A Recent California Appellate Decision Underlines the Importance of the Supreme Court's 2003 Pronouncements on Punitive Damages

In April of this year, the United States Supreme Court tried to settle the long-simmering battle over punitive damages in its decision in State Farm v. Campbell.

The decision was heralded by conservative commentators as an unprecedented rebuke to courts which had allowed punitive damages to get "out of control." More liberal, pro-plaintiff commentators tried to minimize the importance of State Farm.

Last month, a California appellate court issued an opinion in a $290 million punitive damages case that proves that State Farm will be as important as the conservatives predicted and that 2003 will be remembered as a watershed year.

In State Farm, the U. S. Supreme Court reversed a $145 million punitive damage award. The award arose out of a Utah tort suit in which compensatory damages were a comparatively more modest $2.6 million. The Court found that this large ratio between punitive and compensatory damages was too high.

As I noted in an earlier column about the case, State Farm was important because it raised, for the first time, the issue of the purpose of punitive damages before the U.S. Supreme Court.

In an earlier case, BMW v. Gore, the Supreme Court also had decided to reverse a punitive damages award. But there, the Court's ruling was partly explained by the fact that the wrongdoing involved was somewhat trivial (the defendant, BMW, had repainted the plaintiff's car and sold it as new).

In contrast, the wrongdoing alleged in State Farm was far from trivial; the defendant insurer was accused of doing some very terrible things across the United States, and apparently the jury concluded that it indeed had done at least some of those things.

The plaintiff there was Curtis Campbell, and State Farm was his insurer. He alleged that they refused a reasonable offer of settlement in a suit against him. And Campbell alleged that, as a result, a huge verdict was rendered that could have bankrupted him and destroyed his life. Finally, he alleged, and apparently persuaded the jury, that he was not alone in suffering this type of wrongdoing: Instead, he claimed, what State Farm had done to him was simply part of a larger and more nefarious national scheme.

In State Farm, the Supreme Court, in a divided 5-4 opinion, held that despite the fact that the wrongdoing alleged was quite serious, a 58-1 ratio of punitive damages to compensatory damages was still too high. It also reviewed the principles it articulated in Gore and expanded on what it had tried to say in that decision. And in the Court's discussion of Gore, were the seeds of the importance of the State Farm decision -- which came to fruition in the recent California ruling.

The most important comment the Court made about Gore, in State Farm, was this one: The Court suggested that that, after Gore was decided, many subsequent interpreters of that decision had misunderstood it. And in particular, they had misunderstood what the Court had meant by saying in Gore that punitive damages should relate to the reprehensibility of the wrongdoer's act.

Many courts and many academic commentators had taken "reprehensibility" to include the wrongful character of the act, regardless of who it harmed. So suppose a case was based upon a fraud that was designed to harm hundreds and happened to harm the plaintiff. Under this definition of "reprehensibility," the reprehensibility of that fraud should be measured against the potential harm to everyone the defendant tried to harm or exposed to injury through its reckless conduct.

In other words, based on this definition of "reprehensibility," a punitive damage award should be measured against the "total harm" risked by a defendant, not the actual harm caused by the defendant to the plaintiff.

The 'total harm' approach to reprehensibility has a certain appeal. The appeal can be based on either (or both) of two possible views of the purpose of punitive damages.

First, suppose you think the point of punitive damages is to deny a wrongdoer all the wrongful gain he achieved through his wrongful act. Then you might embrace the "total harm" theory -- for you might want punitive damages to force that wrongdoer to disgorge the losses suffered by all of his victims, not just the plaintiff.

Second, suppose you think that the point of punitive damages is to deter future wrongdoers from acting wrongfully. In that case, you might also embrace the "total harm" theory. That is because you would want to make sure that future wrongdoers knew that if they were caught and sued, the amount of punitive damages they would pay would be so large as to make their wrongful scheme unprofitable.

To put it bluntly, in State Farm the Supreme Court rejected the "total harm" approach.

Justice Kennedy said that "a defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business." This, more than anything else in the decision, was what led Justice Kennedy to state famously that punitive damages in the "single digits" were more likely to comport with due process than punitive damages in the double or triple digits.

Despite this clear signal, however, a debate among commentators over the meaning of State Farm has been raging since April. Some advocates of the "total harm" approach to punitive damages have argued that the Court rejected this approach only in some cases -- not all cases. (For instance, they have suggested that the Court rejected the "total harm" approach only in cases involving economic torts, but not in personal injury cases -- or only when the total bad acts were different from the bad acts that harmed the plaintiff, but not when they were similar.)

But others have urged -- and I myself take the view -- that the Court rejected the "total harm" approach wholesale. Justice Kennedy's statements seem quite unequivocal.

And recently, a California appellate court also took the view that the "total harm" approach has been dealt a death blow by the Court in all cases.

The California decision, Romo v. Ford Motor Company, was issued by the state's Fifth Appellate District Court. That court had previously upheld a $290 million punitive damage award in a case in which a comparatively modest $5 million in compensatory damages were awarded. But in light of State Farm, the court reversed itself.

In Romo, the jury had found that Ford had "willfully and consciously ignored the dangers to human life" inherent in its design of the 1978 Ford Bronco.

When the Romo family's Bronco swerved to avoid another driver, it tipped over and three of the family were killed and three were injured. The plaintiffs argued that the deaths and injuries were caused by the following design defect: The Bronco had a metal roof covering the first third of the passenger compartment, but only a fiberglass roof, with no rollbar, in the back.

The attorney for the plaintiffs asked the jury to award $1 billion in punitive damages -- arguing that this amount would force Ford to recall all remaining 1978-79 Broncos and "crush them to dust."

However, the jury awarded the lesser -- though still huge -- sum of $290 million in punitive damages. And, as noted above, it awarded the Romo family $5 million in compensatory damages.

In June 2002, the appellate court upheld the jury's verdict. In so doing, it compared Ford's conduct to the crime of involuntary manslaughter.

But then, in 2003, State Farm was decided. Subsequently, the California Supreme Court sent the case back to the appellate court for reconsideration, in light of Justice Kennedy's opinion in State Farm.

Upon reconsideration, the Court issued a unanimous opinion -- written by the same judge who wrote the June 2002 opinion upholding the $290 million award. The opinion reduced the punitive damages award was reduced to $23.7 million -- an amount more proportional to the $5 million compensatory damages award.

What makes the opinion incredible is that the court did not change its views of Ford's conduct in any way. It still took it as a given that Ford acted in a way which was the equal to the crime of involuntary manslaughter (a conclusion Ford has vigorously denied).

Instead, the only factor that changed for the Romo court the second time around was the issuance of State Farm -- and the guidance it now provided with respect to what is an acceptable scale for the ratio between compensatory and punitive damages.

Significantly, the Romo court took that guidance to apply to all tort cases -- even personal injury and death cases in which the defendant's conduct is claimed to be extremely wrongful. It did not hold State Farm inapplicable in a personal injury or death case. Nor did it hold it inapplicable in a case in which the defendant's culpability was severe.

The vast majority of judges have similarly declined to limit the reach of State Farm. And they have thus begun to follow its guidance, and to limit punitive damages accordingly.

(One exception, however, is Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit, who has interpreted State Farm in a way that ignores Justice Kennedy's core point. In a recent case, Posner upheld a $186,000 punitive damage award despite a compensatory damages award of only $5000.).

For the moment, it looks as if 2003 will go down in the annals of the American tort wars as the year that the U.S. Supreme Court decisively reined in the "total harm" theory of punitive damages.

In the end, this approach is important in only a few types of cases in which the plaintiff's alleged harm may be widely replicated. Among them are products liability and consumer fraud cases. But these are cases that have made headlines.

Should we mourn or celebrate the passing of the 'total harm' theory of punitive damages? The answer depends on whether one thinks the purpose of punitive damages really is.

Is it to deny tort defendants of their total wrongful gains? Is it to deter their future wrongdoing nationwide? Or is its scope more modest?

The far-reaching versions of these justifications for punitive damages were never fully embraced in the common law. Now, they have been plainly rejected by the current Supreme Court.

Will they someday be allowed back into the theory of punitive damages in America? That depends in part on what the Supreme Court does next, and in part on whether American judges will begin to passively resist State Farm.

For the moment, the lesson of Romo seems to be that in 2004, the "total harm" theory may well be totally -- or almost totally -- absent from American courts.