Supreme Court throws out punitive damage award

Published: September 01, 1996, By MacArthur, Malcolm D.

For the first time ever, the US Supreme Court has struck down punitive damages as being "excessive" and has issued guidance on when such damages are too high. The decision will significantly aid businesses and others facing damage suits and could also renew the push for a new law limiting-punitive damages.

No other issue has so concerned business litigants as the prospect of having to pay enormous damage awards limited only by what a jury considers to be appropriate "punishment" for their wrongdoing. Such awards can be and often are in the millions of dollars, even though the actual damage sustained by the plaintiff is negligible.

This occurred in the case leading to the Supreme Court decision. The case began when automaker BMW was sued in an Alabama state court by a customer who discovered, nine months after buying a $40,000 car in 1990, that its surface had been damaged and refinished before sale. BMW's policy at the time had been not to reveal repairs worth 3% of a car's retail price.

BMW claimed that the damage had been slight, and the repair cost only $601. But an Alabama jury awarded the car owner $4,000 in compensatory damages for what it determined to be the decrease in the value of the car. In addition, the jury awarded $4 million in punitive damages. BMW appealed, protesting the size of the punitive award and the method by which it had been determined. The jurors arrived at the $4 million amount after the plaintiff's lawyer urged them to multiply the compensatory damages by the roughly 1,000 cars BMW had refinished and sold as new through the US over a ten-year period.

The Alabama appellate court ruled that the jury had improperly punished BMW, because many of the transactions had occurred outside the state. However, rather than order a new trial, the court simply cut the punitive damages award in half to $2 million.

In the Supreme Court decision, Justice John Paul Stevens, writing for the majority, cited three factors to be used in determining whether an award violates the constitutional due process of law: the reprehensibility of the conduct; the harm suffered by the victim; and a comparison between the jury award and the civil penalties authorized for such conduct through state legislation or imposed in comparable cases.

"Elementary notions of fairness enshrined in our constitutional jurisprudence dictate that a person receive fair notice" of the penalties, Stevens wrote. He said that nothing in BMW's conduct met the test for reprehensibility and that the harm to the plaintiff was "purely economic," having no effect on the car's performance, safety, or appearance.

Stevens ruled that courts should look at the ratio between the actual damages and the punitive damages and called the plaintiff's $2 million award "breathtaking." In fact, the award was 500 times the amount of actual harm to the BMW in question.

"We are not prepared to draw a bright line marking the limits of a constitutionally acceptable punitive damage award," Stevens wrote. "However, we are fully convinced that the grossly excessive award imposed in this case transcends the constitutional limit."

Under the somewhat vague guidelines established by the Court, the door continues to be open for very high punitive damages awards. Indeed, the court sent the case back to the Alabama courts, which could still permit a large punitive damage award short of $2 million.

The decision was a victory for business in its efforts to limit punitive damages. But it is far from the end of the politically charged debate over what many say are escalating jury awards.

Victor Schwartz, counsel to the American Tort Reform Assn., was quoted as saying that "the decision will be a spark plug for national legislation. The Court has now said you have a constitutional barrier to excessive jury awards, but they didn't say what the limit is."

Recently, President Clinton vetoed proposed civil justice legislation that would have limited punitive damages. Proponents of the legislation said lawsuits cost consumers billions of dollars a year in higher prices. But whether the Supreme Court's decision will provide the necessary impetus for the enactment of such legislation remains to be seen.