Excessive awards ruling seen as positive for small biz: state chamber agrees while national trial lawyers oppose Supreme Court decision

San Diego Business Journal, April 28, 2003 by Rene'e Beasley Jones

Many believe the U.S. Supreme Court handed the business community a major victory over excessive punitive damage awards when the high court overturned a $145 million award against State Farm.

In a 6-3 decision April 7, the Supreme Court found the award -- 145 times bigger than compensatory damages awarded -- excessive and said it violates the U.S. Constitution.

The justices heard the State Farm case after the Bloomington, Ill.-based insurance company lost a Utah lawsuit in which a customer, Curtis Campbell, alleged the company contested liability and failed to settle a claim.

In 1981, Campbell caused an auto accident in which one person died and another was permanently disabled. After State Farm refused to settle the claim and embroiled Campbell in a court battle over the accident, Campbell sued the company for bad faith, fraud, and intentional infliction of emotional distress.

A Utah state jury awarded Campbell $1 million in compensatory damages and $145 million in punitive damages.

"Single-digit multipliers are more likely to comport with due process, while still achieving the state's deterrence and retribution goals, than are awards with 145-to-1 ratios, as in this case," Justice Anthony Kennedy wrote in the recent opinion.

As in the past, the justices declined "to impose a bright-line ratio, which a punitive damages award cannot exceed." However, in the State Farm ruling, they again cited a former guidepost of four-to-one.

They said an award should be big enough to punish wrongdoing but not grossly unrealistic.

Bottom Line Affected

The ruling is significant to California businesses, said Fred Main, senior vice president and counsel for the California Chamber of Commerce.

"California has seen tremendous growth in the size of punitive damage awards ..." Main said.

Many times in the past, the California chamber has sponsored legislation that would cap punitive damages, along the lines of a three-to-one ratio, Main said. No bills have passed.

In California and many other states, companies can't insure themselves against punitive damage awards, he said.

"The theory is you can't insure yourself against your own bad conduct," Main said.

Therefore, any punitive damage award comes out of a business' bottom line. Big companies have deep pockets, Main said, but it's particularly difficult for a small- to medium-sized business to recover from a large punitive damage award.

David Casey Jr., a partner at San-Diego based Casey Gerry Reed & Schenk, is also the president-elect of the Association of Trial Lawyers of America.

Casey's local firm is one of 60 or so across the nation that joined to fight the tobacco industry, which settled with 46 states that received a total of $206 billion. California will net $25 billion to be paid over a 25-year period from tobacco litigation.

The Washington, D.C.-based national trial lawyers' association was disappointed with the recent Supreme Court ruling, Casey said.

"That there would be such a protection given to what is basically criminal conduct is unfortunate," he said. "... You can't put those people in jail. All you can do is sanction them economically."

Casey said the recent ruling removes the incentive to play by the rules and gives greater protection to businesses that don't operate in an ethical fashion.

Contact Rene'e Beasley Jones via e-mail at rbeasley@sdbj.com or call her at (858) 277-6359, ext. 109.