Supreme Court Confirms Narrow Limits For Punitive Damages Awards

Author:Mr Edward Flanders
Profession:Pillsbury Winthrop Shaw Pittman LLP

Co-authored by John E Davis and Amy C Gross

Utah Supreme Court Award Overturned As Unreasonable And Disproportionate

On April 7, 2003, the U.S. Supreme Court ruled that a punitive damages award of $145 million was excessive and violated the Due Process Clause of the 14th Amendment to the Constitution, where compensatory damages were only $1 million. State Farm Mutual Automobile Insurance Co. v. Campbell, No. 01-1289, 2003 WL 1791206 (2003). Calling the case "neither close nor difficult," the Court found that such award was an "irrational and arbitrary deprivation of the property of the defendant" because it was based on out-of-state conduct that was unrelated to that injuring the plaintiff, and because the 145 to 1 ratio of punitive to compensatory damages was grossly high and arbitrary. This is the latest in a string of cases by the Supreme Court restricting the upward limits for punitive damages.

Utah Courts Upheld Massive Punitive Damages Award Based On Nationwide "Scheme"

In 1981, Curtis and Inez Campbell drove on the wrong side of the road, resulting in an accident that killed one person and seriously injured another. The Campbells' insurer, State Farm Mutual Automobile Insurance Company (State Farm), refused to settle the victims' tort action for the policy limit of $50,000. When a jury imposed damages of $185,849 against the Campbells, State Farm initially refused to cover the verdict. Although State Farm had previously assured the Campells that they would have no personal liability, it suggested that the Campbells sell their house to pay the sum. In collaboration with the accident victims, the Campbells instituted an action against State Farm based on its bad faith handling of that claim.

The jury determined that State Farm's decision not to settle was unreasonable given the near certainty that an excess award would ensue. The jury awarded the Campbells $2.6 million in compensatory damages and assessed $145 million in punitive damages against State Farm. The trial court reduced the awards to $1 million and $25 million respectively, but the Utah Supreme Court reinstated the $145 million punitive damages award.

Out-Of-State Conduct Generally May Not Serve As Basis For Punitive Damages

The Supreme Court reviewed the appropriateness of the punitive damage award under the three factors set forth in BMW of North America, Inc. v. Gore, 517 U.S. 559, 575 (1996), namely, "(1)†the degree of reprehensibility of the defendant's...

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