State Farm Mutual Automobile Insurance Co. v. Campbell

538 U.S. 408

Case Year: 2003

Case Ruling: 6-3, Reversed and Remanded

Opinion Justice: Kennedy

FACTS

This case began in 1981 when Curtis Campbell and his wife, Inez, were involved in a serious auto accident in Cache County, Utah, when Campbell attempted to pass six vans ahead of him on a two-lane highway. Todd Ospital, driving in the opposite direction, drove onto the road’s shoulder when he attempted to avoid a head-on collision with Campbell’s vehicle. He lost control of his car and collided with a vehicle driven by Robert Slusher. Ospital was killed and Slusher permanently disabled. The Campbells were unhurt.

Slusher and Ospital’s estate sued Campbell, who claimed that he was not at fault in the accident; investigations, however, concluded that he was. Campbell had a $50,000 liability policy with State Farm Insurance, which refused to accept an offer to settle the lawsuit for the policy limit. Against the advice of its own investigators, State Farm took the case to trial. The company ensured the Campbells that their assets were safe, that they had no liability, and that there was no need for them to hire their own attorney. The jury, however, found Campbell 100 percent at fault and awarded the plaintiffs a total of $185,849 in damages.

State Farm then refused to pay more than the $50,000 limit on Campbell’s policy, leaving the couple the responsibility to pay the $135,849 difference. The company advised the Campbells to put their house up for sale in order to start the process of gathering enough money to pay the judgment. In response, the couple reached a deal with Slusher and Ospital’s estate. Campbell would sue State Farm for acting in bad faith, fraud, and intentional infliction of emotional distress, with Slusher and Ospital’s estate receiving 90 percent of any judgment.

After long and complicated litigation at the state level, the Utah Supreme Court ultimately found in favor of the Campbells in their suit against State Farm. Based not only on the company’s behavior in the Campbell case but also on its actions and policies in other states over a period of more than twenty years, the Utah Supreme Court upheld an award for the Campbells of $1 million in compensatory damages and $145 million in punitive damages. State Farm requested review by the U.S. Supreme Court.

JUSTICE KENNEDY DELIVERED THE OPINION OF THE COURT.

We address once again the measure of punishment, by means of punitive damages, a State may impose upon a defendant in a civil case. The question is whether, in the circumstances we shall recount, an award of $145 million in punitive damages, where full compensatory damages are $1 million, is excessive and in violation of the Due Process Clause of the Fourteenth Amendment to the Constitution of the United States....

We recognized in Cooper Industries, Inc. v. Leatherman Tool Group, Inc. (2001) that in our judicial system compensatory and punitive damages, although usually awarded at the same time by the same decision maker, serve different purposes. Compensatory damages “are intended to redress the concrete loss that the plaintiff has suffered by reason of the defendant’s wrongful conduct.” By contrast, punitive damages serve a broader function; they are aimed at deterrence and retribution.

While States possess discretion over the imposition of punitive damages, it is well established that there are procedural and substantive constitutional limitations on these awards. The Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor. The reason is that “[e]lementary notions of fairness enshrined in our constitutional jurisprudence dictate that a person receive fair notice not only of the conduct that will subject him to punishment, but also of the severity of the penalty that a State may impose.” To the extent an award is grossly excessive, it furthers no legitimate purpose and constitutes an arbitrary deprivation of property.

Although these awards serve the same purposes as criminal penalties, defendants subjected to punitive damages in civil cases have not been accorded the protections applicable in a criminal proceeding. This increases our concerns over the imprecise manner in which punitive damages systems are administered. We have admonished that “[p]unitive damages pose an acute danger of arbitrary deprivation of property....

In light of these concerns, in [ BMW of North America, Inc. v. Gore (1996)] we instructed courts reviewing punitive damages to consider three guideposts: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. We reiterated the importance of these three guideposts in Cooper Industries and mandated appellate courts to conduct de novo review of a trial court’s application of them to the jury’s award. Exacting appellate review ensures that an award of punitive damages is based upon an “‘application of law, rather than a decisionmaker’s caprice.’”

Under the principles outlined in BMW of North America, Inc. v. Gore, this case is neither close nor difficult. It was error to reinstate the jury’s $145 million punitive damages award. We address each guidepost of Gore in some detail.

“[T]he most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct.” Gore. We have instructed courts to determine the reprehensibility of a defendant by considering whether: the harm caused was physical as opposed to economic; the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions or was an isolated incident; and the harm was the result of intentional malice, trickery, or deceit, or mere accident. The existence of any one of these factors weighing in favor of a plaintiff may not be sufficient to sustain a punitive damages award; and the absence of all of them renders any award suspect. It should be presumed a plaintiff has been made whole for his injuries by compensatory damages, so punitive damages should only be awarded if the defendant’s culpability, after having paid compensatory damages, is so reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence.

Applying these factors in the instant case, we must acknowledge that State Farm’s handling of the claims against the Campbells merits no praise. The trial court found that State Farm’s employees altered the company’s records to make Campbell appear less culpable. State Farm disregarded the overwhelming likelihood of liability and the near-certain probability that, by taking the case to trial, a judgment in excess of the policy limits would be awarded. State Farm amplified the harm by at first assuring the Campbells their assets would be safe from any verdict and by later telling them, postjudgment, to put a for-sale sign on their house. While we do not suggest there was error in awarding punitive damages based upon State Farm’s conduct toward the Campbells, a more modest punishment for this reprehensible conduct could have satisfied the State’s legitimate objectives, and the Utah courts should have gone no further.

This case, instead, was used as a platform to expose, and punish, the perceived deficiencies of State Farm’s operations throughout the country. The Utah Supreme Court’s opinion makes explicit that State Farm was being condemned for its nationwide policies rather than for the conduct direct toward the Campbells. This was, as well, an explicit rationale of the trial court’s decision in approving the award, though reduced from $145 million to $25 million.

The Campbells contend that State Farm has only itself to blame for the reliance upon dissimilar and out-of-state conduct evidence. The record does not support this contention. From their opening statements onward the Campbells framed this case as a chance to rebuke State Farm for its nationwide activities. This was a position maintained throughout the litigation....

A State cannot punish a defendant for conduct that may have been lawful where it occurred. Nor, as a general rule, does a State have a legitimate concern in imposing punitive damages to punish a defendant for unlawful acts committed outside of the State’s jurisdiction. Any proper adjudication of conduct that occurred outside Utah to other persons would require their inclusion, and, to those parties, the Utah courts, in the usual case, would need to apply the laws of their relevant jurisdiction....

... A basic principle of federalism is that each State may make its own reasoned judgment about what conduct is permitted or proscribed within its borders, and each State alone can determine what measure of punishment, if any, to impose on a defendant who acts within its jurisdiction.

For a more fundamental reason, however, the Utah courts erred in relying upon this and other evidence: The courts awarded punitive damages to punish and deter conduct that bore no relation to the Campbells’ harm. A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis, but we have no doubt the Utah Supreme Court did that here. Punishment on these bases creates the possibility of multiple punitive damages awards for the same conduct; for in the usual case nonparties are not bound by the judgment some other plaintiff obtains....

The Campbells have identified scant evidence of repeated misconduct of the sort that injured them. Nor does our review of the Utah courts’ decisions convince us that State Farm was only punished for its actions toward the Campbells.... In this case, because the Campbells have shown no conduct by State Farm similar to that which harmed them, the conduct that harmed them is the only conduct relevant to the reprehensibility analysis.

Turning to the second Gore guidepost, we have been reluctant to identify concrete constitutional limits on the ratio between harm, or potential harm, to the plaintiff and the punitive damages award. Gore. We decline again to impose a bright-line ratio which a punitive damages award cannot exceed. Our jurisprudence and the principles it has now established demonstrate, however, that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process. In [ Pacific Mutual Life Insurance Co. v. ] Haslip[1991], in upholding a punitive damages award, we concluded that an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety. We cited that 4-to-1 ratio again in Gore.The Court further referenced a long legislative history, dating back over 700 years and going forward to today, providing for sanctions of double, treble, or quadruple damages to deter and punish. While these ratios are not binding, they are instructive. They demonstrate what should be obvious: Single-digit multipliers are more likely to comport with due process, while still achieving the State’s goals of deterrence and retribution, than awards with ratios in range of 500 to 1, or, in this case, of 145 to 1.

Nonetheless, because there are no rigid benchmarks that a punitive damages award may not surpass, ratios greater than those we have previously upheld may comport with due process where “a particularly egregious act has resulted in only a small amount of economic damages.” The converse is also true, however. When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. The precise award in any case, of course, must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff.

In sum, courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered. In the context of this case, we have no doubt that there is a presumption against an award that has a 145-to-1 ratio. The compensatory award in this case was substantial; the Campbells were awarded $1 million for a year and a half of emotional distress. This was complete compensation. The harm arose from a transaction in the economic realm, not from some physical assault or trauma; there were no physical injuries; and State Farm paid the excess verdict before the complaint was filed, so the Campbells suffered only minor economic injuries for the 18-month period in which State Farm refused to resolve the claim against them. The compensatory damages for the injury suffered here, moreover, likely were based on a component which was duplicated in the punitive award. Much of the distress was caused by the outrage and humiliation the Campbells suffered at the actions of their insurer; and it is a major role of punitive damages to condemn such conduct. Compensatory damages, however, already contain this punitive element....

...While States enjoy considerable discretion in deducing when punitive damages are warranted, each award must comport with the principles set forth in Gore.... The wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award. Gore. The principles set forth in Gore must be implemented with care, to ensure both reasonableness and proportionality.

The third guidepost in Gore is the disparity between the punitive damages award and the “civil penalties authorized or imposed in comparable cases.”...

Here, we need not dwell long on this guidepost. The most relevant civil sanction under Utah state law for the wrong done to the Campbells appears to be a $10,000 fine for an act of fraud, an amount dwarfed by the $145 million punitive damages award....

An application of the Gore guideposts to the facts of this case, especially in light of the substantial compensatory damages awarded (a portion of which contained a punitive element), likely would justify a punitive damages award at or near the amount of compensatory damages. The punitive award of $145 million, therefore, was neither reasonable nor proportionate to the wrong committed, and it was an irrational and arbitrary deprivation of the property of the defendant. The proper calculation of punitive damages under the principles we have discussed should be resolved, in the first instance, by the Utah courts.

The judgment of the Utah Supreme Court is reversed, and the case is remanded for proceedings not inconsistent with this opinion. It is so ordered.

JUSTICE SCALIA, DISSENTING.

I adhere to the view expressed in my dissenting opinion in BMW of North America, Inc. v. Gore (1996), that the Due Process Clause provides no substantive protections against “excessive” or “‘unreasonable’” awards of punitive damages. I am also of the view that the punitive damages jurisprudence which has sprung forth from BMW v. Gore is insusceptible of principled application; accordingly, I do not feel justified in giving the case stare decisis effect. I would affirm the judgment of the Utah Supreme Court.

JUSTICE THOMAS, DISSENTING.

I would affirm the judgment below because “I continue to believe that the Constitution does not constrain the size of punitive damages awards.” Cooper Industries, Inc. v. Leatherman Tool Group, Inc. (2001) ( Thomas, J., concurring). Accordingly, I respectfully dissent.

JUSTICE GINSBURG, DISSENTING.

It was not until 1996, in BMW of North America, Inc. v. Gore (1996), that the Court, for the first time, invalidated a state-court punitive damages assessment as unreasonably large. If our activity in this domain is now “well-established,” it takes place on ground not long held.

In Gore, I stated why I resisted the Court’s foray into punitive damages “territory traditionally within the States’ domain.” I adhere to those views....

When the Court first ventured to override state-court punitive damages awards, it did so moderately. The Court recalled that “[i]n our federal system, States necessarily have considerable flexibility in determining the level of punitive damages that they will allow in different classes of cases and in any particular case.” Gore. Today’s decision exhibits no such respect and restraint. No longer content to accord state-court judgments “a strong presumption of validity,” the Court announces that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” Moreover, the Court adds, when compensatory damages are substantial, doubling those damages “can reach the outermost limit of the due process guarantee.” In a legislative scheme or a state high court’s design to cap punitive damages, the handiwork in setting single-digit and 1-to-1 benchmarks could hardly be questioned; in a judicial decree imposed on the States by this Court under the banner of substantive due process, the numerical controls today’s decision installs seem to me boldly out of order.

I remain of the view that this Court has no warrant to reform state law governing awards of punitive damages. Even if I were prepared to accept the flexible guides prescribed in Gore, I would not join the Court’s swift conversion of those guides into instructions that begin to resemble marching orders. For the reasons stated, I would leave the judgment of the Utah Supreme Court undisturbed.