Risk Management

A Supreme Court Case to Haunt Execs

A punitive-damages case that pits Big Tobacco against a smoker's widow went to the High Court on Halloween. The decision could unshackle damage awa...
Marie LeoneOctober 31, 2006

A Supreme Court case being heard on Halloween seems sure to haunt companies for some time to come. At issue: whether the High Court will agree with earlier decisions that punitive damages awarded in civil cases should remain uncapped, thereby giving juries the choice of awarding plaintiffs multi-million-dollar settlements. Currently, punitive damages are uncapped but usually limited by due process and precedents.

The case before court on Tuesday pitted Philip Morris (now Altria Group) against Mayola Williams, the widow of a smoker who says that her husband’s death was caused by “reprehensible” actions by the cigarette maker. In February, the Oregon State Supreme Court ruled that a trial court’s jury award of $79.5 million to Williams was appropriate.

Philip Morris pushed the case up to the Supreme Court after several appeals did not reduce the award amount. The High Court justices chose to review the case under the “due process” clause of the Constitution and consider whether Philip Morris’s rights under the law are being violated by what the company claims is an excessive damage award.

While plaintiff’s lawyers would enjoy the fruits of unbounded punitive damage awards if the Supreme Court upholds earlier decisions, corporations will suffer mightily, says Lori Nugent, a Chicago-based attorney with Cozen O’Connor and author of Punitive Damages: A State-by-State Guide to Law and Practice.

A decision that supports uncapped awards could force some U.S. companies offshore, where punitive damages are capped. “I don’t think Corporate American can stand for that,” according to Nugent. What’s more, “important commercial interests outside of the U.S. increasingly are avoiding the U.S. because of what are seen as arbitrary awards of punitive damages,” she noted in a 1994 amicus brief to the Supreme Court in BMW of North American, Inc. v Ira Gore, Jr.

From a more local perspective, a decision that favors Williams would send companies scattering from plaintiff-friendly states and have executives thinking twice about opening new units there, the lawyer thinks. Nugent’s list of top-10 states that are “dangerous for defendants” are: California, Texas, West Virginia, Mississippi, Louisiana, Illinois, New Jersey, Pennsylvania, Arkansas, Alaska.

This isn’t the first time the question of excessive punitive damages has come before the Supreme Court. A 1996 decision involving BMW set up three “guideposts’” for assessing the amount of punitive damages: the reprehensibility of conduct, a comparison of statutory fines or penalties to punitive awards, and a subjective ratio between punitive and compensatory damages.

The ratio was further defined in another High Court case, decided in 2003. In State Farm Mutual Insurance Co. v. Campbell, the court observed that, in practice, punitive awards rarely exceed a “single-digit ratio” between punitive and compensatory damages.

Although the Supreme Court didn’t issue a bright-line standard, the justices seemed to say that as a practical matter, punitive payouts don’t often exceed nine times the compensatory award. In fact, says Nugent, the more common punitive payout is much lower, about three or four times the compensatory award. If the Supreme Court decides that adhering to the lower ratios would fulfill the due process requirements, the ruling could substantially cut the Philip Morris award, since Williams was awarded about $821,000 in compensatory damages.

Since the outcome of the case is by no means predictable, executives of companies in the path of possible punitive damage awards might well be frightened this Halloween. Even within the guideposts, the Oregon high court did not find that the facts of the Philip Morris case warranted a reduction in the award.

To be sure, the Oregon court said that the cigarette maker’s actions should be considered reprehensible since they weren’t isolated to a single case, involved trickery, deceit, and a reckless disregard for safety, and were carried out over nearly a half century. The court also found that Williams award was comparable to similar civil or criminal penalties.

More importantly, the Oregon court noted, since the single-digit ratio wasn’t a bright line, the other two guideposts—reprehensibility and comparable sanctions—could provide the basis for overriding the 9:1 ratio.

A few more case nuances might spook corporate executives who are hoping that the Supreme Court rules in favor of a cap on punitives. First, there’s hardly a more unsympathetic defendant than Big Tobacco. Further, even though the jury found that Williams’s husband was partly to blame for his own death, it found Philip Morris liable for fraud and other egregious offenses.

Most frightening to companies is the prospect that, according to Nugent, conservative Supreme Court justices, who are known for siding with Corporate America, may not be on the side of Philip Morris. As judges that believe in a strict interpretation of the Constitution, including that due process is served by not permitting the courts to cap damages, Justices Samuel Alito and Clarence Thomas wound up on the same side in the BMW decision as liberal-minded Ruth Bader Ginsburg, the attorney notes. That could mean that the conservative justices also believe that lawmakers, not courts, should deal with tort reform.

If that’s true, plaintiffs seeking large punitive damage awards may find that they have a friend in what many consider a pro-business Supreme Court.

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