PUNITIVE DAMAGES AFTER PHILLIP MORRIS USA V. WILLIAMS

Transcription

1 PUNITIVE DAMAGES AFTER PHILLIP MORRIS USA V. WILLIAMS THE WORLD IS FLAT: PUNITIVE DAMAGES AT HOME AND ABROAD IADC ANNUAL MEETING, BERMUDA JULY 11, 2007 DABNEY CARR TROUTMAN SANDERS LLP P.O. BOX 1122 RICHMOND, VA (804) ( (fax)

2 While not a clear victory nor as far-reaching as defendants had hoped, the Supreme Court s February 20,2007 ruling in Philip Morris v. Williams, 127 S.Ct (2007), that a jury may not award punitive damages to punish a defendant for harm it has inflicted on nonparties, represents an important step forward in the defense of punitive damages claims. Despite the departure of Chief Justice Rehnquist and Justice O Connor from a slim majority, the Supreme Court reaffirmed its holdings in BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996) and State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003), that the Due Process Clause provides both procedural and substantive limits on a State s power to award punitive damages. Moreover, at a minimum, Williams holding -- that a jury may not directly punish a defendant for harm or potential harm to nonparties -- places limits on the jury arguments a plaintiff may make and entitles a defendant to a limiting instruction whenever a court admits evidence of harm to non-parties. Finally, when read in conjunction with State Farm, the majority s decision provides defendants with a basis to limit or exclude evidence and argument relating to such harm. Though Williams explicitly recognizes that harm to non-parties is relevant to the determination of the reprehensibility of a defendant s conduct, on balance, the decision is a welcome one because it continues the Court s trend towards limiting punitive damages and provides additional tools to restrict punitive damages awards. BACKGROUND: BMW V. GORE AND STATE FARM V. CAMPBELL In BMW and State Farm, the Supreme Court made clear that while States have a legitimate interest in punishing unlawful conduct through punitive damages, the Constitution imposes both procedural and substantive limits on punitive damage awards. BMW, 517 U.S. at 559, State Farm, 538 U.S. at 416. The Due Process Clause prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor. State Farm, 538 U.S. at 416. To determine

3 whether a punitive damages award is grossly excessive, the court must consider three guideposts: (1) the degree of reprehensibility of the defendant s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded and the civil penalties authorized in comparable cases. BMW, 517 U.S. at 575. Of the three guideposts, the most relevant is the reprehensibility of a defendant s conduct. Id. It should be presumed a plaintiff has been made whole for his injuries by compensatory damages, so punitive damages should only be awarded if the defendant s culpability after having paid compensatory damages, is so reprehensible as to warrant the imposition of further sanctions to achieve punishment or deterrence. State Farm, 538 U.S. at 419. For the second guidepost, the Court has declined to set a bright-line ratio which a punitive damage award cannot exceed, but it has stated that few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process and has noted that an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety. Id. at 425. Ratios greater than single digits may comport with due process where a particularly egregious act has resulted in only a small amount of economic damages. Id. (quoting Gore, 517 U.S. at 582). Conversely, when compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. Id. at 426. Finally, as to the third guidepost, the Court has cautioned that while the existence of a criminal penalty is relevant, criminal penalties have less utility in determining the dollar amount of an award. Id. at 428. Great care must be taken to avoid use of the civil process to assess criminal 2

4 penalties that can be imposed only after the heightened protections of a criminal trial have been observed. Id. THE WILLIAMS CASE The plaintiff in Williams was Mayola Williams, the widow of a heavy cigarette smoker, Jesse Williams. Mayola Williams claimed that Jesse continued to smoke based on Philip Morris knowing and false representations that smoking was not harmful. The jury found in favor of Williams and awarded compensatory damages of approximately $821,000 and punitive damages of $79.5 million, a ratio of close to 100:1. Williams, 127 S.Ct. at The trial judge set the punitive damage award aside as excessive, but the Oregon Court of Appeals reversed and reinstated the award. After its decision in State Farm, the U.S. Supreme Court remanded the case, and the Oregon Court of Appeals reinstated the original award. Philip Morris then obtained review in the Oregon Supreme Court. There, Philip Morris argued that the trial court erred when it refused to instruct the jury that it could not punish the defendant for harm to anyone other than Williams. In his closing argument, Williams counsel asked the jury to think about how many other Jesse Williams in the last 40 years in the State of Oregon there have been... Cigarettes... are going to kill ten [of every hundred]. [And] the market share of Marlboro s [i.e., Philip Morris] is one-third [i.e., one of every three killed]. Id., 127 S.Ct. at Based on that argument, Philip Morris asked the trial court to instruct the jury that: [Y]ou may consider the extent of harm suffered by others in determining what [the] reasonable relationship is between any punitive award and the harm caused to Jesse Williams by Philip Morris misconduct, [but] you are not to punish the defendant for the impact of its alleged misconduct on other persons, who may bring lawsuits of their own in which other juries can resolve their claims... 3

5 Id. The trial court refused the instruction, and the Oregon Supreme Court affirmed, rejecting Philip Morris claim that the Constitution prohibits a state jury from using punitive damages to punish a defendant for harm to nonparties. Id. 127 S.Ct. at THE SUPREME COURT S DECISION The Supreme Court reversed the Oregon Supreme Court and remanded the case. Justice Breyer, writing for a majority that included Chief Justice Roberts and Justices Kennedy, Souter and Alito, held that the Constitution s Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that it inflicts upon nonparties. First, a defendant has no opportunity to defend against the claims of parties who are not before the Court. Second, to permit punishment for a nonparty victim would add a near standardless dimension to the punitive damages equation, magnifying the risks of arbitrariness, uncertainty and speculation. Id., 127 S.Ct. at Finally, the Court could find no authority supporting the use of punitive damages awards for the purpose of punishing a defendant for harming others. Id. While a jury may consider the reasonableness of a punitive damage award in light of the potential harm from the defendant s conduct, the potential harm at issue is harm potentially caused the plaintiff. Id. (emphasis in original). The Court agreed with Williams, however, that harm to others is relevant to the determination of reprehensibility. Id., 127 S.Ct. at While a jury may consider harm to others in determining reprehensibility, though, it 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. Id., 127 S.Ct. at Thus, courts must provide assurance that the jury will ask the right question, not the wrong one, and must avoid procedures that deprive juries of proper legal guidance. Id. The Court acknowledged that it is difficult to know whether a jury, 4

6 in considering the reprehensibility of a defendant s conduct, also punishes a defendant for actual or threatened harm to others. The Court s only answer was that state courts cannot authorize procedures that create an unreasonable and unnecessary risk of any such confusion. Id. at 1065 (emphasis added). In particular, where the risk of that misunderstanding is a significant one -- because, for instance, of the sort of evidence that was introduced at trial, or the kinds of argument that plaintiff made to the jury in Williams, a court must protect against the risk of confusion. Id. States have flexibility to determine what kinds of procedures to implement, but they must provide some form of protection in appropriate cases. Id. In dissent, Justice Stevens characterized the majority s decision as imposing a novel limit on a State s power to allow punitive damages and stated that he could see no reason that harm to others could not be considered when determining a punitive damage award, since such damages are a sanction for the public harm a defendant s conduct had caused. Further, the distinction between considering third-party harm for reprehensibility and considering it in order to punish the defendant directly, Justice Stevens found, was a nuance that eluded him. Id., 127 S.Ct. at Likewise, Justice Ginsberg found no error in the rulings of the Oregon courts and no evidence that the jury did anything other than assess the reprehensibility of Philip Morris conduct. Id. 127 S.Ct. at She also found that Philip Morris had not adequately preserved its objections to the instruction the trial court actually gave, to the evidence at trial or to opposing counsel s argument. The sole objection Philip Morris had preserved was the failure to give the instruction it offered, which Judge Ginsburg found was more likely to confuse than to enlighten. Id., 127 S.Ct. at

7 ANALYSIS OF THE WILLIAMS DECISION Perhaps the most significant aspect of the Williams decision is that the balance in the Supreme Court has not changed. BMW, State Farm and now Williams have been decided by slim 5-4 majorities, and two of the Court s more conservative justices, Justices Scalia and Thomas, have joined two of the more liberal justices, Justices Ginsburg and Stevens, to dissent from both State Farm and Williams. With the departure of Chief Justice Rehnquist and Justice O Connor from the Court since the State Farm decision, there was a considerable question whether the Court would continue to find a Constitutional basis on which limit the authority of a State to award punitive damages. Williams not only reaffirms BMW and State Farm, it clarifies some uncertainty from those cases. Though often overlooked in the commentary on the decision, the continued existence of a five-justice majority willing to limit punitive damage awards is significant not only for future cases before the Court but also for the application of BMW, State Farm and Williams in the lower courts. After Williams, lower courts, especially the federal circuit courts, will recognize that for the foreseeable future there will remain a majority of justices in favor of constitutional limitations on punitive damage awards, enhancing the precedential force of these decisions and increasing the likelihood that they will be faithfully applied by the lower courts. The closeness of the vote in the Supreme Court, however, has invariably led to muddled decisions and only incremental advances in the law. As one court has noted, the history of the experience of he Supreme Court with punitive damages over the last decade-and-a-half reflects an evolutionary, not a revolutionary, course. In re Exxon Valdez, 472 F.3d 600, 612 (9 th Cir. 2006). Thus, in Williams, the Court limited its decision to the procedural due process aspects of the case and refused to reach whether the award was grossly excessive because of the high 6

8 ratio of punitive to compensatory damages. Williams, 127 S.Ct. at The Court s refusal to reach the issue of the relationship of the punitive award to the compensatory award, in fact, may leave open the issue of whether there is a five-member majority for overturning punitive damage awards on the grounds of excessiveness. See In re Exxon Valdez, 472 F.3d at 613 (noting that the Supreme Court has only overturned two punitive damage awards because of their size and each of the awards in those cases each exceeded a ratio of 100:1). Williams also illustrates the analytical flaws in the Supreme Court s jurisprudence on punitive damages. It is very difficult to justify why a jury may consider harm to others when determining reprehensibility but may not consider the same evidence when determining the amount of damages. The convoluted jury instruction Philip Morris offered in Williams, and Justice Breyer s tacit admission that the Court could not instruct lower courts how to prevent jury confusion on the issue demonstrate the limitations of the Court s approach. In fact, the Williams decision gives the impression that had the Oregon Supreme Court not explicitly stated that a jury can punish for conduct that may harm other parties, the case might have been decided the opposite way, illustrating the imprecision in the analysis. Id., 127 S.Ct. at WHAT THE FUTURE HOLDS Despite its limitations, Williams does provide some important assistance in defending punitive damage claims. First, under Williams, where a plaintiff introduces evidence of harm to non-parties, it seems clear that a defendant is entitled, at a minimum, to a limiting instruction that the jury can consider such evidence only when assessing the reprehensibility of a defendant s conduct and may not consider such evidence when determining the amount of punitive damages. See Moody v. Ford Motor Co., 2007 U.S. Dist. LEXIS at *78 (N.D. Okla. March 20, 2007) (stating that under Williams, the jury must be instructed that evidence of harm to non- 7

9 parties has no bearing on the amount of punitive damages. ). While that distinction may be elusive, it could have a real impact on the size of punitive awards by precluding the use of multipliers to reach punitive damage verdicts. As one commentator has pointed out, consideration of harm to non-parties when determining reprehensibility might result in a modest increase in the ratio of punitive damages to compensatory damages. On the other hand, allowing juries to directly punish a defendant for harm to non-parties is likely to produce much larger ratios. Tager, Evan M., Philip Morris USA v. Williams: Another Brick in the Punitive Damages Wall, Legal Backgrounder, Vol. 22, No. 10 (March 9, 2007). BMW itself, in which the jury multiplied the number of similar transactions by the amount of the plaintiff s compensatory damages, is an example of the type of result that Williams precludes. Id. (citing BMW, 517 U.S. at 574 n. 21). Similarly, after Williams, courts are far more likely to preclude arguments, such as the plaintiff made in Williams, in which the jury is asked to think about all of the other individuals that may have been harmed. In fact, in one of the first cases decided since Williams, a district court criticized arguments by plaintiff s counsel that it found closely mirror objectionable statements made by the plaintiff s attorney in Williams. Moody, 2007 U.S. Dist. LEXIS at *76 (describing arguments comparing the number of deaths from automobile rollovers to the number of deaths in Iraq as a veritable supernova of prejudice ). Moreover, the Supreme Court s decision in Williams is not limited to jury instructions and argument. Williams prohibits any procedures that create an unreasonable and unnecessary risk of jury confusion, including the admission of evidence that creates a significant risk of misunderstanding. Williams, 127 S.Ct. at State Farm already required that evidence of harm to other parties must have a nexus to the specific harm suffered by the plaintiff. State 8

10 Farm, 538 U.S. at 422. Williams caution regarding the risk of jury confusion caused by the introduction of evidence of harm to non-parties adds force to the arguments to exclude or severely limit the type and scope of such evidence. See Tager, supra. Thus, plaintiffs in future cases bear the burden of laying a foundation that evidence of harm to non-parties is substantially similar to the harm suffered by the plaintiff and will not create confusion by the jury as to the purposes for which they may consider such evidence. Evidence of other conduct or harm to nonparties that is not closely the same as that at issue should face a higher bar for admissibility. One of the issues remaining after Williams is how quickly the Court will return to the question of punitive damages, and whether the Court will address the standards under which a punitive damage award can be considered grossly excessive. One potential candidate for Supreme Court review is In re Exxon Valdez, 472 F.3d 600 (9 th Cir. 2006). In that case, the Ninth Circuit issued its second decision addressing a jury verdict awarding $5 billon in punitive damages. After the Ninth Circuit s most recent remand of the case, the district court reached a punitive damages figure of $4.5 billion. The Ninth Circuit ordered a remittitur of $2 billion, resulting in a $2.5 billion punitive damage award based on a calculation of actual harm of approximately $500 million. Id. at 602. Thus, the Ninth Circuit upheld a ratio of punitive damages to actual harm of 5:1, despite its finding that Exxon s conduct was in the mid-range of reprehensibility and that there were several mitigating facts that serve materially to reduce the reprehensibility of the original conduct, including the prompt action Exxon took to clean up the oil spill and compensate plaintiffs for economic losses, and the substantial costs that Exxon had already borne in the clean up. Id. at 618. It is hard to square the Ninth Circuit s conclusions regarding the proper ratio in In re Exxon Valdez with State Farm s statements that an award of more than four times the amount of 9

11 compensatory damages might be close to the line of constitutional impropriety and that a lesser ratio, perhaps only equal to compensatory damages, may be the outermost limit of the due process guarantee where compensatory damages are substantial. State Farm, 538 U.S. at 425. Moreover, there may be an argument that the Ninth Circuit improperly included harm to nonparties in its assessment of punitive damages because its calculation of $500 million in actual harm included all the judgments, settlements and other recoveries obtained from Exxon, not just damages paid to the plaintiffs in the suit at issue. The Ninth Circuit denied rehearing en banc in the case in late May, 2007 U.S. App. LEXIS 12031, and so Exxon will likely be filing its petition for writ of certiorari by the end of the summer. CONCLUSION Because the Court did not reach the issue of the excessiveness of the award in Williams, the reaction to the decision among the defense bar has been muted. The Court s reaffirmance of the Constitutional limitations on punitive awards, and the restrictions the decision imposes on the use of evidence of harm to non-parties, however, are important developments in the continuing effort to limit punitive awards. The question now becomes how the lower courts will apply the decision and whether the Supreme Court will soon accept another punitive damage case. 10