Supreme Court asks states to reform punitive damages laws.

For the fifth time in the past six years, the U.S. Supreme Court has agreed to hear oral arguments in a case challenging the constitutionality of a punitive damages award.

The case, TXO Production Corp. vs. Alliance Resources Corp. et. al., features a jury award of $19,000 compensatory damages and $10 million punitive damages--a ratio of more than 530 to 1.

The decision to hear this case came as a surprise because the Court had directly addressed the punitive damages issue in March 1991 in Pacific Mutual Life Insurance Co. vs. Haslip, now commonly known as the Haslip case.

In Haslip, the Court determined that the due process clause of the 14th Amendment placed restraints on the common law of punitive damages. Although the plaintiff in Haslip was successful in keeping her punitive damages award and the constitutionality of Alabama's law on punitive damages was upheld, the Court sent a wake-up call to state legislatures--the law of punitive damages in many states was out of control and needed to be fixed.

The Supreme Court said that punitive damages had "run wild" in this country, and "unlimited jury discretion in fixing punitive damages may invite extreme results that jar one's constitutional sensibilities." But the Court declined to "draw a mathematical bright line between the constitutionally acceptable and the constitutionally unacceptable that would fit every case." The Court indicated, however, that a punitive damage award of four times the compensatory award may be close to that line.

In the wake of the Haslip decision, the Supreme Court vacated and remanded 12 different punitive damages awards. The justices indicated that the Haslip opinion had constitutional teeth and that the Court was placing confidence and trust in state legislatures to clear up and clean up their punitive damages system. The Court's acceptance of the TXO case may signal a lack of patience with the state legislative process and a new willingness to articulate specific reforms.

The Courts vs. the Legislatures

Since Haslip, five appellate courts have held state punitive damages systems unconstitutional: Virginia, South Carolina, West Virginia, Maryland and Tennessee. Although these courts have tried to improve the punitive damages system, they may not be the best forum. I believe that role belongs to state legislatures. Courts deal only with narrow legal issues--they cannot invoke broad-based reform. Courts also lack the ability to hold hearings and consider the views of all interested parties in our society, i.e., doctors, manufacturers, consumers, organized labor. Legislatures, by way of contrast, can deal with the subject as a whole and can obtain information that will enable them to make sound public policy judgments.

Legislative Help Is Needed

The current system of uncertainties in punitive damages has created legal chaos. A recent General Accounting Office study shows that reversals of punitive damages awards in some states are running over 90 percent. Often, these cases have to be retried with major legal expenses being borne by both sides and, ultimately, by society. The fault in these cases does not rest with the jury or, for the most part, the judges. The problem is the absence of clear rules on punitive damages--rules that can and should be enacted by state legislatures.

Suggestions for Implementing Haslip

* Raise the burden of proof. Many legislatures have revised the burden of proof in punitive damages cases to "clear and convincing evidence." This burden allows juries to think seriously about whether they should award punitive damages.

* Provide clear guidelines for the jury. Haslip suggested that the appropriate standard was conscious wrongdoing.

* Provide guidelines for review. Haslip suggested that states should have clear guidelines for reviewing punitive damages awards and determining whether they are fair.

* Prevent multiple impositions of punitive damages for what is, in essence, the same course of conduct. Multiple imposition of punitive damages exhausts a company's resources before people are compensated for their harms.

* Place rational limits on punitive damages. Haslip suggested that a ratio of $4 of punitive damages to $1 of compensatories was close to the line of being unconstitutional. A very workable scheme has been developed by the American College of Trial Lawyers and provides a ratio of $3 punitives to $1 compensatories. To deal with cases of particularly egregious behavior where compensatories are small, an award up to $250,000 would be allowed. On the other hand, where compensatories are particularly high, i.e., above $1 million, a smaller ratio such as 2:1 is more appropriate. If the defendant has honestly complied with the regulatory system, such as the Food and Drug Administration or the Federal Aviation Administration, punitive damages should not be allowed.

The Supreme Court in Haslip indicated that punitive damages was an area in dire need of reform. The Court has placed key responsibility for formulating and implementing the reform with state legislators. If they do not meet it, however, the Court may develop its own guidelines. State legislators have the power, the resources and the skills to develop guidelines that can meet both the letter and the spirit of the Haslip case. Now is the time to proceed and answer the wake-up call of the Court.

Victor E. Schwartz, a Washington, D.C., attorney, regularly files briefs in punitive damage cases pending before the U.S. Supreme Court for such groups as the American Automobile Manufacturers Association, the Chamber of Commerce of the U.S., the National Association of Manufacturers and others. He is co-author of the most widely used torts casebook, Cases and Materials on Torts.