More questions about punitive damages.

No decision this year will be more important for trial lawyers than the Supreme Court's rulingin Philip Morris v. Williams. (1) This case marks the third time in 11 years that the Court has imposed constitutional limits on punitive damages awards, but it seems to go further than the earlier rulings.

In a 5-4 decision, the Court held that juries cannot base punitive damages awards on harm to nonparties. However, it qualified this holding by saying that juries may consider harm to nonparties in assessing the reprehensibility of the defendant's conduct, which the Court has repeatedly said is the most important factor in determining the size of a punitive damages award.

Trial judges are likely to struggle for years with formulating jury instructions that simultaneously tell the jury to consider and not consider harm to people other than the plaintiffs. Appellate courts are left with little guidance on when the size of a punitive damages award is appropriate and when it is unconstitutional. Juries can consider harm to others in determining reprehensibility, but they cannot base punitive damages on harm to others. How can an appeals court possibly determine whether a punitive damages award violates this command?

Perhaps the ruling's greatest significance is the composition of the Court's majority. Justice Stephen Breyer wrote the opinion, joined by Chief Justice John Roberts and Justices Samuel Alito, Anthony Kennedy, and David Souter. Justices Ruth Bader Ginsburg, Antonin Scalia, John Paul Stevens, and Clarence Thomas dissented. Until this decision, it was not known how the two newest justices, Roberts and Alito, would view constitutional challenges to punitive damages. Some Court watchers speculated that they might agree with fellow conservative justices Scalia and Thomas, who in earlier cases had found that the Constitution imposes no restrictions on the size of punitive awards. But Philip Morris shows that they will be part of a five-person majority to enforce due process limits on punitive damages. That-and the lack of clarity in the Court's opinion--virtually ensures that the Supreme Court will revisit the issue in the near future.

Philip Morris is the Supreme Court's third major decision using the Due Process Clause to impose a limit on the size of punitive damages awards. In BMW of North America, Inc. v. Gore, the Court held that grossly excessive punitive damages violate due process. (2) The Court invalidated a punitive award of $2 million against an automobile manufacturer for repainting cars and not disclosing that to consumers.

The Court, in an opinion by Stevens, said the award was impermissible, in part because the jury based it on BMW's conduct in other states where its actions were lawful. The Court set out three "guideposts" for determining whether an award is grossly excessive. First and most important is the reprehensibility of the defendant's conduct--the more reprehensible it is, the larger an appropriate punitive damages award can be.

Second is the ratio between the punitive damages award and the actual loss suffered by the plaintiff. The Court stressed that there is no bright-line test. In fact, it cited approvingly to TXO Production Corp. v. Alliance Resources Corp., where it had upheld punitive damages 500 times the compensatory damages awarded in the case. (3)

The final guidepost looks to other punishments in the state for the conduct at issue. Minimal other sanctions indicate that the state does not regard the conduct as particularly wrongful.

The Court used these factors to invalidate the punitive award against BMW. The Court explained that repainting cars is not particularly reprehensible: No lives were in danger, and there was no risk to public safety. The punitive damages of $2 million far exceeded the $4,000 compensatory award. And Alabama provided only minimal other sanctions for BMW's conduct.

Damages ratio

The Court returned to the issue in State Farm Mutual Automobile Insurance Co. v. Campbell. (4) A Utah jury awarded $1 million in compensatory damages and $145 million in punitive damages against State Farm for fraud and bad faith in refusing to pay a claim.

In a 6-3 decision, the Court found that the punitive damages award violated due process as grossly excessive. The majority opinion by Kennedy applied the three guideposts the Court had articulated in BMW.

First, it reemphasized that reprehensibility is the most important consideration, but it said the jury can focus only on the defendant's conduct in that state and only on behavior that is similar to the conduct that injured the plaintiff. In other words, whereas BMW said a jury could not punish a defendant for conduct in other states that is lawful in those places, State Farm went further and held that a jury may not punish a defendant even for illegal conduct that occurs in other places.

Second, the Court said that the ratio between the punitive and compensatory damages should generally be in single digits. But the Court's exact words here are important, because some lawyers and courts have seen a bright-line rule prohibiting all greater ratios--and that is not at all what the Court said. Kennedy wrote: "We decline again to impose a bright-line ratio which a punitive damages award cannot exceed. Our jurisprudence and the principles it has now established demonstrate, however, that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process." (5)

The Court concluded, "Single-digit multipliers are more likely to comport with dale process, while still achieving the state's goals of deterrence and retribution, than awards with ratios in the range of 500 to 1, or, in this case, 145 to 1." (6) The Court plainly did not prohibit all ratios greater than 9 to 1, but it did articulate a presumption in favor of single-digit ratios.

As to the final guidepost, the Court simply said that the fact that State Farm's conduct was criminal fraud in Utah was not enough, by itself, to justify a large punitive damages award. The Court cautioned against using the civil justice system to impose criminal punishments.

Assessing reprehensibility

State Farm engendered a great deal of litigation, and the Court returned to constitutional limits on punitive damages yet again in Philip Morris. The Oregon Supreme Court reinstated a jury's punitive award of $79.5 million against Philip Morris for its fraud in marketing cigarettes. The jury had awarded $821,000 in compensatory damages.

The Supreme Court, in a 5-4 decision, reversed the Oregon court's decision and remanded the case for further proceedings. Breyer's majority opinion stated: "In our view, 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 or those whom they directly represent, i.e., injury that it inflicts upon those who are, essentially, strangers to the litigation." (7) In other words, the Supreme Court clearly said that punitive damages may "punish for harm" caused to the plaintiff but not for harm caused to nonparties.

But just three paragraphs later, the Court said that juries may consider harms to nonparties in assessing the reprehensibility of a defendant's conduct. Brever wrote:

[Williams] argues that she is free to show harm to other victims because it is relevant to a different part of the punitive damages constitutional equation, namely, reprehensibility. That is to say, harm to others shows more reprehensible conduct. Philip Morris, in turn, does not deny that a plaintiff may show harm to others in order to demonstrate reprehensibility. Nor do we. Evidence of actual harm to nonparties call help to show that the conduct that harmed the plaintiff also posed a substantial risk to the general public, and was particularly reprehensible.

How, then, should a jury be instructed? It can be told that it can consider harm to nonparties in assessing the reprehensibility of a defendant's conduct and that reprehensibility is the most important factor in determining the size of the punitive damages award. But the jury also must be told that it cannot punish the defendant for harm to nonparties. Perhaps Breyer and the Court's majority understand the theoretical difference here, but it is hard to imagine juries comprehending it.

The Court remanded Philip Morris to the Oregon courts to decide whether the jury instructions that were given in the case meet the new standard. The Court expressed no view on this subject, but as the dissent noted, Philip Morris did not preserve any objections to the instructions at trial. (9) Moreover, a careful reading of the instructions indicates that they focused the jury's attention on harm to others in terms of assessing the reprehensibility of the defendant's conduct. So it would not be at all surprising to see the Oregon Supreme Court reinstate the punitive damages award. Presumably, Philip Morris would seek review in the Supreme Court all over again.

Little guidance

The majority's opinion in Philip Morris is puzzling in other ways as well. At the outset, Breyer reaffirmed that punitive damages awards "may properly be imposed to further a state's legitimate interests in punishing unlawful conduct and deterring its repetition." (10) But deterrence is all about preventing future harm to people not involved in the litigation. After Philip Morris, it appears that a jury can base punitive damages on the need to deter wrongdoing, but the Court gives no guidance on how to do so. It would seem that jury instructions that specifically locus the jury's attention on assessing punitive damages so as to deter would be permissible.

Also, the Court did not even comment on whether the ratio of almost 100 to 1 between the punitive damages and the compensatory award raised constitutional problems.

Undoubtedly, both plaintiff and defense lawyers will claim victory in Philip Morris. The decision is sufficiently unclear that it is difficult to figure out what it means. The one thing that is absolutely clear is that the ruling will engender enormous confusion in the lower courts and cannot possibly be the last word from the Supreme Court on the question of when large punitive damages awards violate due process.

Notes

(1.) 127 S. Ct. 1057 (2007).

(2.) 517 U.S. 559 (1996).

(3.) 509 U.S. 443 (1993).

(4.) 538 U.S. 408 (2003).

(5.) Id. at 424.

(6.) Id. at 425.

(7.) 127 S. Ct. at 1063.

(8.) Id.

(9.) Id. at 1069 (Ginsburg, J., dissenting).

(10.) Id. at 1062.

ERWIN CHEMERINSKY is the Alston & Bird Professor of Law and Political Science at Duke University.