Will The High Court Make Damages Less Punitive?

It started out nine years ago as an arcane dispute over the title to a desolate spit of land. But TXO Productions Corp., a Dallas-based unit of USX Corp., made a federal case over a 1,000-acre tract in West Virginia's coal country. Now, the legal squabble has become Corporate America's best chance to squelch what it claims is an epidemic of megabucks punitive-damage awards.

The U.S. Supreme Court on Mar. 31 will hear TXO's appeal of a West Virginia jury's decision to slap the oil and gas company with a $10 million punitive sanction--526 times the actual loss in the dispute. The decision to hear the case took most legal experts by surprise: Only two years ago, the justices heard another challenge to punitive damages. But that ruling only complicated matters for state courts and legislatures. And it did little to curb the size of punitive-damage awards. In January, for instance, an Atlanta jury imposed $101 million in punitive damages against General Motors Corp. in the case of a teenager's death, which was allegedly caused by defects in a GM pickup truck. And a 1992 Texaco Inc. study of cases in California, Illinois, New York, and Texas shows that between the years 1968 and 1971, and in 1988-91, punitive damages rocketed from a total of $800,000 to $312 million--increasing by a multiple of 117, after adjusting for inflation.

OUT OF CONTROL? The enormous disparity between TXO's actual and punitive judgments lies at the heart of a new strategy that business is taking to persuade the high court to curb the awards. Manufacturers, financial-services and accounting firms, media companies, and others want the justices to impose some kind of cap, perhaps limiting punitive damages to four times the actual loss a plaintiff suffers. The outsize verdicts, they contend, are so unfair that they are unconstitutional. "The system is getting out of control," says Leonard P. Novello, general counsel of accounting firm KPMG Peat Marwick, which submitted one of more than a dozen friend-of-the-court briefs urging reform.

But public interest groups, such as Consumers Union and Trial Lawyers for Public Justice, argue that a cap on punitive damages would undermine their purposes, which are to punish and deter. Large companies would barely feel the sting of smaller awards: "With big companies, you need to hit them over the head with a two-by-four," says Arthur H. Bryant, who heads the Trial Lawyers for Public Justice.

Nevertheless, some states have already passed laws restricting punitive- damage awards (map). While the Supreme Court has been reluctant to do the same, corporate lawyers have high hopes for this case. They plan to argue that intemperate comments by a West Virginia Supreme Court justice show the kind of home-court advantage plaintiffs often have when they sue out-of-state companies. Getting gouged if you're from out of state "is a very real fear," says Carter G. Phillips, the Washington attorney representing TXO.

That's why the stakes are so great in the TXO case. The legal tussle started when the company, eager to develop new oil and gas properties, agreed to lease land in southern West Virginia from a local company, Tug Fork Land Co., two area residents, and Dallas-based Alliance Resources Corp. Later, TXO's lawyers claimed that title to the property wasn't clear and asked the court to resolve the matter.

HOMETOWN JOB. The landlords fought back, charging TXO with an obscure legal violation called "slander of title." The jury found that TXO had fabricated the dispute to gain leverage in negotiations over royalties. Such hardball, the jury concluded, deserved harsh punishment. In what some lawyers regarded as a classic hometown job, the jurors awarded the landlords actual losses of only $19,000 but $10 million in punitive damages. "The $10 million was a shock," says Richard L. Horstman, an attorney for Houston-based Marathon Oil, which took over TXO in 1991. The landlords' lawyers declined comment.

The West Virginia Supreme Court's decision upholding the verdict only hardened TXO's feeling that it had been done in. In the court's unanimous opinion, Judge Richard Neely characterized some defendants as "really stupid" and others as "really mean," implying that TXO's "mean" actions warranted an award of punitive damages. And in ruling that the jury could look to the $2.5 billion net worth of its parent company in assessing sanctions, he wrote: "It is the management of USX that must ultimately make the decision that its employees will not engage in malicious and nefarious business activities."

Public interest groups and plaintiffs' lawyers say that large awards are a rarity, and that most are scaled back or tossed out on appeal. From 1965 to 1990, for instance, there were 355 punitive-damage awards in product-liability cases, and about half were reduced, according to a 1991 study by Professor Michael Rustad of Boston's Suffolk University's law school.

DIFFERENT CLIMATES. It's far from certain that business will get what it wants. In the past, justices have invited companies to challenge mega-awards, suggesting that the high court would rein them in. But the justices did far less than business had hoped. In 1989, the high court rejected the argument that big punitive awards violated a constitutional bar on excessive fines. And in 1991, the court rebuffed a challenge to Alabama's system for awarding punitive damages, which gave juries specific instructions and allowed judges to review the jury decisions. But the high court gave industry a glimmer of hope by ruling that any state without such safeguards might be violating due-process requirements.

States have varying interpretations of what the high court meant. South Carolina and Virginia courts have declared their procedures for setting punitive damages unconstitutional because they violate the 1991 Supreme Court decision. But companies complain that courts in Arkansas and other states have continued their procedures even though they don't conform to those in the 1991 case. "I've never seen any one opinion cause more mix-up," says Washington lawyer Victor E. Schwartz, who wants Congress to overhaul the whole system.

With litigation costs exploding and fear of lawsuits affecting business decisions daily, companies are again turning to the Supreme Court. But predicting what the justices will do is always difficult. Some corporate lawyers fear that the conservative majority may be reluctant to expand constitutional protections even though the justices may sympathize with the companies. Right now, TXO Productions Corp. vs. Alliance Resources Corp. is the best way for the high court to clear up the confusion.

Before it's here, it's on the Bloomberg Terminal.