Oregon State Bar Bulletin — JUNE 2007
Smoke Signals
Philip Morris provides yet another chapter in the ongoing
saga of punitive damages in the U.S. Supreme Court

By Jeff Bleich, Michelle Friedland, Dan Powell and Aimee Feinberg

For nearly two decades now, the U.S. Supreme Court has struggled with the issue of punitive damages. When review was granted this term in Philip Morris v. Williams many Court-watchers expected it to be the case for deciding how much was too much when it came to punitive damages. Instead, the Court decided for the first time that the purpose of a punitive damage award (separate from its amount) could be improper. The Court’s decision, as in prior cases, left many details for another day, but it contributed yet another chapter to the ongoing saga of punitive damages in the Supreme Court.

Where it All Began
Most states give civil courts broad discretion not only to make defendants pay for the damage they caused, but then also stick it to the defendants to pay "exemplary damages" for intentionally doing bad things in the first place. Proponents have explained that this system works to discourage bad acts where the damages may be small compared to the breach of trust involved, to deter egregious misconduct generally, and — at least until now — to make up for the fact that some victims may never get their day in court. Because punitive damages have been so popular among legislators and trial attorneys, the political branches have put relatively few checks on their amount or the reasons for their use.

While punitive damages serve some important and popular social purposes, there is always the risk of too much of a good thing. Over the years, critics have complained that punitive damages can be arbitrary (since an individual jury can’t know the relative culpability of various corporate practices based on what it learns in a particular case) and unduly punitive (since multiple juries can duplicate the same punishment against one company, or pick a number that has no relation to reality).

This has left the Supreme Court to figure out if the Constitution itself somehow places limits on the amount or purpose of punitive damage awards that courts may impose on a defendant. Over the years, the Court considered whether punitive damages offend the Eighth Amendment (Browning Ferris v. Kelco (1989)), the Fifth and Fourteenth Amendments (Pacific Mutual v. Haslip (1991), TXO Production v. Alliance Resources (1993) and Honda Motor v. Oberg (1994)), and even the Seventh Amendment (Cooper Industries v. Leatherman Tool Group (2001)).

Following a handful of challenges between 1989 and 1993 in which the Court flirted with whether the Constitution might impose some substantive limits on punitive damages awards, the Court in 1994 finally issued its first decision striking down a punitive damages award. In BMW v. Gore, the Court considered a massive punitive damages award against BMW in favor of a doctor who became quite upset after learning that his new BMW had actually been repainted without his knowledge to fix scratches that occurred during the boat ride from Germany. The jury had awarded Dr. Gore $4,000 in actual damages, but hit BMW with a $4 million punitive damages award (or 1,000 times his actual damages). The Court held in that case that the Due Process Clause forbids state juries from imposing "grossly excessive" punitive damages awards. Whether any given award fell into this "grossly excessive" category would have to be determined, it explained, by three guideposts: 1) the degree of "reprehensibility" of the defendant’s conduct; 2) the ratio between compensatory damages and punitive damages; and 3) the extent of civil or criminal penalties that could be imposed. Applying these guideposts, the Court struck down the punitive damages award as excessive, and sent it back for further proceedings.

While the decision in Gore provided the first standard for limiting punitive damages, the facts of the case did not make it easy to apply in other contexts. After Gore, it seemed clear that it was "excessive" to apply a one thousand percent multiplier for the terrible sin of selling a BMW without first disclosing that it had not been painted entirely by real Bavarians. However, in more standard punitive damages cases, the test was less obvious. After years of lower courts complaining that the Gore standard needed refinement, the Court issued a decision in a second case, State Farm Mutual Automobile Insurance Company v. Campbell (2003), in which it struck down a jury’s punitive damages award — this time, a $145 million punitive judgment against an insurance company based on a $1 million compensatory judgment for wrongfully failing to pay claims against a policyholder. In clarifying the Gore guideposts, the Court explained that even though the Constitution drew no bright line, "single-digit" ratios between compensatory damages and punitive damages are "more likely" to comply with due process. The 145-to-1 ratio against State Farm, the Court found, went beyond the constitutional limit.

The Philip Morris Decision
In the intervening years, lower courts have questioned whether the Court’s hints that "single-digit ratios" were "more likely" to survive review, meant that, in fact, the Court had adopted — without saying so — a rule that punitive damage awards that were more than nine times actual damages would not be permitted. Philip Morris this term was the first case that appeared to squarely present this question. In Philip Morris, a Multnomah County, Oregon jury had awarded the plaintiff $79.5 million in punitive damages on top of $821,000 in compensatory damages for deceit. Philip Morris argued that this ratio of 97-to-1 was out of constitutional bounds.

Although Philip Morris prevailed in the case, it did so for reasons other than it had expected. This time, the Court struck down the award based not on what the jury had awarded, but how the jury had reached its decision. In doing so, the Court emphasized that the Constitution not only forbids excessive damages awards but also requires juries to follow proper procedures when deciding how much to punish a defendant. According to Justice Breyer’s opinion for the Court, the procedural defect in the Oregon system was that the court did not direct jurors not to punish a defendant for injuries inflicted on "strangers to the litigation" — that is, victims who were not party to the case. To allow a state to punish a defendant for harm caused to non-parties, the Court reasoned, denied the defendant the opportunity to present its defense against those absent victims. And allowing a jury to punish the defendant for harm inflicted on non-parties would untether the jury from any meaningful standards for measuring how much the defendant should pay and for what.

At the same time that the Court recognized this new due process limit on punitive damages awards, the Court did not hold that injuries to non-parties were always verboten. Rather, evidence that the defendant harmed "strangers to the litigation" could be considered as part of the jury’s assessment of the "reprehensibility of the defendant’s conduct." The Court drew this very slender line as follows: a plaintiff can use evidence of actual harm to non-parties to help "show that the conduct that harmed the plaintiff also posed a substantial risk of harm to the general public, and so was particularly reprehensible," but could not use that evidence to "punish a defendant directly on account of harms it is alleged to have visited on nonparties." The Court sent the case back to the Oregon courts to apply the new standard.

The Line-Up
Philip Morris produced a 5-4 split. With two new justices on the bench, the Court remained firm that the Constitution imposes real limits on state punitive damages awards.

But numbers may not tell the whole story. Of the justices who decided Gore and State Farm, three in the majority remained in the majority: Justice Kennedy (State Farm’s author), Justice Souter and Justice Breyer. The two newest members of the Court — Chief Justice Roberts and Justice Alito — joined their ranks, but did not decide whether a punitive damages award 97 times the amount of compensatories was constitutionally excessive. The Philip Morris majority rested on procedural grounds alone, which did not require them to address the State Farm "single-digit" standard.

The Philip Morris dissenters, however, drew a new adherent. Justice Stevens, who had authored Gore and had cast his vote with the majority in State Farm, rejected the Court’s new limit on punitive damages awards: while Gore and State Farm were correctly decided, he explained, the Constitution did not prohibit juries from meting out punishment for harm caused to non-parties. Punishing defendants for harm inflicted on others, he concluded, is exactly what punitive damages are all about. And here, a $79.5 million award — even one that was 97 times higher than the compensatory damages award — did not in his view violate due process.

The other three dissenters — Justices Scalia, Thomas and Ginsburg — continued to stand apart from the Court’s majority as they did in Gore and State Farm. Nevertheless, instead of launching a predictable broadside against the Court’s new rule, Justice Ginsburg’s dissent for the three justices argued only that the Oregon Supreme Court had done precisely what the Court was now telling it to do: allow the jury to consider harm to others when assessing the reprehensibility of the defendant’s conduct. Only Justice Thomas reiterated his position that the Constitution contains no limits at all on punitive damages awards and that the Court’s punitive damages jurisprudence was hopelessly misguided. Interestingly, Justice Scalia, who in State Farm had refused to give stare decisis effect to Gore for that very reason, did not add his voice to Justice Thomas’s dispatch. Instead, he quietly joined Justice Ginsburg’s narrow dissenting opinion, leaving open whether he might accept the legitimacy of those cases in future matters.

The Impact
The only sure conclusion arising out of the Philip Morris case is the firm conclusion that the Supreme Court’s struggles with punitive damages have not ended yet. For now, defendants and punitive-damages opponents scored a big victory in that states must now add yet further constraints on juries’ consideration of the amount of punishment to impose on a corporate tortfeasor. Indeed, the Court’s prohibition on punishing defendants for harm to non-parties could — by inference — add further teeth to State Farm’s "suggested" single-digit ratio: to comply with due process, a punitive damages award must hew closely to the harm suffered by the party before the court.

On the other hand, the Philip Morris test may be a difficult one to apply or police, and so it may not amount to much of a limitation at all. The Court approved jury consideration of harm to non-parties when the jury assesses the reprehensibility of the defendant’s conduct. Thus while juries cannot directly count harm to non-litigants, they could continue to impose, under the mantle of reprehensibility, hefty damages judgments on defendants whose conduct affects many people. Moreover, with no clear indication that Chief Justice Roberts or Justice Alito buy into the "single-digit ratio" idea, litigation on that question is sure to follow. In short, while the case has been decided, the two-decade long struggle most likely continues.

ABOUT THE AUTHOR
The authors are litigators at Munger, Tolles & Olson in San Francisco, and all previously clerked at the U.S. Supreme Court. Jeff Bleich clerked for the late Chief Justice William H. Rehnquist in the 1990 term and lectures on constitutional law at the University of California, Berkeley, Boalt Hall School of Law. Michelle Friedland clerked for Justice Sandra Day O’Connor in the 2001 term and has taught federal jurisdiction at Stanford Law School. Dan Powell clerked for Justice John Paul Stevens and Aimee Feinberg clerked for Justice Stephen Breyer in the 2004 term.

© 2007 Jeff Bleich, Michelle Friedland, Dan Powell and Aimee Feinberg


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