The Upcoming Supreme Court Tobacco Case That Will Test Punitive Damages Rules:
|By ANTHONY J. SEBOK|
|Tuesday, Oct. 10, 2006|
On October 31, the Supreme Court will hear oral argument in Philip Morris v. Williams, in which it will review a decision of the Oregon Supreme Court. It is the latest in a series of cases in which the Supreme Court has been asked to use the Due Process Clause of the Constitution to limit punitive damages awards rendered in state court cases.
In this two-part series, I will examine the politics and the law that lay behind this case.
The Supreme Court's Two Key Cases on Punitive Damages Limits
The Supreme Court's modern odyssey with punitive damages began in 1996, with BMW of North America Inc. v. Gore. There, the Court overturned a $2 million Alabama punitive damages award that had resulted from a consumer fraud claim as to which there was only $4000 worth of compensatory damages. (Compensatory damages, as the name suggests, aim to compensate actual harm to the plaintiff, putting him back in the position he would have been in, absent the tort that was committed.)
In BMW v. Gore, the Court held, for the first time, that the U.S. Constitution set a limit on the size of the punitive damages award a state court could grant to a plaintiff.
One of the dissenters in Gore, Justice Scalia, scoffed at the idea that the Constitution set any sort of limit on what the states could do with their tort law. Scalia, to be sure, probably suspected the worst of many state juries, but, following Holmes, he also probably believes that if states like Alabama want to go to hell in a handbasket, it was the federal courts' responsibility to step aside and permit them to do so. Gore, predicted Scalia, would be a "road to nowhere." And indeed, since 1996, the Court has struggled to create workable rules for the state courts to use to apply its holding in Gore in specific cases.
In 2003, in State Farm v. Campbell, the Court once again grappled with the punitive damages Due Process issue. There, the punitive damages award was $145 million. But by comparison, the award of compensatory damages was only $1 million - representing the harm to the plaintiff from a bad-faith failure, by an insurance company, to settle, within policy limits, a personal injury case that had been brought against the plaintiff.
One key issue in State Farm was whether, in calculating punitive damages, the jury could take into account evidence of similar (and not so similar) bad acts by the defendant insurer against other policy holders. The Court said no.
More significantly, Justice Kennedy, on behalf of the majority, suggested that, except in highly unusual cases, punitive damages awards should not exceed a "single digit ratio" vis-à-vis the compensatory award in the case. In other words, a 9-to-1 ratio would be okay; a 145-to-1 ratio surely was not.
The Facts and Proceedings in the Court's New Punitive Damages Case
Now, with Philip Morris v. Williams, the Court will confront the issue of punitive damages once again. And this time, Scalia's pessimism about this line of decisions may be proven to have been right on the mark.
The facts of the case begin in 1997, when Jesse Williams died of lung cancer, after smoking for 45 years. His family sued Philip Morris in tort, alleging it was responsible for his death. In 1999, a jury in Oregon found that Williams was 50% responsible for his smoking, but found that Philip Morris had committed fraud. Accordingly, it awarded his family $821,000 in compensatory damages and $79.5 million in punitive damages, doubtless reflecting the jury's extreme distaste for what it found to be the tobacco company's fraud.
The trial court reduced the whopping punitive damages award to a still-considerable $32 million. Then the appellate court reinstated the full amount of $79.5 million. The Oregon Supreme Court denied review. But then, State Farm was decided - and it changed everything.
All around the country, state courts wielded State Farm like a sword, cutting punitive damages verdicts down to 9:1 and 8:1 ratios. But in the Williams case, the Oregon Supreme Court refused to reduce the $79.5 million punitive damages award.
In effect, the Oregon Supreme Court held that the Williams case was one of those highly unusual cases where State Farm did not apply. Put another way, it interpreted State Farm as not setting up a "hard" cap - that is, a cap that was mandatory for state courts to follow. So it deemed itself to be able to approve a punitive damages award that exceed the single-digit punitive-to-compensatory ratio that the Supreme Court had blessed in State Farm.
Having side-stepped State Farm, the Oregon Supreme Court then relied on BMW v. Gore. It noted that in Gore, the Supreme Court had made clear that the defendant's reprehensibility is the most important determinant of a punitive damages award - and that the defendant's reprehensibility can be measured, in part, according to how many other people it deliberately killed or injured. And it held that in the Williams case, a jury could have found that Philip Morris's conduct was highly reprehensible, in part because the company's fraudulent conduct injured many other people in Oregon in addition to Jesse Williams.
Of course, Philip Morris takes the position that what the Court said in State Farm was much more than merely advisory, and that the single-digit ratio ought to be applied to cut the punitive damages award down dramatically.
Should The Supreme Court Require Lower Courts to Enforce State Farm?
So Williams v. Philip Morris is now back before the Supreme Court. The feeling among many observers is that the Supreme Court needs to say something clear and direct to recalcitrant state and federal courts that do not take seriously the point of Gore and State Farm - in order to curb the award of exorbitant amounts of punitive damages, amounts that are grossly disproportionate to the actual harm caused by a particular tort.
Throughout the country, judges have found creative ways to evade the single-digit ratio set out by Justice Kennedy. Some argue that that ratio was only meant to cover financial injury cases, not cases involving grievous bodily harm. Some argue that the ratio ought to judge punitive damages not against actual harm (as measured in compensatory damages) but against the potential harm that the defendant could have caused with its risky and tortious conduct.
Finally, some judges, such as Richard Posner of the Seventh Circuit, seem to simply scoff at the Supreme Court's rule. In Mathias v. Accor Economy Lodging, Posner argues that no right-minded court could have meant what the Supreme Court said in State Farm, since deterrence requires that damages must equal the social cost of a defendant's act--a sum which is not always equal to ten times (or less) the actual damages suffered by the plaintiff. Finding the single-digit ratio ruling irrational, in other words, Posner opted to ignore it.
The Particular Questions Raised for the Court in Williams
Two questions are raised for the Court in Williams. The first is whether the plaintiff was permitted under the Constitution to ask the jury to punish Philip Morris for harms it caused to other Oregonian smokers, not just to Williams himself.
This question is very important, because it is clear that, although the jury may not have felt very sorry for Williams himself (recall that they held him 50% responsible), they were very angry about what Philip Morris had done in general.
The second question is whether the single-digit ratio created by Justice Kennedy in State Farm applied to all cases--and if only some, which ones? This question is, of course, very important as well.
No wonder all of corporate America in interested in the outcome of this case, and no wonder many--such as the big auto manufacturers--have submitted friend of the court briefs.
On the other side, many consumer groups and academics see this as an opportunity to reverse the recent, pro-defendant direction the Supreme Court has taken on punitive damages. The states have gotten involved too--the Attorney Generals of a number of states have filed a friend of the court brief in support of Williams, arguing that punitive damages under common law can help the state police fraud.
The Ramifications of the Case for Corporations, and Especially, for Big Tobacco
Clearly, the industry with the most at stake in this case is the tobacco industry itself. It has proven itself amazingly adept at limiting the financial threat of tobacco litigation. With the exception of the Schwab case, which I wrote about in my last column, there are no class actions of any significance threatening the industry. A ruling from the Court could either solidify that situation, by lowering the punitive-damages stakes in potential litigation, or incentivize future suits by allowing the single-digit ratio to be exceeded in unusual cases, and providing certainty as to which cases those would be.
State Farm strongly suggested that punitive damages should not be used to bootstrap an individual injury case into a class-action-like threat. And if that ruling holds, Big Tobacco is in relatively good shape. After all, even though personal injury cases involve large sums of money, the tobacco companies win so many of them that they can afford the occasional loss--if the damage is, at worst, a few million total: a sum in compensatory damages, plus that same sum times a single digit like eight or nine.
The other reason why corporate America is watching this case so carefully is that it will be one of the first and most interesting tests of the two new Republicans on the bench. Justices Scalia and Thomas broke with Rehnquist and Kennedy over the question of constitutional interpretation and punitive damages. Scalia, to his credit, refused to support a doctrine that in his eyes is tantamount to "substantive due process" - the same doctrine that provided the groundwork for Roe v. Wade -- even if it helps the Fortune 500 and the Republican Party's allies in business. With whom will Roberts and Alito ally themselves? Scalia the purist, or Kennedy the pragmatist?
These are the obvious reasons for why Williams will be one of the most interesting cases of the new Supreme Court Term. But how should the Court decide the case?
In my next column, I will set out the uneasy case against the Oregon Supreme Court and the U.S. Supreme Court's crude efforts to pull a hard cap out of thin air. And, as a bonus, I will explain why one does not have to agree with Scalia about every aspect of constitutional interpretation to agree with him when it comes to punitive damages and the Due Process Clause.