U.S. Supreme Court’s Decision Limits the Amount of Punitive Damages Available under Federal Common Law and Comments on Due Process Limitations on Punitive Damages in Class Actions

June 26, 2008

On June 25, 2008, the Supreme Court issued an important decision clarifying the standards for punitive damages review under federal common law. In an opinion authored by Justice Souter (in which Chief Justice Roberts and Justices Scalia, Kennedy, and Thomas joined, and Justices Stevens, Ginsburg and Breyer joined in part), the Court vacated a $2.5 billion punitive damages award as excessive under federal maritime common law, and set an upper limit on such awards of a 1:1 punitive-to-compensatory damages ratio. 

In Exxon Shipping Co., et al. v. Baker, et al., 554 U.S. __ (2008), following a jury trial the district court entered judgment for respondents in the amount of $507.5 million in compensatory damages and $5 billion in punitive damages arising from the highly publicized 1989 Exxon Valdez oil spill. The Ninth Circuit later remitted the punitive damages award to $2.5 billion. Petitioners sought review of the remaining $2.5 billion punitive damages award under both federal maritime common law and the Due Process Clause of the Fifth Amendment, but the Supreme Court granted review on only the federal maritime law question. 

The Court held that a 1:1 ratio represented the "upper limit" as a matter of federal maritime law, and vacated the punitive damages award. The Court arrived at this conclusion after thoroughly surveying and considering the law in several states, as well as academic studies that have documented the frequency and amounts of punitive damages verdicts. It also examined various states’ punitive damages laws and regulations, and noted that the median punitive-to-compensatory damages ratio for all American jury and bench trials is 0.65:1. This figure "probably marks the line near which cases like this one largely should be grouped," the Court found, because it expected that this median ratio "would roughly express jurors’ sense of reasonable penalties in cases with no earmarks of exceptional blameworthiness [or] modest economic harm." Specifically, the Court found that for the conduct at issue in Baker–"reckless action, profitless to the tortfeasor, resulting in substantial recovery for substantial injury"–even a 3:1 ratio would be too high. A 1:1 ratio, well above the median, provided a "fair upper limit."

The Baker decision is important not only for the limit it establishes in federal maritime common law, but also for the broader guidance that it provides to courts throughout the country in interpreting the scope of the limits on punitive damages awards under the federal Due Process Clause and state common law. In a far more detailed and pointed manner than it had previously, the Court noted, for example, the problem of the "stark unpredictability of punitive awards." It found that the "spread [between punitive damages awards] is great, and the outlier cases subject defendants to punitive damages that dwarf the corresponding compensatories," and that this disparity results not from fine-tuned judgments by judges and juries based on varying fact-patterns, but from "the inherent uncertainty of the trial process" (quoting BMW of N. Am., Inc. v. Gore, 646 So. 2d 619, 626 (1994) (per curiam)). The Court relied on several scholarly studies in establishing the factual basis for this disparity in punitive damages awards, and in doing so lent its imprimatur to statistics demonstrating the low median ratio for punitive-to-compensatory damages and the wide disparity in the outliers from that median. The Court concluded that this "implication of unfairness" is in tension with our system "whose commonly held notion of law rests on a sense of fairness in dealing with one another." Even those defendants characterized as the worst offenders should be able to "look ahead with some ability to know what the stakes are in choosing one course of action or another."

Notably, in fashioning its 1:1 limit as a matter of federal maritime law, the Court repeatedly reaffirmed and drew upon its prior decisions in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996), and State Farm Mutual Auto Insurance Co. v. Campbell, 538 U.S. 408 (2003). In particular, it noted State Farm’s presumption that single-digit multipliers are more likely to comport with due process, and that in cases involving large compensatory damages a 1:1 ratio "can reach the outermost limit of the due process guarantee." Because concerns over unpredictability and "fair notice" to defendants are unquestionably at the heart of federal due process review, the Baker decision should prove quite helpful to state and federal courts around the country as they seek to set appropriate standards for bringing arbitrary awards under control.

Finally, the Court expanded on a statement it made in State Farm regarding situations where a low, 1:1 punitive-to-compensatory-damages ratio is the "outermost limit of the due process guarantee" (emphasis added), and in doing so noted that punitive damages in class actions "when large numbers of potential plaintiffs are involved" are often if not always limited by a 1:1 ratio. The Court in State Farm stated that such a ratio is appropriate "[w]hen compensatory damages are substantial," 538 U.S. at 425 (emphasis added), and in Baker, the Court clarified that "substantial" refers not to the damages awarded an individual plaintiff, but the aggregate amount awarded against a defendant:

The criterion of "substantial" takes into account the role of punitive damages to induce legal action when pure compensation may not be enough to encourage suit, a concern addressed by the opportunity for a class action when large numbers of potential plaintiffs are involved: in such cases, individual awards are not the touchstone, for it is the class option that facilitates suit, and a class recovery of $500 million is substantial. In this case, then, the constitutional outer limit may well be 1:1.

To the extent punitive damages may ever be awarded in a class action, the Court’s observation would appear to limit such damages, as a matter of due process, to a maximum 1:1 ratio on a classwide basis–regardless of the size of any individual class member’s claim. Of course, the ratio in any particular class may well be lower, particularly in light of the coordinate due process requirement that any due process award bear a reasonable relationship to an individual’s injury.

The Supreme Court’s decision is available at: http://www.supremecourtus.gov/opinions/07pdf/07-219.pdf.

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