Punitive Damages (Update)

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After flirting with the possibility for several years, the Supreme Court has finally identified particular punitive damage awards that violate the due process clause of the fourteenth amendment. In Honda Motor Company v. Oberg (1994), an alleged defect in an all-terrain vehicle injured the plaintiff. At trial, the plaintiff secured a verdict of about $920,000 in compensatory damages and $5,000,000 in punitive damages. Oregon law prohibited any review, by either the trial judge or an appellate court, of the amount of civil-action verdicts (including punitive damage verdicts), except when the record contained "no evidence" to support the verdict. The Court—emphasizing the way in which the common law tradition has consistently recognized the need for judicial review of the level of punitive damage awards—found that the Oregon law violated due process. While the Court's opinion highlighted procedural due process, the opinion also reasoned that procedure is related to substance: better procedure—such as judicial review—helps assure that punitive damage awards are not substantively excessive. The breadth of the Oberg holding is uncertain: It is unclear, for example, whether the Court's opinion means that the Oregon system is unconstitutional insofar as it bars judicial review of jury verdicts for compensatory damages. In any event, the Oberg holding may well be of limited import, for Oregon is apparently unique among American states in denying judicial review of the amount of damage awards.

Two years after Oberg, the Court, in BMW of North America, Inc. v. Gore (1996), invalidated a punitive damage judgment of $2,000,000 imposed on a car manufacturer that failed to disclose that a particular car had been damaged in transit and repainted (at a cost of $600) prior to its original sale. The purchaser of the car, eventually learning of the damage and the repainting, persuaded a jury that these events reduced the resale value of his car by $4,000. Accordingly, the jury granted him $4,000 in compensatory damages. In addition, the jury awarded $4 million in punitive damages. On appeal, the Alabama Supreme Court reduced this award to $2 million. The U.S. Supreme Court, by a 5–4 vote, then concluded that even this lower award was constitutionally excessive.

The majority opinion focused primarily on substantive due process. In determining whether a punitive damage award is excessive, the Court reasoned, three guidelines should be taken primarily into account: how reprehensible is the defendant's conduct, what is the ratio between compensatory damages and punitive damages, and what civil damages are provided by public law for comparable offenses. With respect to each of the three criteria, the Court concluded that the $2 million award was troublesome. As for reprehensibility, BMW's conduct posed no threat to health or safety, the relevant harm being solely economic; and while the company's nondisclosure was in a sense deliberate, its decision not to disclose its limited repainting effort was, in fact, quite legal under the regulatory schemes in effect in many other states. As for ratio, 500-to-1 raises a "suspicious judicial eyebrow." As for sanctions for comparable misconduct, in no state were they more than $10,000. Taking everything into the balance, the Court reached the conclusion that the punitive damage award was constitutionally excessive.

Given the Court's guidelines, the Court's conclusion—even if somewhat ad hoc—follows rather easily. The important question concerns the justifiability of the guidelines themselves. In explaining those guidelines, the Court reasoned that they bear on the ultimate question of whether BMW had been given "fair notice" of the likely award. This "fair notice" criterion introduces a significant element of procedural due process into the case. Moreover, it interestingly suggests that had there been prior verdicts in Alabama for comparable amounts for comparable misconduct, the award in Gore—however offensive in its magnitude—might well have been sustained.

A concurring opinion by Justice stephen g. breyer, speaking for three Justices, focused primarily on procedural due process. Breyer's concern was less with the excessiveness of the award and more with its possible arbitrariness. He focused on the question whether there were legal standards that adequately controlled the jury's discretion. Here Breyer noted that prior Alabama opinions had identified seven factors to take into account in considering the appropriate size of a punitive damage award. In the abstract, Breyer suggested, these standards appear sufficient. Still, insofar as they had been applied by the Alabama Supreme Court in the immediate case so as to justify an award of $2 million, that application revealed to Breyer that the standards do an inadequate job in constraining the jury's discretion.

One feature in Breyer's concurrence can be considered here—in combination with a conspicuous omission in the majority's analysis. In punitive damage cases, courts commonly say that juries can, and should, take the wealth of the defendant into account in determining the amount of a punitive damage award. Indeed, the wealth of the defendant was one of the seven factors that had been specifically endorsed in Alabama. But Breyer found this standard objectionable (at least in part) because of the way in which it "provides an open-ended basis for inflating awards when the defendant is wealthy." Furthermore, defendant wealth is conspicuously absent among the guidelines endorsed by the Court's majority. Accordingly, the constitutional status of defendant wealth as a factor that can justify large punitive damage awards is now subject to some doubt.

Gary T. Schwartz