The Oregon Supreme Court's Recent Decision on Punitive Damages: Why It Took the Wrong Approach

In a column last month, I took the Oregon Supreme Court to task for thumbing its nose at the U.S. Supreme Court in Williams v. Philip Morris. Even after the U.S. Supreme Court had clearly rejected jury instructions that allowed the jury to punish the defendant tobacco company for harms caused to people who didn't sue for damages, the Oregon Supreme Court still refused to reduce a $79.5 million punitive damages award that was based in part on those instructions.

Ironically, in this column, this month, I am going to take the Oregon Supreme Court to task for following the U.S. Supreme Court too slavishly on another punitive damages issue.

The Facts Underlying This Month's Oregon Supreme Court Decision

In Goddard v. Farmers Insurance Company of Oregon, decided last week, the Supreme Court of Oregon approved the reduction of a $20 million punitive damages award to four times the approximately $620,000 compensatory award, or roughly $2.5 million dollars. While this outcome was not necessarily wrong, the court's reasoning deserves to be questioned.

Goddard involved a claim that an insurance company had violated the law against "bad faith" handling of an insurance claim. The claim arose out of an accident in which drunk driver John Munson killed Marc Goddard. Munson was criminally prosecuted for manslaughter. Meanwhile, Goddard's estate offered to settle the case at Munson's policy limits -- an offer that sounds quite reasonable to me since, in a case where a prosecution is being brought, it is also quite likely punitive damages may be substantial. However, Farmers Insurance, Munson's insurer, rejected the offer. At trial, Munson was found liable for $863,274--a sum well above the settlement offers Farmers Insurance had rejected.

Munson assigned his bad-faith claim against Farmers to Goddard's estate. While it may sound odd that a defendant is assigning a claim to a plaintiff, in fact, this is an accepted practice in personal injury litigation. Generally, claims for personal injury cannot be assigned to other parties. However, in personal injury litigation, it is perfectly legal for plaintiffs' attorneys to seek and accept assignments of claims from defendants whose insurers rejected reasonable settlement offers that would have been below the defendants' policy limit.

In evaluating the bad-faith claim against Farmers, a jury found that Farmers had indeed acted in bad faith, "stonewalling" during settlement negotiations and essentially gambling with Munson's meager assets. Thus, a jury found Farmers liable for $690,619 in compensatory damages (based mostly on the damages originally awarded to Goddard in the suit against Munson, which would not have had to have been paid had the insurance company settled the case in good faith) and $20 million in punitive damages.

The Oregon Supreme Court's Ruling

The Oregon appellate court that heard Farmers's appeal viewed the punitive damages award as constitutionally excessive, applying U.S. Supreme Court precedent interpreting the U.S. Constitution's Due Process Clause. Accordingly, the appellate court reduced the punitive damages award to three times the compensatory damages award - diminishing it from $20 million to about $2 million.

The Oregon Supreme Court then basically agreed with the appellate court's analysis. However, it fine-tuned the ratio, changing the punitive damages figure to four times the compensatory award, or a bit less than $3 million dollars. This was still a far cry from the original $20 million award.

The Reason Why the Oregon Supreme Court Ruled As It Did

The obvious question is this: Why did the Oregon Supreme Court, which had only weeks earlier approved of a punitive damages award that was almost 100 times the compensatory award, in the Williams case now decide to reduce an award from a 16:1 ratio to a 4:1 ratio? (As noted above, I discussed the Williams case at length in my prior column.)

Surely, the answer was not merely that the Oregon Supreme Court was trying to make nice with the U.S. Supreme Court, just in case the latter was thinking of taking Williams up on appeal again in order to discipline a wayward state court. I doubt that the Oregon Supreme Court would stoop to flattering its big brother in Washington D.C.

The reason offered by the Oregon Supreme Court itself was that it felt that in cases involving significant financial injury, a ratio of more than 4:1 is unnecessary. It drew this rule from the U.S. Supreme Court's decision in State Farm Mut. Ins. Co. v. Campbell, a 2003 case whose facts were uncannily like the facts in Goddard.

In State Farm, a jury in Utah had awarded a $145 million punitive damages award to the estate of driver who had been killed by a motorist insured by State Farm. As occurred in Goddard, the insurer refused reasonable settlement offers and the motorist was found liable for an amount greatly exceeding his policy limits. He assigned his bad faith claim against the insurer to the estate of his victim, just as occurred in Goddard, and the estate then succeeded in securing a large punitive damages award at trial, just as occurred in Goddard.

Why State Farm May Not Be As Significant Here As It At First Appears

State Farm is a curious case, however, because its main holding was that, in proving punitive damages, a plaintiff cannot introduce evidence of wrongdoing "unrelated" to the wrong for which punishment is sought. In State Farm, the plaintiff introduced evidence of a nationwide "stonewalling" scheme that involved property insurance and life insurance, not just auto insurance. There was also dicta (that is, remarks from the Court unnecessary to the holding it reached) in State Farm suggesting that, except in exceptional cases, punitive damages should rarely exceed "single digits" - imply that at most, a 9:1 ratio would be acceptable. The court also approvingly referred to the ratio of 4:1, but again, it did so in dicta.

Ever since State Farm, observers of punitive damages doctrine under the United State Constitution have debated whether the court really meant to regulate punitive damages in the states according to procedural or substantive constraints. More recently, in Williams--the case that the Oregon Supreme Court chose to snub--the U.S. Supreme Court seemed to go out of its way to elevate the procedural above the substantive - indicating that the current Court may be more interested in procedural constraints.

Williams could have been decided under the substantive due process rule that a 100:1 ratio of punitive damages to compensatory damages far exceeds the 9:1 or 4:1 ratio mentioned in State Farm. But interestingly, it was not. Instead, the U.S. Supreme Court focused on the question of what kind of reasons should be used by the jury in making its determination. The U.S. Supreme Court may not have gotten the theory perfectly right in Williams. The distinction it made -- that acts that harm third parties may be used to determine the reprehensibility of the defendant's act, but not to punish the defendant -- may be a little obscure. But at least it tried to articulate a theory of punitive damages that does more than draw arbitrary lines--which is all that the "ratio game" really does.

In fact, seen from the perspective of the recent history of punitive damages case law before the U.S. Supreme Court, the Goddard decision seems sadly consistent for the Oregon Supreme Court. It provides additional evidence that the Oregon Supreme Court is allergic to the procedural safeguards that the U.S. Supreme Court proposed in State Farm, and then tried to impose on Oregon in Williams.

Why the Oregon Supreme Court's Approach Makes Little Sense

This would not be so bad if the alternative approach so enthusiastically adopted by the Oregon Supreme Court made sense. But it does not. In particular, there are two problems with the substantive due process rule adopted by in Goddard. First, what basis, other than some offhand comments by the U.S. Supreme Court, underlies the specific ratios chosen by the Goddard court? Picking a specific number seems to be the ultimate legislative (as opposed to judicial) activity, and the Oregon Supreme Court's doing so only adds fuel to Justice Scalia's powerful critique of the substantive due process treatment of punitive damages. When courts are debating between whether the ratio should be 3:1, 4:1 or 9:1, they do look an awful lot like members of a legislature dickering over the terms of a statute they are drafting.

Second, the distinction drawn by the Oregon Supreme Court between financial injury--which, it suggests, typically should be subjected to punitive damages of low ratio--and personal injury--where, it seems, there need be no limits on punitive damages at all--also seems ad hoc. Of course, it is a very convenient distinction for the court, since it explains why it upheld a 100:1 punitive damages award last month in a personal injury case, and rejected a 16:1 punitive damages award this month in a non-personal injury case.

But convenience, too, is a legislative, not a judicial virtue.

Traditionally, American tort law has not drawn the distinction the Oregon Supreme Court seeks to draw, either in the proof of intentional torts (fraud is treated as severely as battery) or in the awarding of punitive damages (punitive damages for non-physical wrongs have sometimes exceeded those for physical wrongs). Granted, the Oregon Supreme Court may have a theory as to why personal injuries caused by intentional wrongdoing are worse than financial injuries caused by intentional wrongdoing, and there may be some intuitive basis for the distinction, but is it really the Oregon Supreme Court's job is to impose the theory it has embraced on Oregon? One would have thought that this sort of tort reform was the legislature's job.

In short, the Oregon Supreme Court got punitive damages wrong--once again. The fact that they upheld the reduction of an award this time does not make their error more acceptable; it just means that different interest groups may be pleased with the result.

The problem with contemporary punitive damages had never been that they are too high or awarded too frequently. The problem is that they are awarded that makes no sense to those who request them, or to those who must pay them. Goddard, with its crude embrace of arbitrary ratios, is a step in the wrong direction.