legislation: Supreme Court Reduces "Excessive" Punitive Awards

Why are waste equipment manufacturers and other companies that are often targeted in lawsuits happy about an Alabama dentist who bought a BMW with a bad paint job?

In 1994, an Alabama state court awarded $2 million in punitive damages to a dentist who paid $40,000 for a "new" car without knowing that the dealer had partially repainted the vehicle at a cost of $600. Last year, the U.S. Supreme Court ruled that the huge award was grossly excessive and unconstitutional. (BMW v. Gore).

Since then, five federal appeals courts have applied the decision to cases involving companies and individuals, rejecting what they characterized as excessively high punitive awards.

The U.S. Circuit Court of Appeals for the Tenth Circuit, based in Den-ver, slashed a $30 million award to $6 million in a dispute between energy companies. Before the BMW decision was handed down, the same court had upheld the award. Meanwhile, the Richmond, Va.-based Fourth U.S. Circuit Court of Appeals upheld a trial judge who had reduced a multi-million dollar punitive-damages award in a Maryland case involving defective machinery.

In New Orleans, the Fifth Circuit U.S. Circuit Court of Appeals ordered a federal district judge to lower a $150,000 punitive award in a racial discrimination lawsuit.

The Washington, D.C. attorney who successfully handled the energy case's appeal, feels that the courts are really taking the Supreme Court's excessiveness test very seriously.

Business and industry long have decried big punitive awards, which are intended to discipline and deter corporate misbehavior. Compensatory damages, on the other hand, reimburse actual losses. For their part, plaintiffs' lawyers hail punitive awards as necessary to punish gross conduct. Indeed, they note many punitive awards occur in cases where a company sues another company.

By contrast, the highest courts in two socially- and politically-conservative states - Idaho and South Dakota - seemingly unaffected by the Supreme Court's ruling - have upheld large punitive awards. If these opposing trends continue, plaintiffs' lawyers are likely to be even more resolute in filing cases in state courts than they have been in the past.

The Supreme Court for years has been uneasy about large punitive awards. In a 1989 decision, Brown-ing-Ferris Industries of Vermont Inc. v. Kelco Disposal Inc., the court upheld a large punitive damage award to a small hauler that had been victimized by a local affiliate of a national waste firm.

Nevertheless, said Justice Sandra Day O'Connor in a concurring opinion, the reviewing court "should examine the gravity of the defendant's conduct and the harshness of the award of punitive damages." In short, the punishment should fit the crime.

But not until the BMW ruling did the high court actually invalidate an award as unconstitutionally "excessive." As a majority of the justices saw it, a $2 million punitive award simply could not be justified where the actual damages amounted to only $4,000. The justices directed federal district and appellate judges to assess the degree of "reprehensibility" of the defendants' conduct and to relate such awards to comparable criminal or civil penalties.

In the Tenth Circuit decision, the Supreme Court had told the appellate panel to reconsider a $30 million jury verdict in favor of a group of independent natural gas producers. The jury had found that the defendant, which operates a natural gas pipeline and processing system, illegally told its competitors that they could not do business with the producers. Such action cost the independents nearly $1 million in earnings.

Early last year, the Tenth Circuit rejected the defendant company's argument that the award should be reduced because the injury was purely economic. But after the BMW decision, the appeals court changed its mind and sided with the defendant, giving the independent producers a choice: Accept $6 million or face a new trial on punitive damages.

Elsewhere, the Second Circuit U.S. Court of Appeals in New York threw out a $200,000 punitive damage award to a motorist in a suit against a Waterbury, Conn., police officer. The jury found the policeman guilty of malicious prosecution for arresting the motorist solely to harass him. But the appeals court compared the indignities suffered by the motorist to the abuse received by other victims of police misconduct, and offered the motorist the option of a reduced damages award ($75,000) or another trial on punitive damages.