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Punitive damages aren’t compensatory

It’s the Law

Posted: October 9, 2008 7:47 p.m.
Updated: December 11, 2008 5:00 a.m.
 
Punitive damages are damages imposed to punish certain defendants for malicious conduct, fraud or other despicable conduct. In California, punitive damages have nothing to do with compensating the victim of such conduct. Instead, they are imposed, in addition to compensatory damages, to punish the defendant for egregious or despicable wrongdoing.

Awards of punitive damages are of continuing interest in the business litigation community, because they can be highly unpredictable, especially where the harm occurred in a commercial or business setting involving many transactions or events over a period of many years.

The U.S. Supreme Court has addressed this issue three times in recent years.

In the 2007 case of Philip Morris USA v. Williams, the court struck down more than half of a $79.5 million punitive damages award, which had been assessed on top of $800,000 in compensatory damages. 

In that case, the court found that the jury had been improperly allowed to consider evidence of the defendant’s conduct toward people other that the plaintiff. The court held that the Due Process Clause of the Fourteenth Amendment prevents juries from awarding punitive damages to an injured plaintiff based on evidence of the defendant’s conduct toward nonparties.

The Philip Morris decision followed the Supreme Court’s decision in the 2003 case of State Farm Mutual Auto Insurance Co. v. Campbell. 

In that case, the court struck down a punitive damages award of $145 million, which had been assessed on top of $1 million in compensatory damages. It held that the Due Process Clause of the Fourteenth Amendment prohibits punitive damages awards that are “grossly excessive or arbitrary.”

This year the Supreme Court handed down its decision in yet another punitive damages case, Exxon Shipping Co. v Baker, which arose out of the 1989 Exxon Valdez oil tanker accident.

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 approximately $500 million in total compensatory damages, plus punitive damages in the amount of $5 billion, a punitive-to-compensatory ratio of 10:1. Exxon paid the compensatory damages, but a federal appeals court cut the punitive damages in half, to $2.5 billion, a ratio of 5:1.

The Supreme Court further reduced this punitive damages award to approximately $500 million, a ratio of 1:1. The court examined various ways of measuring the fairness of punitive damages under federal maritime law, and decided that the best way to do so was to establish a “fair upper limit” reflecting the median ratio for such awards. It then held that a 1:1 punitive-to-compensatory ratio is a “fair upper limit” in assessing such damages under federal maritime law.

While some states have set statutory caps or maximum ratios for punitive damages awards, both the state legislature and our courts have so far declined to establish similar “bright line” limits under California law. Instead, California courts follow a “single digit” rule, in which a punitive-to-compensatory ratio of up to 9:1 may be acceptable.

Now, however, these three U.S. Supreme Court decisions are beginning to provide fresh guidance, and new arguments, for protecting California business defendants against the risk of excessive punitive damages awards. Punitive damages may not be grossly excessive; they may not be based on the defendant’s conduct toward nonparties; they may not be based on the defendant’s unrelated wrongful conduct; and they must bear a “reasonable relationship” to any compensatory damages awarded in the case.

It may soon be possible to test whether or not a much lower maximum ratio of punitive to compensatory damages should govern California business litigation, as is increasingly the case in other jurisdictions.

John F. Grannis is a partner with Poole & Shaffery, LLP. His column represents his own views, and not necessarily those of The Signal.

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