A Recent Supreme Court Punitive Damages Decision Unites Usually-Opposed Justices On the Need for More Guidance In This Area

Punitive damages make strange bedfellows. It's not often you can read opinions by Justice Scalia and Justice Ginsburg in the same case and agree - at least in part - with both. But that was precisely our reaction to last month's decision in State Farm Mutual Automobile Insurance Co. v. Campbell, which tackled the issue of the constitutionality of punitive-damages awards.

There, the Court's polar opposites both, in our view, reached the correct conclusion: The whole issue of punitive damages is an awkward fit for the high court. Indeed, just last week, the Court issued two orders that underline that point - as we will explain.

The Problem with State Farm: Correct Result, Unsatisfying Reasoning

To understand State Farm, it's necessary first to look to another, prior precedent, BMW of North America v. Gore. There, the Court held, in essence, that due process forbids huge discrepancies between punitive and compensatory damage awards. But it gave little guidance as to how huge, exactly, is too huge.

In the State Farm case, a jury had found that an insurance company had grossly mistreated its policyholder, and awarded punitive damages on that basis. The ratio of the punitive damages award to the compensatory damage award was a whopping 145:1 (The punitive award was $145 million; the compensatory award, $1 million). For what it assessed as $1 million in actual damages, then, the trial court sought to impose 145 times that much in pure punishment.

The Supreme Court held that this disparity was so excessive that it offended constitutional due process. No doubt, that ruling was correct. But the State Farm decision failed to do what good judicial decisions must: give guidance for the future.

Indeed, in his majority opinion in State Farm, Justice Kennedy would not go beyond the indication that a greater than single-digit ratio would almost certainly be suspect. Otherwise, he simply repeated Gore's statement that there could be no "mathematical certainty" in this area.

But certainly, we should be able to ask for a greater degree of certainty that the court has provided. Is a 9:1 ratio likely to be a problem? What about a 3:1 ratio? The Court has refused to say.

As Justices Ginsburg and Scalia both pointed out in dissent in State Farm, this uncertainty presents a major problem.

A Legal Area Without Guidance, as Two Opposed Justices Agreed

For lawyers, it is generally at least possible to hazard a guess, in a given case, about what compensatory damages will be, more or less, if the jury finds the defendant liable - though the availability of "non-economic" pain and suffering damages complicates the matter.

Punitive damages awards, in contrast, are often highly unpredictable, resisting guesswork. Who would have thought, for instance, in Gore, that repainting a BMW and still selling it as new - admittedly bad conduct, but not conduct that put life or limb in jeopardy - would lead to such a huge punitive damages award?

Yet corporations - and their insurers - trying to assess risk and make business plans need to depend on some measure of predictability when it comes to future cases. When should they settle? When should they go to trial? How much should they pay in settlement? When should they appeal a verdict and when should they live with it?

The Supreme Court's role is to provide meaningful guidance for other courts, for litigants, and for others who need to assess exposure and be guided accordingly. But in the context of punitive damages, it has, instead, essentially taken the approach Justice Stewart wrote about obscenity in his concurrence in Jacobellis v. Ohio: "I know it when I see it."

Businesses cannot operate in the shadow of such caprice. Thus, it is no surprise that in their State Farm dissents, Justices Scalia and Ginsburg both recognized the need for guidance in this area. Justice Scalia remarked that the Court's post-Gore punitive-damages jurisprudence is "insusceptible of principled application." He was right.

Justice Ginsburg wrote that the Supreme Court had no business tinkering with state laws on punitive damages. Those laws should stand, she contended, until judges or legislatures authorized to do so institute systemic change. She was mostly right: Real reform should be legislative. But she was over-optimistic in her hope that state legislatures would likely meet this challenge; there is a role for federal law here.

Two Recent Orders Go Even Further to Prove Scalia and Ginsburg's Point

On May 19, the Court issued two orders that emphasize the problem. Each order vacated and sent back for reconsideration, in light of State Farm, a judgment against Ford Motor Company.

The California case - Ford Motor Company v. Romo - involved a ratio that plainly violates State Farm's analysis. The punitive damages award was $290 million; the compensatory award, just less than $5 million. The ratio, 58:1, far exceeds State Farm's single digit guidance.

But what about the Kentucky case, Ford Motor Company v. Estate of Smith? There, in a wrongful-death case, the initial award was for punitive damages of $20 million, and compensatory award of $3 million. But the Kentucky Supreme Court modified the punitive damages award to $15 million. Still, that leaves a ratio of 5:1. It's single digit, but it's a large ratio nonetheless. On the other hand, perhaps the Supreme Court believes a large ratio is acceptable if a case involves a human life, not just a repainted car.

Under the Court's precedents, does this ratio violate due process? Pity the Kentuckians, who are now left to read judicial tea leaves.

The Best Solution: Federal Legislation To Cap Punitive Damages or Ratios

So what's the solution? As Justice Ginsburg suggested, and as is the case with so many tort-reform issues, the punitive-damages problem must be addressed legislatively and comprehensively, in all 50 states.

Why? Because most corporations and insurance companies do business in many states. For them to assess risk, and for consumers of insurance and other products to benefit, there must be uniform rules.

Suppose that an insurance company writes policies in 40 states, but only 20 of these limit excessive punitive-damages awards. In the rest, the situation is a free-for-all except for the very limited guidance of Gore and State Farm. From the insurance company's perspective, that's still a lot of actuarial uncertainty - enough that the company is unlikely to feel any pressure to lower premiums.

That means there are two basic options: A federal law, or coordinated action by the states. States certainly have some incentives to act - a state that does not cap punitive damages or punitive/compensatory ratios may find its businesses fleeing to states that do. Still, inertia and strong lobbying efforts make it unlikely that enough states will act to make a real difference. As the example above illustrates, even if 25 of the 50 states were to act, that might make little difference to companies and thus to consumers.

The best solution, then, is a federal law. The problems engendered by excessive punitive-damages awards affect interstate commerce in myriad ways. That provides a justification for congressional intervention. Meanwhile, the current uncertainty, with its inevitable detrimental effect on the economy, provides more than enough reason for Congress to act.