Judicial review of punitive damages under the common law - Exxon

1. Judicial review of punitive damages under the common law - Exxon • Sitting as a common law court, SCT used “multipliers” (ratio of punitives to compensatories) to bring predictability to awards of punitive damages. • Why does SCT say that a 1:1 ratio is the appropriate ratio for “this particular type of case”rather than some of the higher ratios seen in legislation (i.e., 3:1, 5:1)? • What “type of case” is this? • Should courts be in the position of imposing ratios? How should they go about determining how to set that ratio?

2. Ways for courts to limit awards (at common law) • Judicial Review Using Factors– judges use factors (similar to those seen on Tuesday) to review verdicts for excessiveness • Higher standard of proof– majority of states require “clear & convincing proof” of D’s mental state before imposing punitive damages • Missouri – Rodriguez v. Suzuki Motor Corp (1996) • Higher threshold for respondeat superior liability– Half the states require managerial employees to be implicated in decisions while half allow punitives with ordinary respondeat superior liability • Missouri appears to be an ordinary respondeat superior state • Restricting awards in multiple victim cases– Should all victims in mass tort cases get punitive damages or only the first to sue? Courts generally reject the latter approach preferring to take possible other awards into account when setting the amount of punitives. • Remittitur

3. Legislative approaches to limiting punitive damages • Caps on damage awards • Mo. Rev. Stat. §510.265– limit awards to $500,000 or 5x net compensatory damage award, whichever is greater • Bifurcated trial • Mo. Rev. Stat. §510.263– parties can request bifurcated trial. No evidence of D’s wealth admissible at liability stage. • Credit for punitive damages previously paid • Mo. Rev. Stat. §510.263– post trial motion allows D to prove up punitive damages paid arising out of the same conduct. If successful, D gets credit on any punitive damages awarded in this trial • Defendant only severally liable • Mo. Rev. Stat. §537.067– D less than 51% at fault is only severally liable for percentage of punitive damages for which D at fault • Pay portion of punitive damages to the state • Mo. Rev. Stat. §537.675– State has lien on 50% of all final judgments awarding punitive damages, which it deposits in tort victims fund

4. Constitutional challenges to punitive damages • In addition to common law review of punitive damages, in the last 2 decades the SCT has entertained constitutional challenges to punitive damage awards • What challenges are most typical? • Excessive Fines – 8th Amendment • Browning v. Kelco Disposal (1989) – SCT rejected this argument because 8thAmdt requires fines payable to the state • Procedural Due Process – 14th Amendment • Pac. Mutual Life v. Haslip (1991), Honda Motor Co. v Oberg (1994) – Constitution requires adequate procedural safeguards when awarding punitive damages • Substantive Due Process – 14th Amendment • TXO Production Corp. v. Alliance Resources Corp. (1993), BMW v. Gore (1996), State Farm v. Campbell (2003) – Constitution provides a substantive right against excessive punitive damage awards

5. Why does it matter whether court reviews excessiveness of punitive damages from common lawor constitutional perspective? • Common Law Review • D makes motion to set aside verdict due to excessiveness based on common law. • Reviewing court uses “abuse of discretion” standard to review judge’s ruling on motion - theoretically • Remittitur – P given option of new trial when damages remitted. • Constitutional Review • D makes motion to set aside verdict due to excessiveness based on constitution. • Reviewing court uses “de novo” standard to review jury verdict • Remittitur – P (theoretically) must take remitted damages because they are constitutionally required (unless they have further appeals available). But sometimes courts offer new trials. • Possibility of US SCT review of state court tort judgments & federal courts can apply own standards in diversity cases (since the case is cast as a constitutional issue)

6. Procedural due process challenges to punitive damages – Pac. Mutual Life Ins. Co. v. Haslip • D’s agent “sold” health insurance to city and pocketed the premiums. When P’s employees filed claims, they found they had no insurance. An employee sued D company, which was liable under respondeat superior principles. Jury verdict was over $1 million - $800,000 of which was punitive damages. • D challenged the award as violating its procedural due process rights because the jury instruction had insufficiently reined in the jury’s discretion. • Instruction – (1) told jury that purpose of punitive damages was deterrence and punishment, and (2) punitive damages could be imposed for willful deceit • Instruction was typical of common law approach • BUT D argued that instruction violated due process because punitive damages were like criminal fines and required greater procedural protections

7. Procedural due process & Haslip • Haslip Court held punitive damages award did not violate procedural due process • Jury instruction regarding “purpose” of punitive damages adequately guided jury (also had an intent standard in the instruction) • Post-trial appellate review of jury verdict based on 7-factor test provided sufficient procedural protection • App. Ct. looked at: reprehensibility of D’s conduct, D’s wealth, relationship of PD to P’s harm, litigation costs, profitability of D’s action, and criminal penalties/civil awards for same conduct • What if a state has stringent pre-trial guidance in jury instructions (i.e., factors such as the above) but no post-trial review of an award? • Honda Motor Co v. Oberg (1994) – Some form of post-trial review is a necessary aspect of procedural due process • It’s not clear, however, that post-trial review must take the form of a multi-factor test in Haslip. The review in Haslip was good enough but it may not be required.

8. Substantive due process – the early years • TXO (1993) recognized that even when adequate procedural safeguards exist, an award can be grossly excessive so that it violates substantive due process. • TXO upheld punitive damages award claiming there was no bright line rule to determine excessiveness. D’s knowing/false assertion that P was not the true title holder of oil/gas rights could potentially cause enormous harm so 500:1 ratio of punitives to compensatories was not unreasonable. • BMW v. Gore (1996) – 3 guideposts in determining whether punitive damages pass substantive due process scrutiny • Reprehensibility of D’s conduct • The ratio between punitive damages and the likely/actual harm from from D’s conduct • Other civil/criminal penalties that could be imposed for D’s conduct • SCT struck down award of $2 million in punitives – they were grossly excessive in light of amount of (not-all-that-reprehensible) in-state conduct.

9. State Farm v. Campbell (2003) – refining BMW • Campbell caused two serious accidents. State Farm investigators found he was the cause but, when defending lawsuit, refused offers to settle for the policy limits. Lawsuit against Campbell resulted in $186K verdict (above the policy limits), which SF refused to pay. Campbell sued SF for bad faith refusal to settle, fraud & IIED. Evidence showed SF had national policies re meeting financial goals that involved refusing to pay claims and squeezing unsophisticated insureds, etc. Campbell was awarded $2.6 million compensatories (remitted to $1 million) and $145 million punitives (remitted to $25 million). • SCT of Utah reinstated $145 million punitive damages award after relying on the Gore guideposts • SFs actions very reprehensible, SF had massive wealth and secret actions would only rarely be discovered and punished, SF could be punished $10K in fines for each fraud, and its officers could be imprisoned so the acts were treated as significant violations in other areas of law

10. State Farm – the Supreme Court • Which of the three BMW guideposts is the most important “indicium of the reasonableness of a punitive damages award?” • Why doesn’t SF’s behavior justify the award here? Do you agree? • Regarding the 2ndBMW guidepost – what presumption re the ratio between punitive and compensatory damages does the SCT use? • When can a court deviate from that “presumption”? • Why was the ratio used (1:1) so low in this case? • What is the relevance of the 3rdBMW guidepost – other fines/penalties?