by Samuel A. Thumma,  partner at Brown & Bain, Phoenix  (E-mail: thumma@brownbain.com)

Punitive damage awards are coveted by plaintiffs, devastating for defendants and problematic for courts. In BMW of North America, Inc. v. Gore,(2) the United States Supreme Court set forth a framework to determine when punitive damage awards are constitutionally excessive. Approximately 25 published cases applied that analysis in the first year following BMW(3) and nearly 50 additional published cases have applied that analysis in the second year following BMW. This article focuses on those second year cases and the continuing evolution of the BMW analysis.

II. The BMW Guideposts.

BMW set forth three "guideposts" to use in determining when a punitive damage award is constitutionally excessive: (1) the degree of reprehensibility; (2) the ratio of punitive to compensatory damages; and (3) sanctions for comparable misconduct.(4) These guideposts frame the rationale used in applying BMW.

A. Degree of Reprehensibility.

The degree of reprehensibility is "[p]erhaps the most important indicium" in assessing punitive damage awards.(5) Unfortunately, this factor is almost entirely subjective. In fact, courts may be using this guidepost to affirm punitive damages where conduct is deemed repugnant and to reduce punitive damages where conduct is not particularly offensive. There are, however, some generalizations as to what will be deemed "more" or "less" reprehensible.

Examples of conduct that may be deemed "more" reprehensible include intentional misconduct;(6) a pattern of misconduct;(7) conduct improperly exploiting trust or lack of sophistication;(8) indifference to constitutional or statutory rights;(9) threatening the physical safety of others;(10) and other "sufficiently outrageous" misconduct.(11)

By contrast, examples of conduct that may be deemed "less" reprehensible include isolated misconduct;(12) actions that do not involve a "threat of violence;"(13) conduct resulting in purely economic harm;(14) and conduct that "was not extreme."(15)

These examples merely reinforce the subjectivity of this guidepost. Indeed, as one dissenting West Virginia Supreme Court Justice observed:

"I am reminded . . . [of] Justice Potter Stewart's comment that although he could not define hard-core pornography, `I know it when I see it.' Likewise, I know an excessive punitive damages award when I see one, and I see one here. I would call this one hard-core."(16)

It remains to be seen whether this guidepost will add much certainty in assessing punitive damage awards.

B. Ratio of Punitive to Compensatory Damages.

Although rejecting "the notion that the constitutional line is marked by a simple mathematical formula," BMW directed courts to examine the ratio of punitive to compensatory damages.(17) Applying this guidepost, federal courts frequently allow a ratio of 3 to 1 or less.(18) Of the nearly 30 federal cases applying BMW in the second year, more than half found the permissible ratio to be 3 to 1 or less and nearly 75 percent found the permissible ratio to be 10 to 1 or less.

State courts, however, have been more generous. Of the nearly 20 state cases applying BMW in the second year, two-thirds allowed punitive to compensatory damage ratios of greater than 3 to 1, with the remaining one-third yielding ratios of 3 to 1 or less.

Under BMW, small compensatory awards may support higher ratios than large compensatory awards.(19) Cases applying BMW generally follow this dictum, particularly in nominal damage cases. For example, in a wrongful death case where state law allowed only punitive damages, one court held that the ratio guidepost did not apply and affirmed a $3,000,000 punitive damage award.(20) Similarly, in assessing a $1 nominal and $20,000 punitive damage award, another court did not examine the ratio and, rejecting a BMW challenge, observed that the punitive damage award did not "`shock the judicial conscience.'"(21)

Apart from nominal damage cases, only one court approved a punitive to compensatory damage ratio of more than 100 to 1.(22) That court affirmed awards yielding ratios as high as 489 to 1 arising out of $2,500,000 in punitive and $14,500 in compensatory damages.(23) In doing so, however, the court relied solely on a nominal damage case that affirmed a $75,000 punitive damage award.(24) Although perhaps the dramatic 488 to 1 ratio was justified, unfortunately, the court did not discuss the differences between nominal and compensatory damage cases.

In justifying some large punitive damage awards, a few decisions have relied on ratios in cases where the United States Supreme Court denied certiorari.(25) Such reliance, however, is dubious. The "`denial of a writ of certiorari imports no expression of opinion upon the merits of the case'"(26) and does not "have any precedential effect."(27) Cases where the Supreme Court vacated decisions in light of BMW, however, would have precedential value and involve ratios as low as 3.5 to 1.(28) In any event, and unlike reprehensibility, the ratio guidepost generally provides some objective measure in assessing punitive damages under BMW.

C. Sanctions for Comparable Misconduct.

BMW directs courts to look at "the civil or criminal penalties that could be imposed for comparable misconduct."(29) Courts generally have found that penalties authorizing modest fines undercut significant punitive damages while penalties authorizing substantial prison terms support significant punitive damages.(30) As one court put it, "[w]hen criminal sanctions are involved, monetary sanctions necessarily pale in comparison."(31)

Curiously, some courts have found that the absence of any potentially applicable penalties makes this guidepost irrelevant.(32) However, because this guidepost reflects a due process requirement that a party have "adequate notice of the magnitude of the sanction,"(33) the absence of such penalties should suggest that a substantial punitive damage award cannot be upheld. Accordingly, properly applied, the absence of any potentially applicable penalties for comparable misconduct cuts against affirming a significant punitive damage award.(34)

In applying this guidepost, courts also compare punitive damage awards affirmed by other courts, at times relying on pre-BMW decisions as authority to affirm punitive damage awards.(35) However, unless the applicable pre-BMW law accurately predicted the three guideposts,(36) reliance on such decisions would not include the constitutionally-mandated BMW analysis. Thus, although pre-BMW precedent may be instructive in reducing punitive damages,(37) in most instances, those cases will not be proper precedent for affirming punitive damage awards.

D. Other Factors.

Courts look at a variety of other, primarily state-law factors to evaluate whether a punitive damage award is excessive, including defendant's net worth, defendant's profit and plaintiff's cost of litigation.(38) Although the net worth inquiry is an objective comparison, as demonstrated by four Alabama decisions, there is wide divergence in the evaluation of that inquiry.

In one fraud case, the Alabama Supreme Court reduced a punitive damage award to "approximately 1%" of the defendant's net worth.(39) In another fraud case, that same court noted that a punitive damage award representing 7.5 percent of defendant's net worth "will certainly sting" but would "not cripple the defendant."(40) In a wrongful death case, that same court affirmed punitive damages representing "roughly" 33 percent of defendant's assets.(41) And in another fraud case, that same court affirmed punitive damages representing nearly 50 percent of defendants' collective net worth.(42) These cases demonstrate that, although some courts are looking at a defendant's net worth, the results of that examination are somewhat capricious and perhaps irreconcilable.

III. Conclusions.

BMW, the published second year cases do suggest some trends. Almost half of the second year decisions reduced punitive damage awards. Specifically, nearly half of the federal cases, and exactly half of the state cases, reduced punitive damage awards on BMW grounds.(43)

In addition, courts are continuing to ignore the punitive to compensatory damage ratio in nominal damage cases.(44) In compensatory damage cases, the divide centers around a ratio of 10 to 1, with punitive damage awards above that level likely to be reduced. When compared to first year cases, this ratio is somewhat more generous for federal courts--where first year cases suggested a 5 to 1 cutoff--and somewhat more miserly for state courts--where first year cases suggested a 30 to 1 cutoff.(45)

Finally, fraud and employment cases represent more than half of the second year BMW cases. Thus, the scope of the BMW inquiry likely will continue to be defined by these types of cases. For now, however, the second year decisions show that the BMW analysis continues to have force and is resulting in many punitive damage awards being reduced.

Samuel A. Thumma

Brown & Bain, P.A.

====================

1. ©Brown & Bain, P.A. Samuel A. Thumma, whose practice focuses on commercial litigation defense, is a director in the Phoenix office of Brown & Bain, P.A., 2901 North Central Avenue, Post Office Box 400, Phoenix, Arizona, 85001-0400. He also can be reached at (602) 351-8338 or, via electronic mail, at thumma@brownbain.com.

2. 517 U.S. 559 (1996).

3. See Thumma, Damages, Nat'l L.J., June 30, 1997, at B5.

4. 517 U.S. at 573-86.

5. BMW, 517 U.S. at 575-77.

6. E.g., Dean v. Olibas, 129 F.3d 1001, 1007 (8th Cir. 1997); Deters v. Equifax Credit Info. Servs., Inc., 981 F. Supp. 1381, 1390 n.9 (D. Kan. 1997); Broome v. Biondi, 1997 WL 691421, at *16 (S.D.N.Y. Nov. 5, 1997).

7. E.g., Weidler v. Big J Enters., Inc., 953 P.2d 1089, 1101-02 (N.M. Ct. App. 1997); Daka, Inc. v. Breiner, 1998 WL 208887, at *13 (D.C. Apr. 30, 1998).

8. E.g., Parsons v. First Investors Corp., 122 F.3d 525, 530 (8th Cir. 1997); Williams v. ITT Fin. Servs., 1997 WL 346137, at *20 (Ohio Ct. App. Jun. 25, 1997), discretionary appeal allowed, 685 N.E.2d 545 (Ohio 1997).

9. E.g., Ikram v. Waterbury Bd. of Educ., 1997 WL 597111, at *4 (D. Conn. Sept. 9, 1997); Progressive Motors, Inc. v. Frazier, 1998 WL 244984, at *3 (D. Utah May 15, 1998).

10. E.g., Alejandre v. Republic of Cuba, 1997 WL 847062, at *9 & n.14 (S.D. Fla. Dec. 17, 1997); Inter Med. Supplies, Ltd. v. EBI Med. Sys., Inc., 975 F. Supp. 681, 696 (D.N.J. 1997); Barnett v. La Societe Anonyme Turbomeca France, 1997 WL 727555, [1998 Transfer Binder] Product Liability Rep. (CCH) 15,185, at 51,123 (Mo. Ct. App. Nov. 25, 1997); Mathie v. Fries, 121 F.3d 808, 816 (2d Cir. 1997).

11. Shiner v. Moriarty, 706 A.2d 1228, 1241 (Pa. Super. Ct. 1998).

12. E.g., Apache Corp. v. Moore, 960 S.W.2d 746, 749 (Tex. Ct. App. 1997); Kim v. Dial Serv. Int'l, Inc., 1997 WL 458783, at *14 (S.D.N.Y. Aug. 11, 1997); Groom v. Safeway, Inc., 973 F. Supp. 987, 995 (W.D. Wash. 1997).

13. E.g., Kim v. Nash Finch Co., 123 F.3d 1046, 1067 (8th Cir. 1997); Mahoney v. Canada Dry Bottling Co., 1998 WL 231082, at *8 (E.D.N.Y. May 7, 1998).

14. E.g., Leab v. Cincinnati Ins. Co., 1997 WL 360903, at *12 (E.D. Pa. Jun. 26, 1997); Vanwyk Textile Sys., B.V. v. Zimmer Mach. Am., Inc., 1997 WL 836157, at *21 (W.D.N.C. Dec. 4, 1997); Apache Corp. v. Moore, 960 S.W.2d 746, 749 (Tex. Ct. App. 1997).

15. Ettinger v. State University of New York State College of Optometry, 1998 WL 91089, at *11 (S.D.N.Y. Mar. 2, 1998).

16. Vandevender v. Sheetz, Inc., 490 S.E.2d 678, 695 (W. Va. 1997) (Maynard, J., dissenting) (citing Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart, J., concurring)).

17. 517 U.S. at 582.

18. E.g., Ace v. Aetna Life Ins. Co., 1998 WL 106106, at *7 (9th Cir. Mar. 12, 1998); Lawyer v. 84 Lumber Co., 991 F. Supp. 973, 976-77 (N.D. Ill. 1997).

19. 517 U.S. at 582.

20. Cherokee Elec. Coop. v. Cochran, 706 So. 2d 1188, 1194 (Ala. 1997).

21. Amato v. City of Saratoga Springs, 1997 WL 727531, at *1-*2 (N.D.N.Y. Nov. 7, 1997) (quoting Mathie v. Fries, 121 F.3d 808 (mem.), 1997 WL 426567, at *8 (2d Cir. 1997)); cf. Wood v. Allstate Ins. Co., 1997 WL 602796, at *7 (E.D. Pa. Sept. 19, 1997). Amato did, however, compare the punitive damage verdict "with awards approved in similar cases" and reduced the award to $15,000. 1997 WL 727531, at *2.

22. Jordan v. Shaw Indus., Inc., 131 F.3d 134 (mem.), 1997 WL 734029, at *5 (4th Cir. Nov. 26, 1997).

23. Id.

24. Id. (citing Lee v. Edwards, 101 F.3d 805 (2d Cir. 1996)).

25. See Life Ins. Co. v. Johnson, 701 So. 2d 524, 530 (Ala. 1997); Leak Stop, Inc. v. Keenon, 705 So. 2d 479, 485 (Ala. Ct. App. 1997); Talent Tree Personnel Servs., Inc. v. Fleenor, 703 So. 2d 917, 927 n.6 (Ala. 1997).

26. Teague v. Lane, 489 U.S. 288, 296 (1989) (quoting United States v. Carver, 260 U.S. 482, 490 (1923)).

27. Hopfmann v. Connolly, 471 U.S. 459, 461 (1985).

28. Thumma, Damages, Nat'l L.J., June 30, 1997, at B5 n.4 (citing cases); Sperau v. Ford Motor Co., 674 So. 2d 24 (Ala. 1995) (3.5:1), vacated, 116 S. Ct. 1843 (1996); American Pioneer Life Ins. Co. v. Williamson, 1995 WL 372051 (Ala. 1995) (8:1), vacated, 116 S. Ct. 1872 (1996); Continental Trend Resources, Inc. v. OXY USA, Inc., 44 F.3d 1465 (10th Cir. 1995) (111.5:1), vacated, 116 S. Ct. 1843 (1996); Apache Corp. v. Moore, 891 S.W.2d 671 (Tex. Ct. App. 1994) (208:1 & 104:1), vacated, 116 S. Ct. 1843 (1996); Union Sec. Life Ins. Co. v. Crocker, 667 So. 2d 688 (Ala. 1995) (unclear), vacated, 116 S. Ct. 1872 (1996); Life Ins. Co. v. Johnson, 684 So. 2d 685 (Ala. 1996) (20:1), vacated, 117 S. Ct. 288 (1996); Johansen v. Combustion Eng'g, Inc., 834 F. Supp. 404 (S.D. Ga. 1993) (319:1), aff'd, 67 F.3d 314 (11th Cir. 1995) (mem.), vacated, 116 S. Ct. 1843 (1996).

29. 517 U.S. at 583.

30. See, e.g., Lister v. Nationsbank of Delaware, N.A., 494 S.E.2d 449, 459 (S.C. Ct. App. 1997) ("maximum penalty" was $5,000 fine and 5 years imprisonment; reducing punitive damage award); Talent Tree Personnel Servs., Inc. v. Fleenor, 703 So. 2d 917, 927 (Ala. 1997) (affirming $1,500,000 punitive damage award; applicable criminal penalty was up to 20 years imprisonment); Johansen v. Combustion Eng'g, Inc., 1997 WL 423108, at *4 (S.D. Ga. June 9, 1997) (allowing 100 to 1 ratio; noting fines of "up to $100,000 per day per violation as well as imprisonment").

31. Food Lion, Inc. v. Capital Cities/ABC, Inc., 984 F. Supp. 923, 936 (M.D.N.C. 1997).

32. See, e.g., Leak Stop, Inc. v. Keenon, 705 So. 2d 495, 485 (Ala. Ct. App. 1997); Union Sec. Life Ins. Co. v. Crocker, 1997 WL 465647, at *5 (Ala. Aug. 15, 1997), cert. denied, 118 S. Ct. 1515 (1998); Hillcrest Ctr., Inc. v. Rone, 1997 WL 707069, at *10 (Ala. Aug. 1, 1997).

33. BMW, 517 U.S. at 574-75.

34. See, e.g., FDIC v. Hamilton, 122 F.3d 854, 862 (10th Cir. 1997); Groom v. Safeway, Inc., 973 F. Supp. 987, 995 (W.D. Wash. 1997); Leab v. Cincinnati Ins. Co., 1997 WL 360903, at *15 (E.D. Pa. June 26, 1997).

35. See, e.g., Guzman v. Tower Dev., Inc., 133 F.3d 927 (Table), 1997 WL 801449 at *2 (9th Cir. Dec. 19, 1997); Weidler v. Big J Enters., Inc., 1997 WL 833968, at *12 (N.M. Ct. App. Dec. 15, 1997); Cherokee Elec. Coop. v. Cochran, 706 So. 2d 1188, 1194-95 (Ala. 1997).

36. See Vandevender v. Sheetz, Inc., 490 S.E.2d 678, 692 (W. Va. 1997) (rejecting "contention that BMW somehow altered the review factors previously identified in Garnes [v. Fleming Landfill, Inc., 413 S.E.2d 897 (W. Va. 1991)]").

37. See Equal Employment Opportunity Comm'n v. HBE Corp., 135 F.3d 543, 556-57 (8th Cir. 1998) (citing pre-BMW cases); MMAR Group, Inc. v. Dow Jones & Co., 987 F. Supp. 535, 549-50 (S.D. Tex. 1997) (same; alternative holding).

38. E.g., Ford Motor Co. v. Sperau, 1997 WL 545878, at *13-*14 (Ala. Sept. 5, 1997), cert. denied, 118 S. Ct. 1519 (1998); Letz v. Turbomeca Engine Corp., 1997 WL 727544, [1998 Transfer Binder] Product Liability Rep. (CCH) 15,184 (Mo. Ct. App. Nov. 25, 1997), transferred, (Mo. Mar. 24, 1998); Grynberg v. Citation Oil & Gas Corp., 573 N.W.2d 493, 504-08 (S.D. 1997).

39. American Pioneer Life Ins. Co. v. Williamson, 704 So. 2d 1361, 1367 (Ala. 1997); see also Equal Employment Opportunity Comm'n v. HBE Corp., 135 F.3d 543, 556 (8th Cir. 1998) (punitive damage award representing 5 percent "of the corporate parent's net worth . . . is a very high ratio").

40. Patel v. Patel, 1998 WL 4756, at *5 (Ala. Jan. 9, 1998).

41. Cherokee Elec. Coop. v. Cochran, 706 So. 2d 1188, 1195 (Ala. 1997).

42. Hillcrest Ctr., Inc. v. Rone, 1997 WL 707069, at *10 & n.4 (Ala. Aug. 1, 1997).

43. For federal courts, this rate is similar to first year BMW cases while, for state courts, the rate is higher than first year BMW cases. See Thumma, Damages, Nat'l L.J., June 30, 1997, at B6 (noting that "nearly half" of the first year federal court decisions "reduced or vacated and remanded punitive awards" but that "only one-third [of the state court cases] reduced or vacated and remanded" punitive damage awards).

44. Thumma, Damages, Nat'l L.J., June 30, 1997, at B6 (noting that, for first year BMW nominal damage cases, the ratio "appeared irrelevant").

45. Id.

This article was revised from an article originally publshed in the June 30, 1997
issue of The National Law Journal © 1997 NLP IP Company

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