Seeking Balance on Punitive Damages, Imperfectly

By June 30, 2008Briefly Legal

A bit more fodder on last week’s U.S. Supreme Court decision in Exxon Shipping v. Baker, in which the court reduced the punitive damages awarded in the wake of the Exxon Valdez oil spill from $2.5 billion to a maximun of $507.5 million — the same amount as awarded in compensatory damages. (Copy of the opinion here.)

Kathleen Flynn Peterson, the head of the national trial lawyers association, the American Association for Justice, issued a statement in response. Excerpt:

The Court said that punitive damages may be capped through a ratio only in maritime cases that do not involve extraordinary misconduct by the corporation itself. Those in the business community who claim this decision stands for a generalized punitive damage limit are wrong, and the Court has made clear their decision applies only to maritime cases. [Our emphasis.]

Straw-man argument. No one in the business community we saw oversold the decision as a sweeping statement on punitive damages, making it clear that the ruling was made under maritime law.  Still, it might influence decision-making in other cases. Take a look at the NAM release:

The ruling was decided on the basis of maritime common law, not constitutional principles, and so is limited in scope, said Quentin Riegel, the NAM’s Vice President for Litigation and Deputy General Counsel. At the same time, the Justices clearly found the original punitive damage award excessive and arbitrary.

“The Court’s ruling continues its recent, important trend of clarifying the limits on punitive damages,” Riegel said. “The formula they chose was based on reasonableness in a case with ‘no earmarks of exceptional blameworthiness.’ By settling on a one-to-one standard – punitives equal to compensatory damages – they provided a standard that other courts can turn to.

And that’s it. L. Gordon Crovitz, a columnist with the Wall Street Journal, further explained the considerations involved in setting punitive damage limits in today’s “Common-sense in punitive damages.”

Over the years, the justices have tried to find limits for punitive damages, with mixed success. Relying on the due process clause, an earlier Supreme Court opinion said that a 9-to-1 punitive-to-compensatory ratio was probably the limit for cases in which there was no intent or maliciousness. In a footnote in this Exxon case, the justices said that when the compensatory damages are substantial, the “constitutional outer limit may well be 1:1.” Later litigation will determine if this indeed has become the new bright-line test for excessive punitive damages.

It’s so unusual for the justices to set clear guidelines that Justice Souter felt obliged proactively to defend the court’s approach. “History certainly is no support for the notion that judges cannot use numbers,” he wrote. He noted that judges made up the 21-year period in the rule against perpetuities relating to inheritances, and courts over the centuries have set common-law age limits in many situations. It would usually be unwarranted judicial activism for judges to replace their judgment for legislative decisions, but where there’s a void, common-law judges do set limits. These can be somewhat arbitrary, but still manage to establish rules of the road.

The void that Crovitz refers to is the worst of all possible worlds for business; such a void includes the possiblity that punitive damages will destroy a company all together, which can lead to all sorts of ill-considered decisions. Predictablity, or at the very least the lack of capriciousness, is the hallmark of a rule of law, with similar wrongs producing similar consequences, in effect reinforcing deterrence. 

In any case, if the choice is straw man versus common-sense, we’ll take the latter.

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