Criticizing the ever increasing size of punitive damages awards, the Court wrote that "courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff..." High Court Cracks Down on Punitive Damage Awards

The U.S. Supreme Court on Monday struck down a $145 million punitive damages verdict against the nation's largest automobile insurance company ruling that such an award was "neither reasonable, nor proportionate to the wrong committed, and ... was an irrational and arbitrary deprivation of property of the [corporate] defendant." The decision is the latest pronouncement from the Court that the Constitution places significant procedural and substantive limitations on the award of punitive damages. It is also the most specific decision to date explaining when a verdict may simply be too big.

"Our jurisprudence and the principles it has now established demonstrate ... that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages ... will satisfy due process," Justice Kennedy wrote for the six-justice majority. Furthermore, "[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit."

The Court also explained that, while punitive damages serve the broad purposes of deterrence and retribution, "[t]o the extent an award is grossly excessive, it serves no legitimate purpose and constitutes an arbitrary deprivation of property."

The case was brought in legal aftermath of a highway accident by policyholder Curtis Campbell against his insurer, State Farm Mutual Automobile Insurance Co., for its bad faith refusal to settle wrongful death and personal injury claims against him for his policy limits of $50,000. State Farm's decision to contest liability at trial, despite an investigative consensus that Campbell was at fault, exposed him to liability that exceeded his insurance coverage. As a result, Campbell sued, alleging bad faith, fraud and the intentional infliction of emotional distress on the part of State Farm.

Finding for Campbell, a jury awarded $2.6 million in compensatory damages and another $145 million in punitive damages. The size of the punitive award was motivated, at least in part, by evidence presented about State Farm's alleged nationwide practices designed to reduce payouts in order to boost corporate profits. Although the trial court later reduced the amounts to $1 million and $25 million respectively, the Utah Supreme Court reinstated the original $145 million punitive damages award on appeal.

A majority of the U.S. Supreme Court reversed, concluding that "this case is neither close nor difficult" because the imposition of punitive damages amounting to 145 times the actual damages is "no doubt" presumptively unconstitutional. In addition, the Court speculated that the case "likely would justify a punitive damages award at or near the amount of compensatory damages."

Criticizing the ever increasing size of punitive damages awards, the Court wrote that "courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered."

The Court also made it clear that Utah trial court incorrectly admitted evidence of State Farm's wealth and unrelated conduct that swayed the jury to impose too great a penalty.

"A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business," Justice Kennedy wrote for the Court. "A defendant's dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages." Likewise, "[t]he wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award," the majority opinion explained.

Three justices dissented from the decision. Justices Antonin Scalia and Clarence Thomas maintained their position that the Constitution does not limit the size of permissible punitive damages awards, while Justice Ruth Bader Ginsburg explained her view that the Supreme Court "has no warrant to reform state law governing awards of punitive damages." Nevertheless, even Justice Ginsburg noted that "[t]he large size of the award upheld by the Utah Supreme Court ... indicates why damage-capping legislation may be altogether fitting and proper."

The case, State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289, now returns to the Utah courts for a new determination of punitive damages.

April 10, 2003
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