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Supreme Court looks at punitive damage awards

Posted: March 7, 2008 1:03 a.m.
Updated: May 8, 2008 5:02 a.m.
Punitive damages are damages imposed to punish certain defendants for malicious conduct, fraud or other despicable conduct. Such damages have nothing to do with compensating the victim of such conduct. They are imposed, in addition to compensatory damages, to punish the defendant for egregious wrongdoing. Imposition of such damages used to be relatively rare, but the frequency and amount of punitive damage awards - especially on business defendants - has increased dramatically in recent years.

About a year ago, I wrote about the 2007 decision of the U.S. Supreme Court in the case of Philip Morris USA v. Williams, in which the court struck down an award of punitive damages that had been based upon evidence of the defendant's conduct toward other people who might be like the plaintiff, but who were not parties to the litigation.

Justice Stephen Breyer's majority opinion in that case held that the Due Process Clause of the 14th Amendment limits the scope of the evidence of a defendant's conduct that may be used to establish liability for punitive damages.

The Philip Morris decision followed the court's 2003 decision in the case of State Farm Mutual Auto Insurance Co. v. Campbell. In that case, the court held that the Due Process Clause of the 14th Amendment limits the amount of punitive damages that may be awarded. Such damages may not be "grossly excessive or arbitrary," in the words of Justice Kennedy's majority opinion.

These decisions have had the effect of somewhat reducing the number and amount of punitive damage awards. In some cases, punitive damage awards have been reduced as being "grossly excessive or arbitrary," according to the State Farm decision. In other cases, punitive damage awards have been reversed and remanded as having been based on improper evidence, under the Philip Morris decision.

The Supreme Court is now reviewing a new case in which punitive damages were imposed by the jury. Last week the court heard oral arguments in the Exxon Valdez case, in which damages were assessed for the 1989 oil spill in Alaskan coastal waters. In that case, in addition to approximately $3.4 billion already paid by Exxon for claims, fines, penalties, cleanup costs and other expenses, the jury awarded $287 million in economic damages, plus punitive damages in the amount of $5 billion. Exxon has paid the compensatory damages, and an appeals court has cut the punitive damages in half, to $2.5 billion.

Analyzing Supreme Court arguments is a tricky business - especially for someone who wasn't there. However, according to news reports, several justices in the recently argued Exxon Valdez case seemed to express a concern that a punitive damage award of $2.5 billion might be excessive. Questions by Justices Anthony Kennedy and David Souter, for example, suggested that they might view a punitive damage award of double the compensatory damages as more reasonable in this case.

This may be significant simply because neither Justice Kennedy nor Justice Souter is identified with the conservative wing of the Court. Although Justice Alito has recused himself from the Exxon Valdez case, it is still possible that a majority of the Court - possibly consisting of Chief Justice Roberts and Justices Kennedy, Souter, Breyer and Thomas - might hold the reduced punitive damage award in this case to be excessive. They might even go further, and suggest a ratio of compensatory damages to punitive damages that might be generally acceptable in most cases. In the alternative, the court might limit its ruling to the facts of this case, with the intention of continuing to evaluate future punitive damage awards on a case-by-case basis.

In any case, it now is clear that several members of the U.S. Supreme Court, including Justices Souter, Kennedy and Breyer, have significant reservations about the bases and amounts of modern punitive damage awards. It is unlikely that the decision in the Exxon Valdez case will lead to the elimination of punitive damages. There still will be cases involving despicable defendants, decided by juries who are willing to punish them for their conduct. However, the trend continues to be that punitive damage awards must be more carefully based on evidence of the defendant's conduct, and must not be "grossly excessive" in amount. This trend is likely to help protect the rights of businesses who might otherwise face the danger of a runaway punitive damage award merely as a consequence of doing business.

John F. Grannis is a partner of the law firm of Poole & Shaffery, LLP, a law firm which provides general counsel and litigation services to businesses and management personnel. His column represents his own views, and not necessarily those of The Signal. "Business Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association.


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