AN UPCOMING SUPREME COURT PUNITIVE DAMAGES CASE WILL DETERMINE HOW MUCH AN INDIVIDUAL STATE'S COURTS CAN AFFECT COMPANIES' NATIONWIDE CONDUCT

If the answer is an unqualified "yes," then state courts will be able to use punitive damages to regulate conduct occurring far outside their borders. On the other hand, if the answer is "no" (or a partial no), then the power of tort law to be used to influence social policy nationwide - as in many of the suits against Big Tobacco - will be blunted.

How the State Farm Case Arose: Tort Suits Against Curtis Campbell

State Farm itself began as a tragic car accident. In 1981 Curtis Campbell tried to pass six cars on a highway in Utah. His negligence caused the death of one driver, Todd Ospital, and disabled another driver, Robert Slusher.

Ospital's estate and Slusher sued Campbell, and Campbell's insurance company. State Farm hired a lawyer (per Campbell's car insurance policy) to defend Campbell in the case.

Ospital's estate and Slusher tried to settle with State Farm for the maximum Campbell's policy allowed: $50,000. Despite the fact that its own investigation indicated Campbell had been at fault, State Farm refused.

In 1983 a jury found that Campbell was responsible for the accident. It set damages at $185,000. State Farm appealed, but in 1989, the appellate court affirmed the verdict.

State Farm then paid Ospital's estate and Slusher both the $50,000 it owed and the remaining $135,000 - which Campbell would otherwise have had to pay himself.

Campbell's "Bad Faith" Suit Against State Farm

Nevertheless, Campbell afterwards sued State Farm for "bad faith." (In a "bad faith" action, an insured claims his insurer did not represent him honestly.) Campbell alleged that State Farm should have honored its investigator's report and settled the case - rather than , State Farm exposed Campbell to an almost unlimited risk, for no other reason than to take a roll of the dice that the jury would come back with a judgment of less than $50,000.

Furthermore, Campbell claimed that State Farm's bad faith was just one instance of a national scheme of fraud and deceit that it had been promoting for twenty years under the innocuous-sounding title "Performance, Planning and Review" ("PPR" for short). Campbell also asked for damages for this alleged longstanding, nationwide pattern of conduct.

What The Trial Judge Did in Campbell's Case - and The Issues It Raised

The trial judge divided Campbell's bad faith suit against State Farm into two parts.

In part one, the jury heard evidence only about the way State Farm handled Campbell's suit with Ospital's estate and Slusher. If it found "bad faith" on State Farm's part, a second jury would handle part two, which would consider additional allegations of bad conduct by State Farm.

The first jury did, indeed, find bad faith - and so a second jury heard Campbell's evidence about the alleged national scheme. And in 1996, the second jury awarded Campbell and his wife $2.6 million in compensatory damages and $145 million in punitive damages.

However, the trial judge reduced the awards significantly--the compensatory award was cut to $1 million and the punitive award to $25 million. Then, in an unusual act, the Utah Supreme Court reinstated the entire award.

It held that the trial judge had misapplied the Fourteenth Amendment test for excessiveness in punitive damages as set out in the 1996 U.S. Supreme Court case of BMW v. Gore.

Therein lies the issue the State Farm case raises - and the reason the U.S. Supreme Court decided to take the case. Therein lies, also, the reason the list of 15 amici ("friend of the court") briefs--all favoring State Farm--reads likes a who's who of corporate America.

What BMW v. Gore Did, and Did Not, Decide

In Gore itself, an Alabama jury had awarded a $2 million punitive damage award against a car seller for concealing a $4000 defect in a supposedly perfect BMW. The Court invalidated the award as excessive.

In dicta - that is, remarks that do not have precedential effect - the Court emphasized that no state could use punitive damages "with the intent of changing the tortfeasors' lawful conduct in other States." (Emphasis added.)

But can a state use punitive damage awards with the intent of changing unlawful conduct in other states? The State Farm case on which the Court will hear argument this December will force it to answer this more challenging question.

The Evidence Of an Alleged Illegal Nationwide State Farm Policy

To see the question clearly, it's useful to look at the evidence that was actually introduced in part two of the Campbell "bad faith" trial.

Campbell's experts said the PPR created a "predatory" corporate culture. To support their testimony, Campbell's experts discussed a wide range of practices allegedly adopted by State Farm employees around the nation. They cited, for example, policyholders' complaints about the way State Farm handled earthquake damage complaints in California and hailstorm damage complaints in Colorado.

They also discussed corporate policy requiring the specification of non-original equipment manufacturer (non-OEM) parts when repairing insured's cars, the use of "mad dog defense tactics" in litigation, and allegations that State Farm's fraudulent practices were "consistently directed" towards racial minorities, the poor, women, and elderly individuals around the country.

The evidence was apparently impressive from the point of view of the Utah Supreme Court - which frequently referred to the trial judge's "twenty eight pages of extensive findings concerning State Farm's reprehensible conduct." The problem is, it may have been too impressive, or at least too wide-ranging.

As State Farm notes, in its brief to the Supreme Court, putting the Campbell case itself aside, there was no evidence presented that a refusal by State Farm to settle an insured's case at policy limits had ever resulted in an excess judgment being executed against another Utah policyholder.

Why The Court Should Reject Campbell's Arguments

Campbell's argument, if left unchecked by the Court, could launch punitive damages litigation into a new and unforeseen world of "private law regulation," in which a single state's tort judgments could have effects approximating those of federal laws. Consider, for example, three concerning aspects of Campbell's case.

First, much of PPR itself seems lawful - the kind of out-of-state lawful conduct Gore said a particular state could not reach. PPR is a rather typical example of the sort of legal corporate policy that business schools and consultants have been recommending around the country.

For instance, State Farm policies relating to OEM parts - while controversial, because they deny policyholders more expensive factory parts - are not only legal, but actually mandated by a number of states. If a Utah court can penalize the same actions other states compel, it seems only chaos will result; that part of the verdict that was based on the OEM policy thus seems indefensible. (Perhaps in part for this reason, Campbell - represented by veteran Supreme Court litigator Laurence Tribe - is arguing that State Farm waived its challenge to the OEM evidence by failing to raise it earlier.)

Second, while the Supreme Court has said that a jury may take into account "similar acts" of wrongdoing when calculating punishment, those acts must at least be "similar." Unrelated bad acts must be viewed as irrelevant - and many of the alleged bad acts as to which Campbell presented evidence seem far afield from his own bad faith lawsuit.

After all, what do allegations that State Farm wrongfully denied coverage to California homeowners have to do with allegations State Farm should have settled a Utah vehicle owners insurance case in which the insured was fully covered?

Again, Tribe has tried to moot or minimize this obvious problems by pointing out that when the verdict was reinstated, the Utah Supreme Court looked only to evidence of State Farm wrongdoing that affected people in Utah, and was similar to the wrongdoing that affected Campbell.

This point is a curious one. First, the Court need not look to Utah alone. Gore left open the possibility that a state could use its punitive damages to punish similar wrongful acts in other states (so out of state "bad faith" settlements, for instance, could count.) Second, who are these other Utah residents who suffered similar wrongdoing? Campbell (and Tribe) cannot point to a other State Farm policyholder in Utah who claims to have suffered an excessive jury verdict in a third-party bad faith case.

Third, as much as Tribe would like to narrow the case, it inexorably will raise broad issues. In the end, the case is about using punitive damages to punish a wide range of antisocial, out-of-state conduct - not just specific acts of Utah wrongdoing.

Indeed, in the "bad faith" case Campbell and his wife's own lawyer argued to the jury that "the insurance commissions in Utah and around the country are unwilling or inept at protecting people" and that only juries and people like the Campbells are able to investigate the insurance industry. The validity of this point of view is really what's at issue - and the truth is, this view is wrong and harmful.

This view of punitive damages is insulting to the many state agencies, criminal and civil, who are working to protect the public. It is also a recipe for disaster - especially in an industry as complicated as the insurance industry.

Assume that, as Campbell claims, State Farm's application of its PPR really is a criminal conspiracy. To prove that, one would want a real criminal investigation, along with a real criminal trial - not a civil tort suit that only provides "regulation-lite."

In Gore, the Court left open the question of whether a state can use its punitive damages to deter unlawful acts in other states. When all states agreed as to what is unlawful - as, for instance, in the case of blatant, outright fraud or plain theft - that may make some sense.

When a company is misleading the public with its national press releases, for instance, perhaps damages should be calculated nationally (though the problem of overlapping verdicts, which I discussed in a prior column, remains.)

But where states disagree, and treat, different business practices--even wrongful practices - differently, it will work great mischief to allow single-state "regulation" through punitive damages to replace multi-state regulation through agencies with expertise.

To decide Campbell, it will not be enough to decide whether Utah should be able to punish insurance fraud in California or Colorado. The Supreme Court will have to decide whether a jury in Utah is competent to regulate the insurance industry in Utah, and even elsewhere. The answer it should - and likely will - give should be no.