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U.S. Supreme Court Reins in the Runaway Jury: Punitive Damages in Employment Cases After State Farm v. Campbell

December 31, 2003

It's been a staple of legal thrillers and corporate nightmares for years: the climactic closing argument in which an attorney makes an impassioned plea for the jury to "send a message" to the corporate defendant by awarding his or her clients - the plaintiffs - breathtaking sums in punitive damages. The jury agrees; the plaintiffs hit the litigation jackpot. Numerous appeals later, the parties settle or the award is sometimes reduced to merely tens of millions of dollars.

In 2003, the U.S. Supreme Court at last reined in the ability of juries to award punitive damages far in excess of the underlying compensatory amounts, by holding that punitive damages awards in excess of a single-digit multiplier were so large as to be unconstitutional under the Due Process Clause of the Fourteenth Amendment. State Farm Ins. Co. v. Campbell, 123 S. Ct. 1513 (2003). Finding that the Due Process Clause prohibits grossly excessive or arbitrary punishment, including in cases of civil wrongdoing, the Supreme Court reversed the award of $145 million in punitive damages on top of $1 million in compensatory damages. In so doing, the Court held that punitive damages in excess of nine times the amount of compensatory damages did not survive constitutional scrutiny: "A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business."

The Campbell case arose from a Utah traffic accident in which one person was killed and another person was permanently disabled, while the driver escaped unscathed. The victims' families sued the driver, and State Farm refused to settle the claims within the $50,000 policy limits. State Farm assured its policyholders, the Campbells, that they had no liability and took the case to trial. A jury found otherwise and held the Campbells liable for nearly three times the amount of their insurance coverage. State Farm initially refused to pay the $136,000 in excess liability, and suggested that the Campbells sell their house to satisfy the judgment.

The Campbells then sued State Farm for bad faith, and were awarded $2.6 million (reduced to $1 million) in compensatory damages and $145 million in punitive damages, based in part on evidence of fraud and a company-wide policy of attempting to meet fiscal goals by capping payouts on claims. The trial court reduced the punitive damages award to $25 million, but the Utah Supreme Court reinstated the $145 million amount. The U.S. Supreme Court, in reversing the Utah Supreme Court, noted that the Campbell case "was used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country. . . rather than for the conduct direct[ed] toward the Campbells."

This is precisely the scenario most alarming to employers: that a jury will hold them liable not only for the harm done to a particular plaintiff, but for the harm — real or hypothetical — that the employer has done to other employees or might do in the future. Plaintiffs' attorneys are well aware that the exposure to punitive damages often dwarfs any compensatory damages, and they use this threat as leverage for settlement.

Campbell restores some balance by holding that the size of the punitive damages "message" must be related to the harm to the plaintiff, not merely the size and wealth of the defendant. A judicial examination of the constitutionality of a punitive damages award requires consideration of: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties imposed or authorized in comparable cases. Campbell reaffirmed that the most important of these factors is the reprehensibility of the defendant's conduct toward the plaintiff, not toward society at large. In most cases, due process permits punitive damages awards to exceed compensatory damages by a single-digit ratio (typically a factor of two to one, three to one, or four to one). Rarely, greater ratios might be constitutional where the compensatory damages are small or difficult to measure or the conduct is particularly heinous. Conversely, when compensatory damages are substantial, the appropriate range of punitive damages may well lie in the one-to-one range.

The Supreme Court's decision will have far-reaching consequences for all types of civil litigation, and employment litigation is no exception. First, defendants' valuation of cases will change because the threat of unlimited punitive damages liability is significantly reduced. Second, because the Supreme Court explicitly tied the permissible magnitude of a punitive damages award to the harm done to the particular plaintiff, one can expect increased efforts by plaintiffs' attorneys to bring class or representative actions to broaden the jury's focus beyond a single individual. Employers meanwhile will have even greater reason to fight class actions and "private attorney general" representative actions that seek to hold defendants liable for widespread wrongdoing by extrapolation from a single individual or a small group. Third, defense lawyers will focus greater attention on the amount of compensatory damages claimed by the plaintiff, in light of the limitation on punitive damages ratios.

The Campbell case has already had significant effects in a wide range of cases since it was decided in April 2003. For example, in California, a punitive damages award of $290 million in a products liability case was reduced on appeal to $23 million (Romo v. Ford Motor Co., 2003 Cal. App. LEXIS 1736 (Nov. 25, 2003)), and a $30 million punitive damages award on a $1.725 million compensatory award was reduced by the trial judge to $5 million, while the Ninth Circuit affirmed an award of $2.6 million in punitives on $360,000 of compensatory damages in a wrongful termination and discrimination suit (Zhang v. American Gem Seafoods, Inc., 339 F.3d 1020 (9th Cir. 2003)).

In New York, a prevailing plaintiff was awarded $15,000 in compensatory damages on a retaliation claim and $500,000 in punitive damages, which was reduced to $50,000 by Title VII's statutory cap on punitive damages by virtue of the size of the defendant employer. Parrish v. Solecito, 280 F. Supp. 2d 145 (S.D.N.Y. 2003). The trial court in Parrish noted that absent the cap, the ratio between the punitive and compensatory damages was over 33 to 1, "vastly overreaching the single digit multiplier urged by the Supreme Court." Conversely, a trial court in Kansas found as constitutional a 29-to-1 ratio after reduction to the statutory cap ($290,000 in punitives on $10,000 in compensatory damages). Jones v. Rent-A-Center, Inc., 281 F. Supp. 2d 1277 (D. Kan. 2003).

In another New York case, involving violations of the Labor-Management Reporting and Disclosure Act, Local Union No. 38, Sheet Metal Workers' Int'l Ass'n v. Pelella, 2003 U.S. App. LEXIS 23321 (2d Cir. Nov. 17, 2003), the union attempted to appeal an award of $1 in nominal damages and $25,000 in punitive damages as unconstitutionally excessive, but failed because it had not preserved the issue for appeal.

The tide has definitely turned. Employers can expect more cases applying the due process limitations of State Farm v. Campbell to labor and employment litigation in the months and years to come.