February 23, 2007

U.S. Supreme Court Limits Extent to Which State Court Juries May Consider Harm Inflicted on Third Parties in Awarding Punitive Damages

A recent decision by the United States Supreme Court has limited the extent to which juries may consider harm inflicted upon third parties in awarding punitive damages. In Philip Morris USA v. Williams,[1] the Court held, in a 5-4 opinion, that the Due Process Clause of the United States Constitution prohibits state courts from imposing punitive damages for injuries inflicted upon nonparties not before the court.

The Supreme Court’s decision is a reaction to attempts by plaintiffs to impose punitive damages not just for injuries caused to the specific plaintiff, but also for widespread harms allegedly caused by the defendant – as in Williams, where the plaintiff sought to punish the defendant tobacco company for all of the harm its products had allegedly caused to all smokers in the State of Oregon. While barring such punishment, the Court in Williams stated that juries may permissibly consider harm to nonparties in determining the reprehensibility of a defendant’s conduct as part of the punitive damages analysis.

The Court’s decision in Williams prohibiting punishment based on harm to nonparties is a logical outgrowth of its previous punitive damages rulings. Although open questions exist regarding the degree to which plaintiffs will be allowed to introduce evidence of harm to nonparties under the guise of showing “reprehensibility,” it is reasonably clear that Williams will further constrain the excesses of certain state courts that have continued to resist constitutional checks on the imposition of punitive damages.

Punitive Damages Prior to Williams

In recent years, the Supreme Court has analyzed the constitutional constraints that limit punitive damage awards by state court juries. In BMW of North America, Inc. v. Gore, [2]  the Court recognized that although states have “legitimate interests in punishing unlawful conduct and deterring its repetition” through the imposition of punitive damages, an award that is “grossly excessive” when compared to such legitimate state interests may violate the Due Process Clause. The Court established a three-part test to assist in determining when punitive damages are “grossly excessive,” including: “the degree of reprehensibility of the [conduct]; the disparity between the harm or potential harm suffered…and [the] punitive damages award; and the difference between this remedy and the civil penalties authorized or imposed in comparable cases.”[3]

In State Farm Mutual Automobile Insurance Company v. Campbell,[4] the Supreme Court refined this analysis in the context of a punitive damage award of $145 million that was based upon a $1 million compensatory damage award and that was influenced by plaintiffs’ attack on the defendant insurer’s nationwide policies. In overturning that award, the Court held that a state court may not award punitive damages that bear “no relation to the [plaintiffs’] harm,” and that the punitive damages analysis must be limited to conduct that has a “nexus to the specific harm suffered by the plaintiff.”[5]  As to the amount of the award, the Court held that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.”[6]  But, the Court noted, a higher ratio might be justified where “a particularly egregious act has resulted in only a small amount of economic damages.”[7]  By the same token, the Court noted that when compensatory damages are high, a ratio closer to one-to-one might be the upper limit.[8]  Thus, Campbell placed presumptive limits on the amount of punitive damages tied to the compensatory damages award, provided an “out” in the case of particularly egregious conduct, and made clear that the inquiry into the egregiousness of the defendant’s conduct must be tied to the plaintiff’s own harm.

The Williams Decision

Williams arose out of a wrongful death lawsuit brought by the estate of Jesse Williams against the tobacco company that manufactured the brand of cigarettes that he had smoked. The estate alleged negligence and deceit, claiming that the company knowingly and falsely led Williams to believe that smoking was safe. The jury found in favor of Williams’ estate, awarding $821,000 in compensatory damages and $79.5 million in punitive damages. After the trial judge reduced the punitive damage award and a state appellate court reinstated it, the United States Supreme Court remanded for consideration in light of Campbell. On remand, the Oregon Supreme Court rejected the company’s argument that “the Constitution prohibits a state jury ‘from using a punitive damage award to punish a defendant for harm to nonparties’” and upheld the jury award.[9] 

The United States Supreme Court granted certiorari to address whether “Oregon had unconstitutionally permitted [the defendant] to be punished for harming nonparty victims,” and reversed the punitive damage award.[10]  The Court held that the Due Process Clause prohibits a State from using a punitive damage award to punish a defendant for injuries inflicted upon nonparties.[11]  The Court reasoned that the Due Process Clause prohibits states from punishing a defendant without first providing the defendant an opportunity to present its defenses, and that imposing punishment for harms committed against nonparties would risk “arbitrariness, uncertainty, and lack of notice” – the “fundamental due process concerns to which our punitive damage cases refer.”[12]  Indeed, in the specific case at bar, the Court found that imposing punitive damages for injuries inflicted on nonparties would risk punishing the defendant for injuries suffered by smokers who “knew that smoking was dangerous or did not rely upon the defendant’s statements to the contrary.”[13] 

The Court did not, however, rule that the Due Process Clause prohibits the consideration of all evidence of harm to nonparties. Rather, the Court held that evidence of actual harm to nonparties may be used to show reprehensibility under the first prong of the Gore analysis – i.e., “[e]vidence of actual harm to nonparties can help to show that the conduct that harmed the plaintiff also posed a substantial risk of harm to the general public, and so was particularly reprehensible.”[14] The Court warned that a jury “may not go further than this and use a punitive damages verdict to punish a defendant directly on account of harms it is alleged to have visited on nonparties.”[15]  Recognizing the “practical problem” of how to distinguish a jury’s permissible consideration of harm to nonparties to determine reprehensibility from the impermissible imposition of punishment based on that same harm, the Court held that “state courts cannot authorize procedures that create an unreasonable and unnecessary risk of any such confusion occurring” and left it up to the state courts to develop procedures to protect against that risk.[16]

Four justices dissented in Williams. Justice Ginsberg, joined by Justices Stevens and Thomas, suggested that the Oregon jury’s punitive damage award was consistent with Due Process because the record reflected that it was based on reprehensibility rather than punishment for harm to others. Justice Stevens wrote separately to criticize, as elusive, the majority’s distinction between considering third-party harm in the context of reprehensibility as opposed to punishing the defendant for such harm. Justice Thomas dissented separately to reiterate his view, expressed in prior opinions, that the Constitution places no constraints on the size of punitive damage awards.

Implications of the Court’s Holding

The Court’s refusal in Williams to allow state court juries to consider harm to nonparties is a logical extension of its prior holdings in Gore and Campbell. The Court’s prior decisions in Gore and Campbell demonstrate its increased concern with the fairness of punitive damage awards and its application of substantive due process rights to protect against “grossly excessive” punitive damage awards. The Court also recognized in Campbell that certain punitive damage awards could be clearly excessive when compared with the actual harm suffered with a plaintiff. The Due Process concerns raised in Gore and Campbell are implicated where there is no relationship between the actual harm suffered by the plaintiff and the punitive damage award, and where the defendant has no means of defending itself against injuries suffered against anonymous third parties. Moreover, in Campbell the Court expressly recognized a required nexus between the defendant’s action and the harm to the individual plaintiff. The decision in Williams to rule out punishment for harm inflicted on nonparties is consistent, and indeed logically follows from, the Court’s previous decisions.

The Court’s opinion in Williams leaves open the extent to which harm to others may be considered as evidence in determining “reprehensibility.” Though the Court recognized the potential for confusion between the permissible use of evidence of third-party harm to show reprehensibility and the impermissible use of such evidence to punish the defendant for such harm, the Court’s admonition that state courts must protect defendants against such punishment provides little guidance on how this protection should be accomplished. Fortunately, the Court’s prior opinion in Campbell provides principles that state courts can apply. In particular, the Court in Campbell made clear that to be considered as part of the reprehensibility analysis, the defendant’s conduct toward others “must have a nexus to the specific harm suffered by the plaintiff” and that “[d]ue 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.”[17]  These statements strongly imply that the state courts must be very circumspect in their introduction of evidence concerning nonparties. The requirement that such evidence have connection to the “specific harm suffered by the plaintiff” means that the courts must closely scrutinize the proffered evidence of reprehensibility to make sure that such a connection exists. And the requirement that courts refrain from “adjudicat[ing] the merits of other parties’ hypothetical claims” will require courts to take a hard look at potential factual disputes which would need to be (but may not permissibly be) adjudicated if such evidence were to be received as probative on the issue of reprehensibility. Read in light of Campbell, there are reasons to believe that courts will not permit the exception – reprehensibility – to swallow up the rule requiring that punitive damages focus on the harm to the specific plaintiff who is before the court.

Finally, irrespective of how the reprehensibility versus punishment distinction plays out, Williams will likely have an immediate impact in those jurisdictions where state courts have resisted constitutional checks on punitive damages. For instance, the highest court of West Virginia recently held in In re Tobacco Litigation (Personal Injury Cases)[18] that the Due Process Clause permitted a bifurcated trial in which a plaintiff’s individual claims were determined after the punitive damages multiplier had already been set. Because Williams held that the Due Process clause requires a link between the punitive damages award and the harm to the individual plaintiff before the court, it would appear that such a bifurcated scheme would be ruled out by the decision in Williams.