By Lorraine Woellert and Mike France
It was the biggest tort reform victory in years. On Apr. 7, a six-member majority of the Supreme Court struck down a $145 million punitive-damage award against State Farm Mutual Automobile Insurance Co., calling it "arbitrary," "irrational," and, ultimately, unconstitutional. The decision gives Corporate America a boost in its war against the plaintiffs' bar -- though many tough battles certainly lie ahead.
The target of the High Court's outrage was punitive damages. A Utah jury awarded Curtis Campbell $1 million in compensatory damages when State Farm left him exposed to financial ruin after a car accident -- and then penalized it with another $145 million award. Writing for the majority, Justice Anthony M. Kennedy said the ratio of punitives to compensatories should not exceed 9 to 1. He added that it's unfair to punish companies for being rich and unpopular: "A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory...business."
That's music to the ears of lawyers who defend Big Tobacco, carmakers, drug companies, insurers, and banks. Such companies all do business with consumers and can easily be portrayed as evildoers in courtroom David-vs.-Goliath tales. Giant punitive awards routinely rock these industries, freak out investors, and play havoc with stock prices. The ruling should inject a level of predictability into high-stakes litigation and make companies more willing to take their chances in front of a judge. And it might give aggressive attorneys pause before taking on a marginal case. "There's less of an opportunity for plaintiffs' lawyers to play the litigation lottery," says Steven B. Hantler, associate general counsel for DaimlerChrysler.
State Farm will probably eliminate many of the biggest plaintiff windfalls. One potential beneficiary is Ford Motor Co. (F ), which is appealing a $290 million punitive verdict in a California rollover case.
But, as a practical matter, most companies will see no benefits from the decision. Punitive damages are levied only in about 2% of all cases. In the vast majority where they are applied, they don't even approach the 9-to-1 guideline put forth in State Farm. In any event, Justice Kennedy didn't set that ratio down as a hard rule. And in cases where the defendant's conduct is particularly "reprehensible," he opened the door to higher amounts. What's more, there's some uncertainty about the extent to which the State Farm precedent will apply to cases involving physical, as opposed to economic, injuries.
So this is hardly the end of punitive damages. The biggest thing that Corporate America won was intellectual affirmation. Judges have not clamped down on plaintiffs' lawyers as much as business groups would like, and Congress has failed to deliver meaningful tort reform. Efforts to cap medical malpractice awards and curb asbestos litigation, for instance, have gone nowhere. A less ambitious bill that would make it easier to move class action cases to federal courts may have a chance this year, but is no panacea.
The High Court's palpable outrage about punitive damage awards could, over time, change the climate of this debate. Judges will notice the State Farm case, and so will lawmakers. Even Justice Ruth Bader Ginsburg, who dissented, said that State Farm's experience shows "why damage-capping legislation may be altogether fitting." This has been, for years, one of the tort reform movement's principal articles of faith. Getting the highest court in the land to agree is an important step that could help lead to more broadly based tort reform.
Woellert and France cover Legal Affairs.