double digit ratio between compensatory damages sought in the pleadings and punitive damages for the total award to reach the $75,000 prerequisite? (8) how should available civil sanctions be compared to a damage award? The answer to these questions, at least until the Supreme Court again takes up this issue, will rest in the state courts, as they are the courts that will handle the largest portion of cases involving punitive damages,

This article provides a brief summary of some of the reaction, so far, to State Farm v. Campbell by state appellate courts that have had the opportunity to review or otherwise consider the award of punitive damages since April 2003.1 As will become apparent, perhaps one of the most important developments is the application of the Supreme Court’s warning that a double digit ratio between compensatory and punitive damages will rarely be constitutionally permissible. Some state courts that have considered punitive damages in the light of State Farm seem ready and willing to use that warning either to approve all such awards that do not reach a double digit ratio or to ensure that no double digit ratio is approached, despite the Supreme Court’s additional caution that no bright line ratio exists.

 

Alabama

In Shir-Ram v. McCaleb, No. 1012112 (Ala. Dec. 30, 2003), the Alabama Supreme Court applied State Farm v. Campbell to an award of $176,572.82 in compensatory damages and $500,000 in punitive damages in a case in which the plaintiff injured her leg on a protruding piece of metal on a bed frame in the defendant’s hotel. The Alabama Supreme Court affirmed the verdict and clearly characterized State Farm v. Campbell as a mere reprisal of the Supreme Court’s criteria for analysis of a defendant’s reprehensibility first established in BMW v. Gore. It appears from the Alabama court’s discussion of the ratio of compensatory to punitive damages that the court may not look suspiciously at punitive damage awards as long as those awards do not create a ratio of 10:1 or greater. Though not a case involving an actual award of punitive damages, in Anderson v. Ashby, ____ So.2d ____, No. 1011740 (Ala. May 16, 2003), the Alabama Supreme Court applied the principles in State Farm to the analysis of whether a contract that limits punitive damages to five times economic damages was unconscionable. The court concluded such a contractual limit was not unconscionable by reference to State Farm in footnote 24 of the court’s opinion.

 

Arizona

Though the Arizona courts have not yet directly addressed the impact of State Farm on their punitive damages analysis, a cite to State Farm highlights the focus on the Supreme Court’s discussion of the appropriate ratio between compensatory and punitive damages. See Bridgestone/ Firestone N. Am. Tire v. Naranjo, 414 Ariz. Adv. Rep. 32 (Ariz. Dec. 10, 2003).

 

Arkansas

On at least three separate occasions the Arkansas appellate courts have had the opportunity to cite or otherwise discuss State Farm. Advocat, Inc. v. Sauer, 111 S.W.3d 346 (Ark. 2003); Hudson v. Cook, 105 S.W.3d 821 (Ark. App. 2003), Superior Fed. Bank v. Mackey, CA 02-1119 (Ark. App. Nov. 19, 2003). The most significant of these cases is Advocat, Inc. v. Sauer, 111 S.W.3d 346 (Ark. 2003). After a thorough summary of the State Farm opinion, the court proceeded to review the award of punitive damages in this case based on the three Gore factors – reprehensibility, ratio of compensatory to punitive damages, and the available civil sanctions for similar conduct. This wrongful death case, involving medical malpractice claims, resulted in a jury verdict of compensatory damages of $5 million on the ordinary negligence claim, $ 10 million for medical malpractice, $25,000 for breach of contract, and $100,000 for each surviving beneficiary. The total in compensatory damages was $15.4 million. Punitive damages of $21 million were awarded against each of the three defendants who appealed the judgment. In one of the most comprehensive discussions of State Farm, the court recognized that the Supreme Court elaborated on the considerations to be made when assessing reprehensibility of the defendant’s conduct, including consideration of whether the harm caused was physical or merely economic, whether the conduct demonstrated indifference or reckless disregard for the health or safety of others, whether the target of the conduct had financial vulnerability, whether the conduct was repeated or isolated, and whether it resulted from intentional malice or deceit. In discussing the 4.2:1 ratio of compensatory to punitive damages, the court easily concluded such a ratio did not raise due process concerns. The court also undertook a much more detailed analysis of what civil sanctions were available under state law than the court might have undertaken prior to State Farm.

 

California

The California appellate courts have had ample opportunity to apply State Farm v. Campbell, having had several cases remanded by the Supreme Court for further consideration following that decision: In one of the most recent such cases, Simon v. San Paolo U.S. Holding Co., Inc., B121917 (Dec. 2, 2003 Cal.App.), a case remanded for the second time, the California Court of Appeals affirmed a fraud verdict awarding $5,000 in compensatory damages and $1.7 million in punitive damages. The case was actually tried twice. The first jury verdict awarded $2.5 million in punitive damages, but the trial court granted a new trial unless the plaintiff agreed to a remittitur in punitive damages to $250,000. The plaintiff refused the reduction and obtained the $1.7 million punitive verdict in the second trial. Following this second trial, the trial court made no reduction of the verdict. The appellate court affirmed in large part based on the reprehensibility of the defendant’s conduct, which included lying to the trial court about the wrongful conduct. This dishonesty with the court was viewed as demonstrating trickery or deceit and also indicated that the wrongful conduct was not an isolated incident – both proper considerations according to State Farm for determining the level of reprehensibility of the defendant’s conduct. The court focused a great deal of its discussion on the Supreme Court’s statements that no mathematical bright line exists in terms of the ratio of compensatory to punitive damages between constitutionally permissible and violative of due process. The California appellate court further discussed the Court’s explanation in State Farm, which concluded that in cases where particularly egregious acts resulted in small economic loss, a larger ratio may be appropriate. This, the California court indicated, was just such a case.

In Romo v. Ford Motor Co., F034241 (Nov. 25, 2003 Cal.App.), the Fifth District Court of Appeals had its opportunity to consider State Farm. That court conditionally affirmed the award of punitive damages in a personal injury, wrongful death suit that resulted from the rollover of the plaintiff’s Ford Bronco. The affirmance was conditioned on a reduction of the punitive damages from $290 million, in light of a nearly $5 million compensatory award, to $23,723,287. In this opinion, the California court recognized that State Farm had “impliedly disapproved” the California courts’ broad view of the goal and measure of punitive damages, which view had been that punitive damages were to achieve deterrence of a practice or course of conduct “by depriving the wrongdoer of profit from the course of conduct or making such conduct so expensive it put the wrongdoer at a competitive disadvantage.” This view, according to the California appellate court, was implicitly disapproved by the Supreme Court. Thus, the court reduced the punitive award due to its acknowledgement that punitive damages must focus primarily on what the defendant did to the present plaintiff, not “the defendant’s wealth of general corrigibility.” 

See also Henley v. Philip Morris Inc., 112 Cal.App.4th 198 (2003); Diamond Woodworks, Inc. v. Argonaut Ins., 109 Cal.App.4th 102 (2003).

 

Florida

In Liggett Group Inc. v. Engle, 3D00-3400 (Fla. App. 3 Dist. May 21, 2003), the court reversed an award of $145 billion against tobacco companies based on a number of lower court errors, including the failure to first award compensatory damages and based on the bankrupting impact of the award on the defendants whose net worth was under $9 billion. Providing further support for its decision, the court cited State Farm and its $145 million award as demonstrative that such a large verdict was clearly excessive and violative of due process.

 

New York

Citing State Farm, the Appellate Division of the Supreme Court of the State of New York, reversed the lower court’s reduction of punitive damages from $50 million to $10 million in a two page opinion that concluded $50 million was excessive but that a more substantial penalty than $10 million was appropriate. Mitsuhiro Honzawa, et al. v. Hirokuni Honsawa, et al., 1923 (1st Dept. October 21, 2003). 

 

Conclusion

Numerous other courts have also considered the impact of State Farm v. Campbell, including the courts of Georgia, Indiana, Iowa, Kentucky, Massachusetts, New Hampshire, Ohio, Oregon, Pennsylvania, South Dakota and Wisconsin. And other state appellate courts are currently hearing oral argument or receiving briefs that discuss or argue the impact of this Supreme Court case for the first time. Whatever trends may develop, there can be no question that the language set forth in the Court’s opinion will be used by both sides – those seeking to limit and those seeking to expand punitive damage awards. And that the ultimate decision as to the impact of this decision rests with these state courts.

*The author, Wendy Keefer, is an attorney at Barnwell, Whaley, Patterson, and Helms in Charleston, SC.

 

Endnotes

1 A majority of state courts have not yet had the opportunity to apply the principles of State Farm v. Campbell to an award of punitive damages.

Note from the Editor: The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. We welcome responses to the views presented here. To join the debate, please email us at info@fedsoc.org.