BMW of North America v. Gore

517 U.S. 559

Case Year: 1996

Case Ruling: 5-4, Reversed and Remanded

Opinion Justice: Stevens

FACTS

In January 1990 Dr. Ira Gore Jr. purchased a black BMW sports sedan for $40,750.88 from an authorized dealer in Birmingham, Alabama. Nine months later he took the car to an independent detailer for some appearance enhancements. The detailer informed Gore that he believed the car had been repainted. Gore, convinced that he had been wronged, filed suit against BMW of North America for failure to disclose that his new car had undergone repainting prior to purchase. He asked the court to award him compensatory and punitive damages.

At trial, BMW acknowledged a policy, adopted in 1983, concerning automobiles damaged in manufacture or transport. If repairing the damage cost more than 3 percent of the vehicle's retail value, the car was placed in company service and later sold as used. If the damages amounted to less than 3 percent of the car's value, the vehicle would be fixed and sold as new without disclosing the repair history either to the dealer or the purchaser. Because the cost to refinish the automobile purchased by Gore amounted to only 1.5 percent of the car's value, it was sold as new.

In support of his claim for compensatory damages, Gore presented evidence that a refinished BMW would fetch $4,000 less on the open market than an identical model that had not been repainted. To justify his claim for punitive damages, Gore presented documentation that during the previous decade BMW of North America sold approximately one thousand refinished automobiles as new. BMW replied that the new paint on Gore's automobile was every bit as good as the original factory finish, and therefore the company was under no obligation to disclose the refinishing.

The jury found in favor of Gore, awarding him $4,000 in compensatory damages and $4,000,000 in punitive damages. The justification for the punitive damage award was the jury's conclusion that BMW's nondisclosure policy amounted to "gross, oppressive, or malicious" fraud. BMW asked that the award be set aside or reduced because it was excessive. The trial court denied the request. The state supreme court reduced the punitive damage award to $2,000,000, not because the original award was excessive, but because it found fault with the jury's method of arriving at that figure. The jury erred, according to the state's high court, by considering BMW's wrongdoing in other states when it should have focused only on the company's behavior in Alabama. BMW, still convinced that the revised award was excessive, requested review by the United States Supreme Court.

 

JUSTICE STEVENS DELIVERED THE OPINION OF THE COURT.

Punitive damages may properly be imposed to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition. Gertz v. Robert Welch, Inc. (1974); Newport v. Fact Concerts, Inc. (1981); [Pacific Mutual Life Ins. Co. v.] Haslip (1991). In 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. Most States that authorize exemplary damages afford the jury similar latitude, requiring only that the damages awarded be reasonably necessary to vindicate the State's legitimate interests in punishment and deterrence. See TXO [Production Corp. v. Alliance Resources Corp. (1993)]; Haslip. Only when an award can fairly be categorized as "grossly excessive" in relation to these interests does it enter the zone of arbitrariness that violates the Due Process Clause of the Fourteenth Amendment. . . .

No one doubts that a State may protect its citizens by prohibiting deceptive trade practices and by requiring automobile distributors to disclose presale repairs that affect the value of a new car. But the States need not, and in fact do not, provide such protection in a uniform manner. Some States rely on the judicial process to formulate and enforce an appropriate disclosure requirement by applying principles of contract and tort law. Other States have enacted various forms of legislation that define the disclosure obligations of automobile manufacturers, distributors, and dealers. The result is a patchwork of rules representing the diverse policy judgments of lawmakers in 50 States.

That diversity demonstrates that reasonable people may disagree about the value of a full disclosure requirement. . . .

We think it follows from these principles of state sovereignty and comity that a State may not impose economic sanctions on violators of its laws with the intent of changing the tortfeasors' lawful conduct in other States. Before this Court Dr. Gore argued that the large punitive damages award was necessary to induce BMW to change the nationwide policy that it adopted in 1983. But by attempting to alter BMW's nationwide policy, Alabama would be infringing on the policy choices of other States. To avoid such encroachment, the economic penalties that a State such as Alabama inflicts on those who transgress its laws, whether the penalties take the form of legislatively authorized fines or judicially imposed punitive damages, must be supported by the State's interest in protecting its own consumers and its own economy. Alabama may insist that BMW adhere to a particular disclosure policy in that State. Alabama does not have the power, however, to punish BMW for conduct that was lawful where it occurred and that had no impact on Alabama or its residents. Nor may Alabama impose sanctions on BMW in order to deter conduct that is lawful in other jurisdictions.

. . . [This] award must be analyzed . . . with consideration given only to the interests of Alabama consumers, rather than those of the entire Nation. When the scope of the interest in punishment and deterrence that an Alabama court may appropriately consider is properly limited, it is apparent--for reasons that we shall now address--that this award is grossly excessive.

Elementary 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. Three guideposts, each of which indicates that BMW did not receive adequate notice of the magnitude of the sanction that Alabama might impose for adhering to the nondisclosure policy adopted in 1983, lead us to the conclusion that the $2 million award against BMW is grossly excessive: the degree of reprehensibility of the nondisclosure; the disparity between the harm or potential harm suffered by Dr. Gore and his punitive damages award; and the difference between this remedy and the civil penalties authorized or imposed in comparable cases. We discuss these considerations in turn.

Degree of Reprehensibility

Perhaps the most important indicium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant's conduct. . . . This principle reflects the accepted view that some wrongs are more blameworthy than others. . . . In TXO, both the West Virginia Supreme Court and the Justices of this Court placed special emphasis on the principle that punitive damages may not be "grossly out of proportion to the severity of the offense.". . .

In this case, none of the aggravating factors associated with particularly reprehensible conduct is present. The harm BMW inflicted on Dr. Gore was purely economic in nature. The presale refinishing of the car had no effect on its performance or safety features, or even its appearance for at least nine months after his purchase. BMW's conduct evinced no indifference to or reckless disregard for the health and safety of others. To be sure, infliction of economic injury, especially when done intentionally through affirmative acts of misconduct, or when the target is financially vulnerable, can warrant a substantial penalty. But this observation does not convert all acts that cause economic harm into torts that are sufficiently reprehensible to justify a significant sanction in addition to compensatory damages. . . .

Finally, the record in this case discloses no deliberate false statements, acts of affirmative misconduct, or concealment of evidence of improper motive, such as were present in Haslip and TXO. We accept, of course, the jury's finding that BMW suppressed a material fact which Alabama law obligated it to communicate to prospective purchasers of repainted cars in that State. But the omission of a material fact may be less reprehensible than a deliberate false statement, particularly when there is a good-faith basis for believing that no duty to disclose exists.

. . . Because this case exhibits none of the circumstances ordinarily associated with egregiously improper conduct, we are persuaded that BMW's conduct was not sufficiently reprehensible to warrant imposition of a $2 million exemplary damages award.

Ratio

The second and perhaps most commonly cited indicium of an unreasonable or excessive punitive damages award is its ratio to the actual harm inflicted on the plaintiff. The principle that exemplary damages must bear a "reasonable relationship" to compensatory damages has a long pedigree. . . . Our decisions in both Haslip and TXO endorsed the proposition that a comparison between the compensatory award and the punitive award is significant.

In Haslip we concluded that even though a punitive damages award of "more than 4 times the amount of compensatory damages," might be "close to the line," it did not "cross the line into the area of constitutional impropriety." TXO, following dicta in Haslip, refined this analysis by confirming that the proper inquiry is " 'whether there is a reasonable relationship between the punitive damage award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred.' " Thus, in upholding the $10 million award in TXO, we relied on the difference between that figure and the harm to the victim that would have ensued if the tortious plan had succeeded. That difference suggested that the relevant ratio was not more than 10 to 1.

The $2 million in punitive damages awarded to Dr. Gore by the Alabama Supreme Court is 500 times the amount of his actual harm as determined by the jury. . . .

Of course, we have consistently rejected the notion that the constitutional line is marked by a simple mathematical formula, even one that compares actual and potential damages to the punitive award. . . . When the ratio is a breathtaking 500 to 1, however, the award must surely "raise a suspicious judicial eyebrow." TXO (O'CONNOR, J., Dissenting).

Sanctions for Comparable Misconduct

Comparing the punitive damages award and the civil or criminal penalties that could be imposed for comparable misconduct provides a third indicium of excessiveness. . . . In this case the $2 million economic sanction imposed on BMW is substantially greater than the statutory fines available in Alabama and elsewhere for similar malfeasance.

The maximum civil penalty authorized by the Alabama Legislature for a violation of its Deceptive Trade Practices Act is $2,000; other States authorize more severe sanctions, with the maxima ranging from $5,000 to $10,000. . . .

The sanction imposed in this case cannot be justified on the ground that it was necessary to deter future misconduct without considering whether less drastic remedies could be expected to achieve that goal. . . .

We assume, as the juries in this case . . . found, that the undisclosed damage to the new BMW's affected their actual value. Notwithstanding the evidence adduced by BMW in an effort to prove that the repainted cars conformed to the same quality standards as its other cars, we also assume that it knew, or should have known, that as time passed the repainted cars would lose their attractive appearance more rapidly than other BMW's. Moreover, we of course accept the Alabama courts' view that the state interest in protecting its citizens from deceptive trade practices justifies a sanction in addition to the recovery of compensatory damages. We cannot, however, accept the conclusion of the Alabama Supreme Court that BMW's conduct was sufficiently egregious to justify a punitive sanction that is tantamount to a severe criminal penalty. . . .

. . . [W]e are fully convinced that the grossly excessive award imposed in this case transcends the constitutional limit. . . .

The judgment is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.

It is so ordered.

JUSTICE BREYER, WITH WHOM JUSTICE O'CONNOR AND JUSTICE SOUTER JOIN, CONCURRING.

The Alabama state courts have assessed the defendant $2 million in "punitive damages" for having knowingly failed to tell a BMW automobile buyer that, at a cost of $600, it had repainted portions of his new $40,000 car, thereby lowering its potential resale value by about 10%. The Court's opinion, which I join, explains why we have concluded that this award, in this case, was "grossly excessive" in relation to legitimate punitive damages objectives, and hence an arbitrary deprivation of life, liberty, or property in violation of the Due Process Clause. . . .

The . . . severe disproportionality between the award and the legitimate punitive damages objectives . . . reflects a judgment about a matter of degree. I recognize that it is often difficult to determine just when a punitive award exceeds an amount reasonably related to a State's legitimate interests, or when that excess is so great as to amount to a matter of constitutional concern. Yet whatever the difficulties of drawing a precise line, once we examine the award in this case, it is not difficult to say that this award lies on the line's far side. The severe lack of proportionality between the size of the award and the underlying punitive damages objectives shows that the award falls into the category of "gross excessiveness" set forth in this Court's prior cases.

. . . I conclude that the award in this unusual case violates the basic guarantee of nonarbitrary governmental behavior that the Due Process Clause provides.

JUSTICE SCALIA, WITH WHOM JUSTICE THOMAS JOINS, DISSENTING.

Today we see the latest manifestation of this Court's recent and increasingly insistent "concern about punitive damages that 'run wild.' " Pacific Mut. Life Ins. Co. v. Haslip (1991). Since the Constitution does not make that concern any of our business, the Court's activities in this area are an unjustified incursion into the province of state governments.

In earlier cases that were the prelude to this decision, I set forth my view that a state trial procedure that commits the decision whether to impose punitive damages, and the amount, to the discretion of the jury, subject to some judicial review for "reasonableness," furnishes a defendant with all the process that is "due." I do not regard the Fourteenth Amendment's Due Process Clause as a secret repository of substantive guarantees against "unfairness"--neither the unfairness of an excessive civil compensatory award, nor the unfairness of an "unreasonable" punitive award. What the Fourteenth Amendment's procedural guarantee assures is an opportunity to contest the reasonableness of a damages judgment in state court; but there is no federal guarantee a damages award actually be reasonable. . . .

The most significant aspects of today's decision--the identification of a "substantive due process" right against a "grossly excessive" award, and the concomitant assumption of ultimate authority to decide anew a matter of "reasonableness" resolved in lower court proceedings--are of course not new. Haslip and TXO revived the notion, moribund since its appearance in the first years of this century, that the measure of civil punishment poses a question of constitutional dimension to be answered by this Court. Neither of those cases, however, nor any of the precedents upon which they relied, actually took the step of declaring a punitive award unconstitutional simply because it was "too big." At the time of adoption of the Fourteenth Amendment, it was well understood that punitive damages represent the assessment by the jury, as the voice of the community, of the measure of punishment the defendant deserved. Today's decision, though dressed up as a legal opinion, is really no more than a disagreement with the community's sense of indignation or outrage expressed in the punitive award of the Alabama jury, as reduced by the State Supreme Court. It reflects not merely, as the concurrence candidly acknowledges, "a judgment about a matter of degree"; but a judgment about the appropriate degree of indignation or outrage, which is hardly an analytical determination.

There is no precedential warrant for giving our judgment priority over the judgment of state courts and juries on this matter. The only support for the Court's position is to be found in a handful of errant federal cases, bunched within a few years of one other, which invented the notion that an unfairly severe civil sanction amounts to a violation of constitutional liberties. These were the decisions upon which the TXO plurality relied in pronouncing that the Due Process Clause "imposes substantive limits 'beyond which penalties may not go,' " Although they are our precedents, they are themselves too shallowly rooted to justify the Court's recent undertaking. . . .

More importantly, this latter group of cases--which again are the sole precedential foundation put forward for the rule of constitutional law espoused by today's Court--simply fabricated the "substantive due process" right at issue. . . .

. . . [T]he Court identifies "[t]hree guideposts" that lead it to the conclusion that the award in this case is excessive: degree of reprehensibility, ratio between punitive award and plaintiff's actual harm, and legislative sanctions provided for comparable misconduct. The legal significance of these "guideposts" is nowhere explored, but their necessary effect is to establish federal standards governing the hitherto exclusively state law of damages. . . .

Of course it will not be easy for the States to comply with this new federal law of damages, no matter how willing they are to do so. In truth, the "guideposts" mark a road to nowhere; they provide no real guidance at all. As to "degree of reprehensibility" of the defendant's conduct, we learn that " 'nonviolent crimes are less serious than crimes marked by violence or the threat of violence,' " and that " 'trickery and deceit' " are "more reprehensible than negligence." As to the ratio of punitive to compensatory damages, we are told that a " 'general concer[n] of reasonableness . . . enter[s] into the constitutional calculus,' "--though even "a breathtaking 500 to 1" will not necessarily do anything more than " 'raise a suspicious judicial eyebrow.' " And as to legislative sanctions provided for comparable misconduct, they should be accorded " 'substantial deference.' " One expects the Court to conclude: "To thine own self be true."

These criss-crossing platitudes yield no real answers in no real cases. . . .

For the foregoing reasons, I respectfully dissent.

JUSTICE GINSBURG, WITH WHOM THE CHIEF JUSTICE JOINS, DISSENTING.

The Court, I am convinced, unnecessarily and unwisely ventures into territory traditionally within the States' domain, and does so in the face of reform measures recently adopted or currently under consideration in legislative arenas. . . .

. . . [T]he Alabama Supreme Court left standing the jury's decision that the facts warranted an award of punitive damages--a determination not contested in this Court--and the state court concluded that, considering only acts in Alabama, $2 million was "a constitutionally reasonable punitive damages award."

The Court finds Alabama's $2 million award not simply excessive, but grossly so, and therefore unconstitutional. The decision leads us further into territory traditionally within the States' domain, and commits the Court, now and again, to correct "misapplication of a properly stated rule of law." The Court is not well equipped for this mission. Tellingly, the Court repeats that it brings to the task no "mathematical formula," no "categorical approach," no "bright line." It has only a vague concept of substantive due process, a "raised eyebrow" test, as its ultimate guide. . . .

For the reasons stated, I dissent from this Court's disturbance of the judgment the Alabama Supreme Court has made.