Court limits punitive awards

September 1, 2008 By    

The U.S. Supreme Court has finally weighed in on the limits of punitive damages that may be assessed in its recent ruling in the historical Exxon Shipping Co. v. Baker case.

 John V. Mccoy
John V. Mccoy

The court held that under federal maritime law, an award of punitive damages may not be greater than a 1:1 ratio with compensatory damages. The verdict reduced the prior $2.5 billion punitive-damages award to $500 million.

While the Exxon decision presents issues related specifically to federal maritime law, a large portion of the opinion focuses on the court’s concern about out-of-control punitive-damage awards. Extensive due-process analyses were performed in order to articulate and clarify verbal standards that guide judges and juries in their assessments of these awards.

While the court is careful to state that the rules in Exxon are limited to maritime common-law cases, its reasoning and a much of its language suggest that the court may soon impose stricter constitutional limits on punitive damages in all cases. Among its most conspicuous statements: “The real problem [with punitive-damage awards], it seems, is the stark unpredictability of punitive awards.”

Increasing consistency?

Seeking to eliminate the “stark unpredictability” of punitive-damage awards, the court examined three ways to increase their consistency and predictability:

  • By articulating a more rigorous, verbal formula to assist judges and jurors in assessing punitive damages;
  • By setting a hard dollar cap on the awards; or
  • By “pegging punitive to compensatory damages using a ratio or maximum multiple.”

In rejecting the likely success of verbal formulations used in jury instructions, the court stated, “Instructions can go just so far in promoting systematic consistency when awards are not tied to specifically proven items of damage … our experience … leaves us doubtful that anything but a quantified approach will work.”

The court similarly rejected the notion that a cap would work, citing an inability to settle upon a particular dollar figure appropriate for every case and the ability of the legislature to revisit the issue at will.

Ultimately, it chose to use a 1:1 ratio between the damages awarded to compensate for actual loss or harm and the damages awarded to punish the wrongdoers as the best way to establish predictability.

In other words, punitive damages should not exceed $1 for each $1 of compensatory damages awarded – at least in the context of maritime common-law cases.

Limitations

The Exxon verdict has its limitations, however.

It is not a constitutional ruling at all, but rather relates to the court’s common-law powers. The federal maritime jurisdiction of this case allows courts to apply judge-made common law in the absence of a statute or regulation stating otherwise.

The court also did not engage in a constitutional analysis or argue whether the lower state court punitive-damage award violated due process – arguments that are normally utilized in general tort law.

The decision’s only direct precedential value, therefore, is reserved for other federal common law maritime cases.

Yet the Exxon decision contains the Supreme Court’s obvious signal that it has grown exceedingly skeptical that it can clearly spell out a single set of workable guidelines to bring order and consistency to the chaotic realm of punitive-damages awards.

As a result, we may soon see the court begin to use numbers and ratios to impose strict constitutional limits on punitive damages in all of its cases.

If this case is any indicator, the most likely path will be for punitive damage awards to be limited to the amount of compensatory damages awarded in the underlying case.

John V. McCoy is the president of McCoy & Hofbauer, S.C. and specializes in the representation of propane companies. He can be reached at 800-599-8300 or jmccoy@mh-law.us.

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